The Mother of all Property Booms, Short Term Rally, Bubble, or Recovery?; it’s not the health of the housing market that needs to be tacked, it’s the disease
Tweet Topic Started: 18 Aug 2013, 05:00 PM (2,331 Views)
The jury’s out on whether Australia is entering the ‘mother of all dwelling booms’ as Robert Gottliebsen took note to warn in Business Spectator last week.
And whilst the construction sector continues to fall short of expectation, the established housing market, most notably in Sydney although also reflected in other states – has moved.
’War stories’ are emerging from buying and selling agents of auctions attended where the prices have exceeded the reserve by 10-20 per cent. In turn, vendors are reassessing their expectation of value based on neighbouring results – and with more talk of prospected drops to the cash rate, purchasers are shopping lenders to see how far their budget will stretch.
When prices start to rise – in some areas quite dramatically so – there is always heated debate over whether it’s a bubble. The term itself is somewhat over used perhaps because of the image it invokes.
A bubble gives the impression the market is a flimsy airless balloon which – like a row of standing dominoes – will quite suddenly, irreversibly and dramatically ‘pop’ falling into an endless abyss. For some commentators – the very fact that this hasn’t yet occurred in Australia is enough to demonstrate the theory incorrect. In other words, you can only define a true bubble whilst viewing the devastating aftermath.
However, a bubble or the recognition thereof does not have to fall into the definition posed above. They are not always easily deflated, and there are plenty of different particularities between the policies and lending requirements that have played into the house price ‘corrections’ other countries have already experienced post GFC, that differ from those we have in Australia.
Furthermore, in economies highly exposed to the residential sector, where central banks and governments have the ability to manipulate policy and the amount of cheap credit that flows into mortgage lending, it’s possible to ‘prop’ and temporarily prevent falling house prices that would otherwise occur in line with a challenging macro outlook.
In Australia this would include, rising unemployment, lower prospects for wage growth, an aging headwind of retirees lowering the participation rate, and the gradual winding down in the mining sector – to name but a few. And whilst this will bear relevance in moderating the level of price appreciation long term, there are plenty of ingredients in the pot to ignite the current environment which is causing a range of voices to warn of bubble like conditions in fragmented areas of our established capital city terrains.
The main force behind the buying market is a mix of investors and up-graders who – in turn are boosting the premium housing sector using funds from the sale of lower priced properties to leverage up which coupled with lower rates reduces the size of their loan – distorting the forward analysis of the lending data in relation to price growth somewhat.
In contrast demand from first home buyers has weakened significantly – waxing and waning only on the back of various grants and incentives.
Each are buying for different reasons, and as we know, in this sense, the environment has been nicely manipulated by supply side constraints which keep Australia in a donut like geographical outlook.
However, as Robert Gottliebsen points out in his column, and as I mentioned last week – a very low interest rate environment is once such condition that encourages investors to pull back on saving in favour of a spend/borrow mentality. And in our property obsessed culture – following years of woeful planning for population growth, most of this pent up demand is being fed into the second hand housing sector.
Price rises are more often than not fuelled by speculation that the next generation will pay double for the second hand house in – how does it go – eight or so years time? And whilst population growth can push demand – as I’ve commented previously – actual house price appreciation more directly stems from a higher proportion of mortgage holders, not necessarily home buyers, shopping within an area of limited supply.
In this respect, the money Governments have donated through tax breaks alone to encourage investment into the established residential real estate sector, with policies such as negative gearing which has disproportionately inflated existing property values and created a growing gap between rental yield – rises of which cannot keep pace – is another area of significance which has propped up the prices. It’s also one of many policy measures that should be addressed if affordability were really an issue of concern for our competing political parties.
And whilst there may be heated debate over the recognition of a bubble, in every instance speculation is a significant driving force in the pace of any said increases – which rings nicely with US economist Robert Shiller’s analysis when in his book “Irrational Exuberance” he defined a bubble as;
“a situation in which news of price increases spurs investor enthusiasm – spreading by psychological contagion from person to person, in the process amplifying stories that might justify the price increase attracting a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”
This mentality is evident when we enter what is so often termed the ‘recovery’ phase of our market cycle – usually after a period in which home values have declined in real terms.
It’s an interesting turn of phrase, giving the impression to the uninitiated that prices have dropped so low they needed to ‘heal’ like a sick patient – however seeing prices overshoot the mark as greed along with expectation of another boom inevitably takes a force on investor mentality, is a common feature of this part of the cyclic psychology.
The effects are often amplified in areas where auctions sales predominate. When buyers see properties openly selling above their pre-conceived perception of ‘market value’ (something that generally doesn’t happen when the sale is conducted via ‘private’ negotiation) it provides very visible reality that the market’s ‘appreciating’ and the effects on the mindset act like a kind of contagion.
Interestingly enough, the reverse is the case when a larger proportion of properties pass in at auction – leaving buyers with the worrying impression the market’s ‘tanking.’
During a competitive auction buyers spend far less time thinking about exceeding budget constraints than they do when – in a rational ‘pre auction’ moment, they take time to discuss (usually with their partner) where to draw a sensible limit for the property in question.
In truth, when the market is buoyant, and competition evident, buyers don’t bid for the property – they simply bid to ‘win’ – something I witness weekly.
And of course, whenever rising prices openly occur, stock inevitably reduces. After-all, who wants to sell an asset that’s increasing in value, when the observation prevails that a vendor can get ‘more’ if they hold and wait for further gains to come? Especially as additional rate cuts are still widely predicted.
The other issue which Robert Gottliebsen touches upon is foreign acquisition. The falling Aussie dollar has given Asian property investors an opening to look favourably once again upon dwelling investment in our capital city markets.
As reported in the Australian Financial Review last week “A Sydney Property developer sold 90 off-the-plan apartments at the opening of a new tower in Bondi Junction in 5 hours” and whilst a large proportion of funds will be fed into off-the-plan construction, assisting developers in the approval process somewhat, it’s arguable as to how many of these new apartments will actually make it onto the rental market. With limited options for investment, real estate acts like a magnate for Chinese buyers – who are not averse to purchasing speculatively whilst leaving apartments sitting empty.
There will be plenty of argument yet to come as to the level of the current ‘boom’ and its longevity. But what cannot be argued is the conditions that took values to their 2010 peak following our ‘golden decades’ of growth, will not be replicated as we enter a very different and challenging macro environment than previously experienced – hence why I hold the opinion that we’ll see shorter durations to the traditional boom and bust “market cycle.”
Furthermore – whilst rising established house prices may be perceived as ‘positive’ – particularly for those who want to downsize or ‘tap’ into the equity – is worth remembering that it’s doing little for the productive areas of our economy such as manufacturing, small business or job creation.
The oft quoted perception that the ‘feel good’ factor from rising house prices stimulates consumption has been disputed in several studies – the most recent of which can be found here.
And whilst those who purchased early in the 2000’s have seen their assets ‘boom’ the consequences have forced a social divide as purchasers priced out are forced into areas where schools, transport and local amenities have not been funded to keep up with the flood of lower and middle income households in search of affordable options.
Rising yields ensure renters find it particularly hard to locate close to work hubs (not to mention the pressure it puts on students battling for a university qualification) – and unless we face up to the ‘non voter friendly’ challenges that prevent sustainable solutions and reduce unwarranted inflation in the established sector at the expense of construction, nothing will change.
New Zealand – which is experiencing its own property boom principally in Auckland – has released details of plans to moderate mortgage demand through ‘speed limits’ on high loan to value lending. However, it’s widely acknowledged that without effective polices to enable home building over a wider footprint of land, first home buyers will suffer inevitable pain, and debate circulates as to whether it will lower prices in the long term or just produce a blip on the radar.
Even if it were possible to effectively implement and audit similar restrictions – thereby tapering the flow of money into mortgage debt, it won’t necessarily stimulate lending for productive purposes.
Furthermore, although in real terms, values remain below peak, the property market chills at the thought of prices adjusting downward materially – yet not at the bank controlled credit creation process that inflated the huge increase in the first place, in so much as banks create money every time they make a loan, and then decide where the bulk of lending is directed – building up the price of their preferred assets at their own discretion.
In this respect, it’s not the health of the housing market that needs to be tacked, it’s the disease.
Lastly on interest rates – since November 2011 we’ve been on a downward rate cycle – some of which was only passed on ‘in part’ by the banks. Yet it took until mid 2012 for any marginal improvement in median values to emerge (boosted by consumer confidence,) and only fairly recently have we seen a significant uptick.
Despite it all the building industry is not picking up enough pace to compensate for the tapering of construction in the mining cycle, and we’re a long way from a point at which the RBA can start raising rates to offset any unwelcome boom in established asset prices.
For the time being, existing owners and investors will continue to fuel demand, and despite loan service affordability costs improving – those looking to enter the housing market, will continue to compete with a challenging heated environment.
For the past three years headline-writers at metropolitan newspapers have been in despair. They have been cruelly denied the opportunity to put “bubble” in a headline.
With capital city prices mostly in decline since 2010, even a species willing to use fabrication when sensationalism won’t do has been unable to conjure a bubble out of our property markets.
Now, with capital city prices up a moderate 5% on average, a peephole of opportunity has appeared.
Sub-editors have, as willing accomplices, a gaggle of chattering economists and sharemarket analysts who see an opportunity for a bit of personal limelight while pontificating on a subject outside their sphere expertise.
That’s all it takes in this country to turn a nothing into a sensational issue.
Auction rates signal boom at hand, shouts the Sydney Morning Herald. Fears of bust as property runs hot, squeals The Australian. Hallelujah, the bubble is back.
Three years ago BIS Shrapnel, which makes part of its living from mis-forecasting property markets, declared in 2010 that capital city prices would continue to rise strongly. By 2013 Perth would be up 22% and both Sydney and Adelaide would have added 20%.
Nothing of the sort happened, of course. Three years on, Perth is up about 7% and Sydney a meagre 4%. Adelaide is still down 3%. These are not statistics that support bubble theories.
For there to be a bubble fit to burst, there needs to be a major decline in affordability.
But Australia has the opposite.
The past eight quarters have produced consecutive improvements in affordability. Prices, on average, have fallen and there have been multiple interest rate decreases.
The forgotten part of the affordability equation, income, has assisted as well. New figures from the Australian Bureau of Statistics suggest an average 5% rise in wages in the past 12 months. That’s a rise larger than the median price rise over the past year in five of the eight capital cities.
It’s significant that much of the bubble hysteria is coming out of Sydney.
People who think Australia starts at Sydney Heads, ends somewhere east of Parramatta and occupies a narrow corridor in between those two points, believe that the current auction frenzy in their narrow world represents the Australian property market.
To get an idea of how these people think, here is what agent John McGrath, much loved by the Sydney media, said not so long ago: “Sydney remains the BHP of Australian real estate – the big blue-chip market that generally out-performs the others.”
John, welcome back from the parallel universe you’ve been visiting these past 10 years. The research shows that Sydney has been the chronic under-achiever of the capital city property markets over the past decade. Its capital growth rates have been the worst, by a considerable margin, among the eight state and territory capital cities.
And for those who cling to the myth about the superior performance of the blue-chip suburbs, here’s the capital growth rates (average annual growth in median prices over the past 10 years) of millionaire suburbs in Sydney:
Balgowlah 2.5%, Balmain East 3.7, Bayview 3.5, Birchgrove 2.6, Cammeray 5.1, Castle Cove 2.4, Chatswood 4.2, Clontarf 1.1, Clovelly 4.0, Collaroy 3.7, Cremorne 2.8, Cronulla 2.6, Darling Point 0.5, Double Bay 3.1, Dover Heights 3.1, East Killara 3.7, Gordon 3.0, Greenwich 4.2, Hunters Hill 2.8, Kensington 3.8, Killara 2.3, Lane Cove 3.7, Lilli Pilli 0.3, Lindfield 4.1, Longueville 2.0, Malabar 2.8, Manly 4.3, McMahons Point 2.8, Mosman 2.4, Neutral Bay 3.5, North Bondi 4.8, North Sydney 2.2, Northbridge 4.1, Paddington 4.7, Palm Beach 1.3, Pymble 3.6, Queens Park 3.8, Randwick 4.4, Rose Bay 1.9, Roseville Chase 2.4, Seaforth 4.0, St Ives 2.4, Sylvania Waters 3.8, Turramurra 3.2, Vaucluse 1.3, Warrawee 3.3 Willoughby 4.8, Woollahra 2.4.
Sydney has been an investor’s nightmare since 2004. Now, at last, it’s showing some signs of life. And the rulers of the universe who inhabit the place are in a bit of a tizz.
Turi Condon, property editor of The Australian who takes the time to write an article about as often as the Wallabies beat the All Blacks, was moved to put together a piece that told us that Sydney’s inner suburbs were “red hot”. McGrath has also declared Sydney to be “red hot”.
Do you need to know more? Sydney’s red hot so Australia has a property bubble. Obviously.
The mainstream media have latched on to the auction frenzy and have called that a property boom is at hand in the eastern states.
Meanwhile, more serious economists such as Bassanese at the AFR "remain bullish house prices", while experienced property market analyst Michael Matusik notes that Australia's eastern states could see proce growth of up to 25% over the next three years.
Over at Business Spectator, Robert Gottliebsen forecasts that Australia is heading for "the mother of all dwelling booms" caused by an imbalance between supply and demand.
That's a fair amount of positive sentiment doing the rounds.
It's no doubt confusing for new entrants to the property market, because on the flip side there continue to be negative angles reported too.
There's an old saying in investment circles (which is claimed as their own by a few people) that says: "a speculative bubble is a bull market which you don't have a position in."
There's much more than a grain of truth in that.
The overwhelming majority of those barracking the property market dynamics are either renters (who doubtless want prices to crash so that they can participate in the market themselves) or people making an easy dollar from selling stories on the existence of a bubble.
This all makes logical sense and 'twas always thus: property price rises naturally seem unfair to those not participating in the upside, and that will never change.
There are several negative angles which get churned over.
One is that owning property is somehow vaguely unethical. Such articles can usually be identified by not-so-subtle name-calling with words like "amateur speculators", "unsophisticated landlords", "rent-seekers" and the old favourite "specufestors", being lightly sprinkled in.
Ideally, the words "greed" and "foreign buyers" should also feature.
As a renter myself, I'm very glad that we have landlords to house us - a modern capitalist system would never work in any other way.
Articles continue to portray landlords as evil, making people homeless on a whim or turfing them out at the drop of a hat in a frivolous game of "eviction popcorn":
"Young first-time buyers such as Naomi Jacobs in Newcastle finds herself more in a property nightmare than a property dream. "I'd love to buy a little house now," she told me. She wants to have a family, and as the family gets bigger so she'd want a bigger house. That is the dream. Naomi is a science graduate, a science graduate with a job. But she can't get a mortgage. She blames the buy-to-letters. "The smaller flats that first-time buyers would want are ideal for them to rent out," she sighs. "But that's the way it is these days. It's slightly cruel when you think about it."
On the face of it, this sounds 'bad' and we are invited to be up in arms at the unfairness of it all, the angle being that an employed graduate can't get a mortgage.
But there's no explanation of why she can't get a mortgage. Usually, that would only be because no deposit has been saved by the potential borrower.
So is this an argument for a return to 100% mortgages then? Which, by the way, are the exact same products which also get blamed for speculative activity and booming prices.
It's a never ending negative loop, of course.
The market commentary where I am at the moment in England, has seamlessly shifted from a devastating property market crash to a new property market bubble in just a couple of short months.
Literally only a few weeks ago there were cautionary tales that many remain in negative equity after the crash (this is indeed true in parts of the country), yet as prices are recovering strongly on a national basis it is already also being termed as a bubble.
It's apparently a crash and a bubble at the same time.
With the mass proliferation of online commentary, I suppose that this is a trend which won't go away.
Prices are going up - this is bad because it must be a bubble. Prices could be falling so the whole world is doomed. Someone is in negative equity, so only fools would buy property. Interest rates are falling , this will cause a bubble. And now they're rising, it's unaffordable. Some people work in finance - this is also bad...
You only really have two choices when it comes to property: to complain about how unfair the world is or to do something about improving your own situation.
If that sounds unsympathetic, it's not mean to - it wasn't so many years ago that I was 21 myself and as I entered the full-time workforce all the talk was of unfair and unsustainable London house prices.
The media reports of an Australian property boom should also be viewed with caution.
It's illogical to talk about one property market. Even within cities and suburbs, some property types will appreciate strongly in value over the next decade, while some buyers will pay too much for the wrong type of property and remain forever convinced that owning property is a dud idea.
It has to be said, for all the talk of a boom, Australian property price growth over the last few years has been relatively muted in plenty of areas, which after all, is the best long-term outcome for Australia - prices growing perhaps slightly slower than household incomes, effectively leading to a gradual improvement in affordability over time.
Some people will always do well out of property. Others will always get it wrong.
By Narayanan Somasundaram, Bloomberg News Tuesday, August 20, 2013
Aug. 21 (Bloomberg) -- The pace of recovery in Australia’s $4.5 trillion housing market is boosting bets that the Reserve Bank will consider halting the developed-world’s most aggressive series of rate cuts.
Home prices rose last quarter at the fastest pace in more than three years, and sales of dwellings reached the highest since 2011 in June, government and industry data show. Traders see 50 percent odds the RBA will hold the cash rate through November, up from a 32 percent chance policy makers would refrain from further reductions seen two weeks ago.
Australian houses are 7 percent overvalued based on long- term trends, Sydney-based AMP Capital Investors Ltd. said Aug. 15 in a note to investors. Local homes are the sixth most overvalued globally and the the house-price-to-income ratio was 21 percent above its long-term average, according to the Organisation for Economic Co-operation and Development.
“We have moved from a bust to boom scenario in a year’s time,” Shane Oliver, head of investment strategy at AMP Capital Investors said by phone. “A new housing bubble is the last thing Australia needs as it would limit the RBA’s ability to keep interest rates down to boost the broad economy.”
RBA Flexibility
The flexibility to cut if necessary will be crucial for the RBA. The currency’s direction is important in setting policy, the RBA said yesterday in its minutes of the Aug. 6 meeting when it cut the benchmark rate to a record-low of 2.5 percent. It said more reductions remain a possibility, though not an imminent one.
The Aussie fell 7.9 percent over the past three months to 90.44 U.S. cents at 5 p.m. in Sydney yesterday. The currency has gained 2.2 percent since reaching an almost three-year low of 88.48 cents on Aug. 5.
The RBA has cut rates 2.25 percentage points since late 2011 to spur the economy as employment weakens after a record resources investment boom peaked.
The central bank this month reduced its growth forecast to 2.25 percent in the year to December 2013, compared with 2.5 percent forecast three months earlier. Australia’s jobless rate held at an almost four-year high of 5.7 percent in July as fewer people sought work, government data showed Aug. 8.
Below Trend
With the economy’s expansion expected to remain below trend, “members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand,” the RBA said yesterday in the minutes. While borrowing for housing, prices and indicators for dwelling construction had picked up, the rise was “moderate rather than strong,” policy makers said.
Australian government bonds gained yesterday for the first time in two weeks, bringing benchmark yields down from 16-month highs. The yield on 10-year notes slid 4 basis points to 3.98 percent, after earlier touching 4.05 percent, the most since April 2012. The premium over similar-dated U.S. Treasuries has shrunk 13 basis points this quarter to 114 basis points.
Mortgage lending increased in each of the six months through June, the longest streak of gains since the period ending April 2009, the data show, while house prices climbed 2.4 percent in the second quarter, the most since the first three months of 2010.
Mortgage Rates
The nation’s largest banks dropped benchmark mortgage rates to the lowest since 2009 after this month’s RBA rate decision. National Australia Bank Ltd., the country’s largest lender by assets, on Aug. 12 began offering homeowners A$1,000 in cash if they shift their mortgages to the bank from a competitor.
The median Sydney house price rose 21 percent last year to A$640,000 ($580,000), government data show. That compares with the average cost of $779,000 for a home in New York City last quarter, as tracked by the Real Estate Board of New York. The average house price in London was 451,422 pounds ($706,000) as of June, a 7.1 percent increase from a year ago, according to researcher LSL Property Services Plc.
Home prices across Australia’s biggest cities climbed 4.6 percent in the first seven months of 2013, following declines of 0.4 percent in 2012 and 3.8 percent in 2011, according to RP Data. They’ve risen 6.5 percent since the housing market hit bottom in May last year, the data show.
The lack of a price correction in Australia over the past few years akin to Europe or U.S. would give the RBA some cause for thought, said Kieran Davies, chief economist at Barclays Plc in Sydney.
New Zealand’s central bank will limit loans that exceed 80 percent of a property’s value to 10 percent of new mortgages from Oct. 1, compared with 30 percent now, to guard the financial system from a bubble that has made houses in the nation the fourth most overvalued in the world.
“If the RBA keeps rates too low for too long there is a risk that the housing recovery evolves into something stronger,” said Davies. “You have seen that happen in New Zealand.”
According to Robert Gottliebsen and Saul Eslake, an investor led property resurgence is on the cards.
Low interest rates are driving demand and the lack of development funding is restricting supply and this will create “the mother of all dwelling booms”.
There is no doubt the property market is on the move with clearance rates now above 70% in Melbourne and cracking 80% in Sydney.
But the fact that the overall residential market is growing doesn’t mean you can expect to buy any old property and achieve the same result.
When a market is hot there is a perception that every asset will work; you just need to jump in and hold on for the ride.
Investor driven property booms can cause dramatic spikes in the market because of the kinds of property most investors want to buy. Investors have different criteria to that of homebuyers. They want low maintenance, good tax breaks and stable rental income.
Home buyers on the other hand usually want space, location and affordability.
Well-educated property investors tend to buy established properties in high demand areas where they will get consistent rental return and capital growth.
However as the wave of investors hit the market they will be in danger of getting caught up in the heat of the market and make impulse decisions that make sense at the time.
To minimise risk, investors will need to take heed of the mistakes investors made during the last “mother of all dwelling booms.”
Property prices surged by around 20% each year from 2001 to 2003, when investor-fuelled demand ratcheted up the Melbourne median house price.
Many of these investors bought property that looked good at the time, rather than property that would still be performing well five or 10 years later.
Some bought into multi-unit developments in the CBD/Docklands precinct, reasoning that a surge in construction corresponded with a swell in demand from tenants and sure-fire prospects for capital growth.
In fact, the opposite happened.
The majority of other purchasers in these developments were also investors, so by the time the plethora of construction finished, demand from purchasers had run its course.
Without a significant number of home buyers to fuel ongoing demand, the CBD/Docklands market languished in an oversupplied state. Property values stagnated, and in some cases, fell.
For example, the property pictured above in the Docklands was purchased for $582,000 in 2001. Five years later the investors had abandoned the property market and the best price offered was $455,000. The investor had no choice but to take the loss and move on.
Property investors make up around 30% of the market and although this can drive markets to new heights, it is home buyer demand that really maintains property values over the longer term.
As we move further into the next phase of the market cycle, property investors will be wise to steer clear of assets that primarily have demand from other property investors.
SQM Research director Louis Christopher says despite recent price increases there is no price bubble to worry about.
“No sooner has a housing recovery been confirmed, than the loud voices go straight to assuming we have a looming property bubble on our hands,” Christopher noted.
“The voices seem to range from those who have no experience or qualifications to speak on this sector through to those who should know a lot better.
He says most capital cities are just experiencing a modest recovery rather than displaying any kind of boom conditions.
“It is just Sydney, Perth and Darwin that have been recording more rapid price rises.”
“If we were to see national housing prices sustaining annualised increases of 7% plus for a considerable period then that is something to watch for. However, it just simply isn’t happening yet.”
“There is no doubt in my mind that interest rates are helping the recovery along and there is also no doubt in my mind that the RBA will look at the national result rather than just what is happening in the Sydney housing market.”
SQM has recently launched a vendor sentiment index which shows vendor asking prices on capital city houses are up 3.7% for the year to $667,100. They are up 0.7% for the month but down 1.7% for the week.
Sydney had the most pronounced weekly change in vendor asking prices, up 4.2% to $898,400 and 7.8% for the year.
Melbourne vendor asking prices for houses are up virtually unchanged for the year, but up 1.4% in the past week.
Maybe, UBS released a report today and they're sounding a bit bullish...........
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Dwelling commencements to rise to 154k in 2013, and 160k in 2014
In this detailed note we reiterate our forecast for dwelling commencements to pick-up moderately to 154k in 2013 (was 152k), and 160k in 2014. This view is supported by the RBA slashing rates to a record low, driving: 1) a rebound in prices to 5% y/y; 2) approvals up to a ~160k trend; 3) boom-like auction clearance rates; 4) lending surging by 20% a.r.; 5) housing affordability improving sharply to near a decade-best; 6) rental yields becoming relatively very attractive; 7) ‘time to buy a dwelling’ sentiment near the highest level since 2009; 8) households’ surveyed attitudes to debt becoming less cautious; 9) strong population growth (1.8% or 394k y/y); & 10) 1st home buyer incentives more favouring new housing.
House price growth forecast upgraded to 10% y/y in 2013, and 5% in 2014
We are also upgrading our forecast for house prices to lift 10% y/y in 2013 (was 7%, with upside risk), but look for moderation to 5% y/y in 2014 (was 3%), given a likely ongoing subdued labour market. A ‘boom’ could also induce the RBA to hike, which would quickly hit affordability given a still near-record high household debt-income ratio. That said, housing credit growth should recover modestly to 5% y/y ahead, albeit well below the double-digit trend pre-GFC (so we don’t see a re-leveraging cycle).
Different cycle – more medium-density, less houses and renovations
But, this cycle will likely differ from history with only a moderate overall upswing – and a higher medium-density (61k in 2013, 65k in 2014) share (particularly high-rise), but only a modest rise of houses (91k in 2013, 93k in 2014). This already led the real average value per commencement to drop to a 3-year low. By State, we look for further retracement in Victoria, but strength in NSW, while QLD is slowly recovering from a depressed level, and WA is surprisingly resilient. 1st home buyers are edging up from weakness, supported by changes to incentives favouring new homes, but are likely to recover only gradually given high prices. Meanwhile, alterations & additions are depressed at the lowest share of GDP since 1975, but could improve moderately ahead as unemployment stabilises. Overall, we look for real dwelling investment to bounce by 4-5% y/y in both 2013 and 2014, but note this contributes only ¼%pt y/y to GDP, and hence is clearly not enough to ‘rebalance’ growth amid the drag from weakening mining investment.
Risk that more rate cuts over-stimulate housing, but lower AUD preferred
The RBA responded to a weak economy by cutting rates to a record low. Looking forward, we expect the RBA to hold at 2.5%, as they prefer the AUD to fall further (UBSe 0.85USD by mid-14) to support growth. However, if the economy remains weak, but the AUD fails to fall, the RBA would likely cut again, which would risk fuelling a ‘housing bubble’. This view reflects that the boost from rate cuts historically dominates the hit to sentiment & income from higher unemployment – causing house prices to accelerate. Hence, under that scenario, housing may face targeted (but not publicly announced) macro-prudential tightening measures.
Historically low interest rates are driving signs of an improving residential market, according to Lend Lease which just posted a 10% increase in statutory profits for the year to $551.6 million.
It has construction backlog revenue of $17.3 billion and $15.0 billion of funds under management. The estimated end value of its development pipeline is $37.4 billion – the largest in the company’s history.
“While the market outlook presents challenges, the depth of our pipeline provides Lend Lease with significant earnings visibility and a platform for a strong growth trajectory over the next three years,” the newly reappointed Steven McCann said in a statement.
It says the domestic environment is challenging but says there are early signs of an improving residential market given low interest rates.
“(The) Australian interest rate environment should provide more favourable outlook for residential markets,” Lend Lease said in its results.
It says it had increased residential enquiry levels as well as strong pre-sales at key urban regeneration projects.
It made progress on six major projects in Australia during the 2012-2013 financial year.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
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