Australian Housing Boom Just Beginning, RBA Not Concerned - HSBC; Expect high single-digit housing price growth this year and low double-digit growth over 2014
Tweet Topic Started: 8 Oct 2013, 10:43 AM (3,064 Views)
Australia’s housing boom is just beginning. Housing prices have risen by +9% since their trough in May 2012 and are +5.5% higher over the past year. Growth has accelerated recently, with prices up by a strong +3.7% in Q3. Other indicators are consistent with continued solid growth in prices. Auction clearance rates – a timely indicator of housing market activity – are holding at levels that suggest a forthcoming housing price boom.
A housing boom is largely a positive development. In fact, it is part of the RBA’s plan to rebalance growth as the mining boom fades. At the same time it will present some challenges. Ideally, the RBA would like to see housing construction pick up without a housing price boom. But developers and households are unlikely to build new houses unless prices are rising. In this way, a housing price boom is a necessary “evil”.
While some commentators are worried that Australia could see a housing bubble, we think this concern is premature. Given the fall in housing prices between late 2010 and mid-2012, prices need to rise solidly just to make up for previous losses relative to income gains over the same period. The starting point is also not as worrisome as some think: prices are high, but not unusually high when compared with similar countries. As we have said many times before, Australia does not currently have a housing bubble.
The RBA would not be too worried about the current rate of housing price growth. In fact, the rise in housing prices would be largely as expected and somewhat desirable, given the need to rebalance growth.
Recent comments made by RBA Assistant Governor Malcolm Edey support this. He warned, at a recent conference, about being unrealistically alarmist about a housing bubble and, for effect, stated the obvious: that “we shouldn’t be rushing to reach for the bubble terminology every time the rate of house price increase is higher than average, because by definition, that’s 50% of the time”. Indeed.
Some simple scenario analysis helps to reveal why the RBA is unlikely to be worried about the current pace of growth, in itself. Given the fall in housing prices between late 2010 and mid-2012, there is some catch-up required just to maintain a steady price-to-income ratio (Chart 9). To get back to the previous peak in the dwelling price-to-income ratio by the end of 2015, as one might expect to occur in a housing price upswing, would require growth of +10% this year and in each of 2014 and 2015, assuming average growth in household disposable incomes.
But the price level itself is unlikely to be the main concern anyway. The RBA’s concern will likely be more with the amount of leverage involved in driving housing prices higher. The broad lesson from the global financial crisis (and earlier episodes) was that it is not asset price misalignments that matter in themselves, but the leverage associated with any misalignments that can do the most damage.
New lending has been a key driver of the recent pick-up in housing prices. Housing loan approvals have risen by 18% over the past year. The bulk of the rise in new lending has so far been driven by investors and repeat buyers, rather than first home buyers (Chart 10).
The lack of first home buyer interest may be somewhat surprising, given the improvement in affordability. To some degree it may reflect the elevated unemployment rate, particularly for younger cohorts. The weaker labour market may have held back household formation, as lower job security has held back confidence and higher unemployment has made it more difficult to save a deposit. In short, current job prospects mean more twenty something’s living with their parents or in shared accommodation.
While a high unemployment rate may have held back first-time buyers from entering the market, it hasn’t led to a significant deterioration in banks’ loan quality. In fact, despite a high unemployment rate, loan arrears have drifted lower since 2011 (Chart 11). This is likely to reflect a number of factors, including that: the bulk of Australia’s household debt is held by high income households; lower interest rates have reduced the repayment burden sufficiently to offset the impact of lost income due to rising unemployment; and, Australia has full recourse loans, which should encourage mortgage holders to maintain repayments.
The new lending that has occurred in recent quarters has also generally been at lower loan-to-valuation ratios than in the past, which should also limit concerns about risks amongst banks’ housing lending. New housing lending in the 80-90% LVR category has held steady over the past few years, while new lending in the 90%+ category has drifted lower since the recent peak in 2009 (Chart 12). Australian households have also maintained a fairly high saving rate in recent year and many households with mortgages are well ahead on their mortgage repayments. Recent estimates from the RBA suggest that liquid balances in mortgage offset and redraw facilities – ‘mortgage buffers’ – are 14% of outstanding mortgage balances, which is equivalent to 21 months of scheduled repayments at current interest rates.
At this stage it seems that the financial system is broadly working as it should. Low rates have encouraged a lift in demand for housing, which in turn has driven a pick-up in housing prices. Higher house prices are beginning to attract more developers to the market and approvals for new housing construction have begun to rise.
Bottom line
Australia’s housing boom is beginning. We expect high single-digit housing price growth this year and low double-digit growth over 2014.
This is trickling through to housing construction and we expect a further lift in coming quarters.
We remain firmly of the view that Australia does not have a housing bubble.
But we see concerns about inflating a housing bubble as enough to make the RBA reluctant to deliver more rate cuts.
The macro indicators have been pointing to a crash for some years now, as Steve Keen, Philip Soos and I have been saying. The property spruikers have bet their life savings on a new boom – they will be use every trick to whitewash the bubble burst narrative. Bastards.
We're on the verge of a housing boom, according to the HSBC Bank, yet they also believe the bubble is not worth getting worried about too soon calling the price growth a "necessary evil".
With house prices having risen 9% since their May 2012 lows, and up 5.5% over the past year, it's clear that momentum is picking up.
In their recent Macro Australian Economics' Downunder digest, chief economist for HSBC, Paul Bloxham and economist, Adam Richardon, noted that growth has recently accelerated with prices up 3.7% in the third quarter of the year.
"Other indicators are consistent with continued solid growth in prices. Auction clearance rates - a timely indicator of housing market activity - are holding at levels that suggest a forthcoming housing price boom," the report notes.
This didn't come as a surprise to the report authors who, in Marcha and based on modelling, forecasted high single-digit growth over the year.
This was partly attributed to lower mortgage rates.
"A housing boom is largely a positive development. In fact, it is part of the RBA's plan to rebalance growth as the mining boom fades. At the same time it will present some challenges," they said.
Developers and households, they explained, are unlikely to build new houses unless prices are increasing.
"In this way, a housing price boom is a necessary "evil"," they said.
However, despite the group and current discussions, they do not believe we are heading towards a housing bubble.
"The starting point is also not as worrisome as some think: prices are high, but not unusually high when compared with similar countries. As we have said many times before, Australia does not currently have a housing bubble."
So riddle me this: if price have to rise to incentivise building, how come we didn't get a building boom that last time prices were rising?
The VIs at it again.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
So riddle me this: if price have to rise to incentivise building, how come we didn't get a building boom that last time prices were rising?
The VIs at it again.
chart shows big jump in approvals 2000-2003 & 2009-2010, times of strong house price growth
Trends down for almost the entire decade of the 00s.
Does not compute.
Here is another one showing sales. the key thing to note here is that while demand was surging, demand, much of it investor led was being funnelled into making the price of the houses we already had more expensive in the face of an anaemic supply response.
This suggests that there is far more to it than merely making existing property more expensive relative to new builds if you want to stimulate a decent supply response.
But the VIs don't give a fuck, higher prices, however they occur will be cheer led because it boosts their bottom line.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
It is a very tenous link between rising house prices and new builds. I think this is because on the fringe where many new detached houses are built, FHBs are not going to be wanting to buy as a result of increased prices and builders won't build until they have a buyer. For inner city housing developments where there is much higher demand, developers will often build first then sell or at least get OTP buyers to front up a deposit. These infill developments need to make financial sense so rising prices would encourage developers to build.
Trends down for almost the entire decade of the 00
not most, maybe half, downtrend is 2003-2008, coincides with weaker house price growth then
So what happened in 1999 then to cause building to fall off a cliff?
Again, Id like to see something a little more rigorous than guff from the VIs that suggests the way to get people to consumer more of something is to make it more expensive.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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