Last week, we asked three experts whether the Australian housing market had found a bottom in recent months. While the contributors opinions differed on the overall direction and level of risk, one thing they all appeared to agree on was that no outcome is certain. Uncertainty is a fact of investing, which is probably why the saying (often incorrectly attributed to Yogi Berra), “predictions are difficult, especially about the future”, is so popular among investors.
While we can’t predict the future, we can assess the present by looking at the latest data. But what are the best data series to watch? Read on below to find out what our three contributors think. Responses come from Damien Klassen, Nucleus Wealth; Dr Shane Oliver, AMP Capital; and Angela Ashton, Evergreen Consultants.
The three factors that could move the dial
Damien Klassen, Nucleus Wealth
The table in the previous wire has a longer list of the key factors we expect to affect house prices, but there are really only three factors we believe have the potential to change significantly enough to be the primary cause of upside or downside.
Australian Credit growth:
The Royal Commission into banking reversed the credit boom and was enough to see house prices down around 10%, even while most other factors affecting house prices were still positive.
If I am too bearish (particularly in the short term) and the Morrison government manage to get the already over-levered Australian households to take on more debt, this is where you will see the effects first.
On the regulatory front, the Westpac v ASIC responsible lending court case win for Westpac is a boost for easy lending conditions. ASIC public hearings into responsible lending over the next few months will be key to how easy the lending conditions will be.
Foreign demand was key to both the boom and the bust:
China cracking down on its capital account and deteriorating relations between Australia and China suggests foreign investment will remain low.
The key upside question is whether Hong Kong unrest sees increased demand in Australian property.
There is not enough space here to go into the detailed links between house prices and unemployment. Indicatively, during the 2012 to 2017 housing boom years, the Perth market faced largely the same factors as Sydney/Melbourne except for (a) slightly weaker population growth and (b) rising unemployment. And Perth property prices fell more than 10% while the rest of Australia boomed.
We are expecting considerable job losses in the construction sector.
Source: ABS, Seek, UBS
Add to this job losses from Victorian and NSW state government austerity. Any global shock (trade wars, recessions, debt crises) is likely to be transmitted to the housing market through higher unemployment.
Three charts I’ll be watching
Shane Oliver, AMP Capital
The following are the key things to watch for:
First, that clearance rates remain high and that this translates to improved listings and sales volumes. If not it’s doubtful the recovery in house prices will have any legs.
Source: Domain, AMP Capital
Second and related to this, monthly housing finance commitments need to bottom out and start to trend higher – even if it’s only slowly. There have been some tentative signs of this recently but then again it could just be normal monthly volatility in the housing finance data. Again, if the flow of credit to housing market does not improve there won’t be much recovery.
Source: ABS, AMP Capital
Finally, and most importantly, unemployment will be the key one to watch. We expect unemployment to drift up to around 5.5% by year-end, but a sharper rise could result in forced property sales and another leg down in property prices. This is not our base case but is the key risk in terms of the property outlook. Much higher unemployment is something the RBA is keen to avoid – in fact it wants unemployment to fall to 4.5% or below – so our view remains for further cash rate reductions in the cash rate ultimately taking it down to 0.5%. But given the risks to global outlook flowing from President Trump’s trade wars, there is no guarantee that this will work.
Source: Bloomberg, AMP Capital
A snapshot of key drivers
Angela Ashton, Evergreen Consultants
This is by no means exhaustive but provides a snapshot of some of the important drivers and how these manifest, such house prices relative to income and lending rates. It also entails looking at determinants of disposable income and lending conditions. Finally, we look at dwelling approvals for private sector houses and related commencements as these to help frame industry sentiment.
In previous wires, we looked at certain valuation measures and noted that at the end of March 2019 Aussie house prices were potentially cheap when considering changes in income and lending rates. This is depicted by the green line in Exhibit 1, which is the average of median established house prices nationwide compared this to annualised Average Weekly Earnings (AWE) and is adjusted for changes to the standard variable home loan rate.
Exhibit 1: Australian established house prices
We think that the message from Exhibit 1 is important because it demonstrates the sensitivity of Aussie house prices to changes in interest rates and expected changes. If Australians think they can afford to buy property, then they are strongly inclined to do so. The record highs reached in nationwide established house prices in December 2017 were only able to do so because lending rates were low, and credit was freely available. As credit conditions tightened, funding began to dry up and house prices fell. On the valuation metric above, property prices are arguably cheap and with lending rates falling and financial conditions beginning to ease, prices are likely to adjust higher.
The RBA releases its estimate of the average standard variable interest rate and the discounted rate for both owner-occupiers and investors. The fixed rate loans are currently well below variable rates, suggesting that the latter have further to fall. The RBA also releases a monthly credit series, which contains total housing lending split into owner-occupied and investor-related. It shows that the annual data have been weak, but we believe it will bottom before year end, particularly in owner-occupied.
Exhibit 2: Housing related credit growth
Disposable income is an important determinant of loan approval and serviceability. Here we like to focus on earnings growth and hours worked. As compensation of employees rises, this increases the income available for present and future consumption, along with loan serviceability. Data relating to hours worked can be found in the ABS’ monthly Labour Force data. For June 2019, annual growth in hours worked was 2%, above the twenty-year average of 1.7%. The ABS also releases quarterly Wage Price Index data with the next release scheduled for mid-August. The quarterly National Accounts data gives a direct reading for Compensation of Employees (up 4.3% for the end ended 31 March 2019), but the next instalment is due to be released in September. Finally, the most recent read for private sector housing approvals was in June and it showed a 0.4% increase, seasonally adjusted. However, the long-term trend is still weak.
With a slew of economic data due shortly, culminating in the release of June quarter GDP data on September 4th, investors will have plenty to consider in the coming weeks. By this time next month, we should have a better idea of how the Australian economy and housing markets performed during the second quarter, though it will take at least another three months after that before we’ll know for sure whether the recent changes have had a lasting impact or not. In the meantime, here are some handy resources to keep an eye on:
- Australian Bureau of Statistics, browse statistics by release date.
- Reserve Bank of Australia, News and Announcements.
- Reserve Bank of Australia, Chart Pack.
- CoreLogic Home Property Value Index - Monthly.
- CoreLogic Monthly Chart Pack.
Forex Factory Economic Calendar.
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