The Australian property market - particularly Melbourne and Sydney - has gone from boom and FOMO in 2017 to slump and FONGO last year and now looks like its heading back to boom again with FOMO returning! (FOMO = fear of missing out, FONGO = fear of not getting out.)
The boost from the election result, RBA rate cuts and the relaxation of the 7% mortgage rate serviceability test are continuing to drive a surge in home prices as demand that was pent up over the period of falling prices between September 2017 and June this year has been unleashed. The rebound in demand continues to be evident in strong auction clearance rates in Sydney and Melbourne. See the next two charts.
While this initially came on very low volumes, listings have now picked up following the normal pattern that sees clearances lead volumes. As a result sales at auctions are now running 70 to 80% up on year ago levels.
The high level of auction clearance rates points to a continuing rebound in home prices in Sydney and Melbourne into early 2020. Based on past relationships the current level of clearances points to annual house price growth of 10 to 15% over the next 6 to 12 months. In fact over the last four months annualised price growth in Sydney and Melbourne has been running at 23%.
Our base case remains that after an initial bounce house price gains will be more constrained than what we saw through the 2012-17 property price boom. Compared to past recovery cycles household debt to income ratios are much higher, bank lending standards are much tighter, there are still more units to hit the Sydney and Melbourne property markets and unemployment is likely to drift up as overall economic growth remains weak. This should see property price gains slow to a more moderate pace of say around 5% pa once the initial rebound runs its course. However, this looks unlikely to occur until around April-June next year by which time property prices will have surpassed their 2017 highs in Melbourne and Sydney (by around February and May respectively on our estimates). For 2020 as a whole average capital city property prices are expected to rise by around 10%, with continuing strong gains in the first quarter giving way to a more constrained pace from around April-June.
However, the rapid rebound in Sydney and Melbourne property prices since mid-year poses the risk that we will see much stronger gains for longer as price gains feed on themselves attracting more buyers back into the market who fear that they will miss out. The extent of the rebound in the last few months also highlights ongoing issues around the undersupply of housing relative to strong population driven demand. There are three key things to watch going forward:
- First, if auction clearances remain elevated as listings continue to pick up into next year then it will be a “positive” sign that the pick-up in the property market has more to go. So far this has been happening.
- Second, housing finance commitments – recent months have shown an upswing and this will need to pick up a lot further for rapid price gains in Sydney and Melbourne to be sustained. Total credit is less relevant as it reflects both the flow of new lending and the flow of repayments, with the latter having been strong in recent times as existing borrowers focus on paying down debt in the face of economic uncertainty.
- Finally, unemployment will be critical. If it picks up significantly in response to slow economic growth then it will be a big constraint on house prices and could result in forced property sales and another leg down in property prices. A sharp rise in unemployment is not our base case but is the key downside risk in terms of the property outlook. But we do see weak economic growth and an upwards drift in unemployment ultimately constraining property prices gains.
A big issue remains whether the rebound in the Sydney and Melbourne property markets will present a problem for the RBA in terms of further easing whether by rate cuts, quantitative easing or both. This will no doubt cause some consternation at the Bank. But as we saw over the 2012-17 period the RBA will do what it believes is right for the “average” of Australia as opposed to a couple of cities. However, it may have to return to tighter regulatory controls again if housing credit growth starts to get out of hand again. In other words, we don’t see the rebound in the Sydney and Melbourne property markets as a barrier to further monetary easing, but if it continues to gather pace leading to a rebound in credit growth to levels that causes the RBA to worry about financial stability then expect a new tightening of the screws from bank regulators. With housing credit currently benign at 3% year on year any such tightening looks at least six months away.