Housing coming off the boil now

Stephen Roberts

Altair Asset Management

Banks have tightened their lending criteria further

There needs to be a big jump in the value of housing finance commitments in the September data due in mid-November to escape the conclusion that the all important financing tap for the housing boom is being turned back. It is possible that there may be a delayed positive reaction in housing finance commitments to the RBA’s 25 bps cash rate cut back in early August, although keeping in mind that lenders passed through barely half of that cash rate cut to home loan rates, a source of disappointment rather than rejoicing.

Even if there is a September bounce in housing finance commitments it is very hard to see it as more than a blip in the decline that seems to be setting in. Banks have tightened their lending criteria further for housing investment loans in recent weeks. Evidence of problems in settlements of earlier buy-off-the-plan purchases are mounting.

At the very least it means that purchasers of newly-built home units have more reason now than they have had over the past year or two to postpone any prospective home purchase with the chances improving of bargains down the track. Oversupply of rental properties and moderating, or even falling residential rents, are also working towards waiting longer before buying.

Foreign property investor demand, especially from China may wane

Another plank that has been supporting the housing boom - the buying activities of foreign investors, especially from China - is also wobbling more dangerously after China’s authorities started to focus last week on excessive house price speculation in China.

Rapidly rising house prices in several major cities in China is threatening to sharply lift the number of current and potential urban dwellers unable to consider ever buying their own home. This rising inequality among those living and wanting to live in China’s big cities is a growing force fostering potential political instability at a time when cracks at various levels of the ruling communist party are starting to show. It is reasonable to assume that policy moves to contain house price inflation in China will increase and will reverberate through to investment demand for housing overseas too.

 

Some sellers may be holding back in this Spring property selling season

There still are some forces providing a last wind to the housing boom in cities such as Sydney and Melbourne, of which perhaps the main one is that potential sellers of existing homes have been holding back in the current spring selling season (relative to spring 2015), causing some shortage of supply relative to demand at auctions, producing some final upward price tension. The problem is that those holding back properties in the hope of higher prices down the track could and likely will be easily frightened into trying to catch high prices while they are available.

The scare could come from forces in the wings that look set to push down a fragilely-balanced housing market. The current under-supply of homes for auction could turn very quickly to an anxious rush of sellers trying to catch the last of the high house prices.

 

A big prospective negative for housing is interest rates

The main negative force in the wings is that interest rates are no longer falling and home lending interest rates may rise over coming months. This is not to say that the RBA is about to lift its cash rate, it is not (in our view).  However, the RBA is looking much more reluctant to push its cash rate down in the near term. The next RBA policy meeting on 1st November is a key one in the sense that coming after what we expect to be another very low inflation report in late October, the RBA looks set to leave the cash rate unchanged at 1.50%. If the cash rate remains unchanged, it is likely to reinforce the upward pressure on longer-term interest rates that has developed over the past month (Australia’s 2-year government bond yield is up 16 basis points to 1.70% and the 10-year bond yield is up 29 bps to 2.25%). Funding costs for banks are also starting to rise and the trend seems set to continue in the next month or two, especially if a ‘no change’ cash rate decision by the RBA in early November is followed in December by a decision by the US Federal Reserve to hike its funds rate by 25 bps, as seems increasingly likely.

 

Even a small rise in home loan rates may be enough to flatten housing…

It is rapidly turning towards a matter of when rather than if Australian banks start to lift their home lending interest rates. The housing market is already starting to exhibit warning signs that the boom is coming to an end. Even a small rise in home loan interest rates may prove to be all that is needed to flatten the housing market completely or worse.

…with an impact on our growth (and policymakers) in 2017

There are warning signs aplenty that home buying and building activity will be much less robust in 2017 than in 2016. The contribution to economic growth from housing will be less in 2017 than in 2016 and will probably lessen the contribution to growth from housing related consumer spending too.  In time, policymakers will respond to the weakening outlook, probably with the RBA resuming its cash interest rate cutting program around the middle of 2017. Even when interest rate cuts start to flow again, it may take some time to restore confidence in the housing market.

[Altair Economic Insights 12 October 2016_weekly.pdf]


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Stephen Roberts
Chief Economist
Altair Asset Management

Stephen is the Chief Economist and a member of Altair’s Investment Committee. He provides a comprehensive review and outlook of macro-economic factors likely to influence financial markets. Stephen is an economist/strategist who has worked for...

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