Macro

Back in 2017, we outlined the case for an Australian recession based on a retrenchment of household spending brought about by a negative wealth effect. 

At the time the Australian household savings rate was around 4 – 4 ¼% and as central bankers globally embarked on a tightening course at that time, the key driver of high Aussie house prices (i.e. cheap global & Aussie money) was about to be removed and house prices were, therefore, expected to come under pressure.

If correct and house price weakness commenced, we then laid out the case for Aussie interest rates going to zero and QE being used/discussed by the RBA. Subsequently, Aussie house prices suffered from that tighter global monetary policy (and tighter domestic mortgage regulations) and the economy has slowed (although has, so far, skirted recession).

Much has changed

As a result of that house price weakness, though, it’s become a consensus that the RBA will probably reach the lower effective zero bound, while discussion of possible QE in Australia is widespread (including by the RBA governor).

Clearly in the past six months (i.e. since the election in May), though, much has changed (again): 

  • The Liberal-National coalition won a surprise election (which ensured that negative gearing wouldn’t be banned); 
  • APRA dramatically changed its debt serviceability calculations; 
  • The RBA has enacted a series of rate cuts. 

All of this has generated a strong relief rally in house prices. Melbourne and Sydney house prices are for the past four months (i.e. June through to September – latest data), according to core logic; while loans for first-time buyers is at its highest in over a decade.

Aussie Housing: A dead cat bounce?

All of which leaves the key question: Is this a long-lasting sustained and new uptrend in Australian house prices? Or is this a dead cat bounce?

Dead cat bounces often occur in housing markets after significant falls, as pent-up demand is unleashed by initial rate cuts. Judging how durable and long-lasting that initial bounce will be is, therefore, critical.

Interestingly, in that respect, while prices have bounced along with some of the housing-related lending data, other parts of the housing market are not responding as would be expected (if this was to evolve into a more enduring rally). 

Housing transactions close to record lows

The actual number of housing transactions, for example, remains at low levels. After an initial bounce in May (on election relief), the total number has drifted lower with little strength in volumes post-May. August volumes were amongst the lowest on record (FIG 1).

FIG 1: Australian housing transactions (thousands, monthly data)

Approvals for new residential buildings still falling sharply

Consistent with the low volumes of housing being sold, residential construction activity also looks weak. Approvals for new residential buildings have continued to fall through to August (latest data) and is down sharply over the past 18 months and close to recent record lows (FIG 2). 

FIG 2: Australia approvals – residential houses (thousands)

With that reduced residential construction activity, not surprisingly, private residential investment (part of GDP) has also slowed as a share of GDP from record highs (and is now mid-range).

Still a close call

As such, the outlook for Australian house prices remains a close, and key, call. 

As well as rate cuts, other factors have also come into play to support the economy, including the surprising strength in the iron ore price, which has significantly boosted exports (and been an important underpinning of Australian growth this year). Strong wage growth has also been surprising, given the economic sogginess.

While part of the surge in iron ore prices earlier this year reflected the breaking of the dam and subsequent issues at Vale in Brazil, prices had already been robust ahead of that event. Much of that Vale induced price move has now come out of the price. Today iron ore looks finely poised. Given the lack of re-acceleration and limited stimulus in the Chinese economy, upside in the price is expected to be limited.

Ultimately, though, and like most Anglo-Saxon economies, the most important swing factor remains the outlook for housing. If housing remains robust, then the household savings rate will remain low. If house prices return to a phase of sustained weakness, then consumer confidence should weaken further (FIG 3) and the savings rate back up sharply (driving the recession dynamic). 

FIG 3: Westpac consumer expectations index 

Rates still heading to zero

Complacency about the housing outlook, though, has crept back into market discourse, following the recent bounce in certain measures of activity and prices. 

That, though, seems premature – especially given the lack of transactions and weak construction activity highlighted above. For now, the key focus is on the housing indicators and, whilst finely balanced, our expectation is for further softness in housing, after that initial relief rally.

Over time, therefore, and once housing weakness resumes, then Aussie rates seem destined to reach their effective lower bound with QE likely to follow. 

Our original 2017 expectations, therefore, remain in play. 




Comments

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Harry

Just for the record I state again. If they lower rates further and bring in QE in Australia it will be the death knell for the economy and it will be at least 10 years before the stupidity of the current economic policies are realised and then all these people who are supporting QE will have run for cover and as usual will say theta they really were against it . Central bankers have become politicians and hence are more interested in their own hubris rather than the day to day workers and tax payers who fund them. The absolute incompetence of the leadership of the World Bank has been known for at least a decade.

Michael Croft

Interesting, I wonder at what point the falling housing approvals will feed into the supply/demand dynamic. In the absence of a recession, I would have thought that as the supply pipeline dries up, it would put pressure on house prices. Australia is still importing 260,000 people a year, and they have to be housed.

jack Upton

Seems like your "recession" prediction - along with all of the other identical predictions - was way off the mark. The overlooked factor is that "people have to live somewhere". The world is certainly more dynamic than ever before and predictions have to take into account a new mindset where millenials et al "live for today" because they believe that tomorrow will look after itself - or at least the government will look after us. That they are sleep-walking into a totalitarian future is of no consequence to them as they do not understand the consequences. Big City Syndrome further exacerbates the problem by driving up costs exponentially. Demographers are the more relevant predictors of the future "state of the matter" in concert with economists. The "state of living" dynamic is more complex than ever. I just feel that your parameters for analysis are not moving fast enough to make accurate predictions. Admittedly, the welcome win by Morrison certainly put a spanner into the works of your 2017 prediction - but it doesn't preclude error by ignoring the mindset factor of the coming generation.

Mark Dawson

Yes we're in a never ending debt spiral, however I reckon a dead cat always has one last bounce. This one may bring us part way through next year before running under the bus. The geniuses that thought of taking on more debt, helicoptering money to the mignons and taking away interest rate increases to less than nothing should've first learnt basic 101 mathematics. It's never going to work! It's a short term solution that's been going on for years. Like a leaky boat or badly applied band aid. We could be in for a long slow recession. Hopefully stock market prices don't recede by 30-40% or more. I'm hoping you're readers have got some gold in their portfolios because one day soon most currency's could be worth a whole lot less. Good luck with your investing and sorry about all the doom and gloom.