Housing: Dead cat bouncing?

Chris Watling

Longview Economics

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. 

Chris Watling
CEO & Chief Market Strategist
Longview Economics

Longview Economics, founded in 2003 by Chris Watling, is an independent research house based in London, providing three distinct yet interrelated groups of research products: Short and medium term market timing; Long term global asset allocation...

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