There are many signs that the Australian economy is strengthening. Exports of goods and services are rising strongly. Employment growth has been unusually strong. Business investment spending is starting to lift. Despite these positive signs concern remains about the potential fragility of household spending. Slow wages growth and a high debt burden are turning households in to more cautious spenders by necessity. That constraint could be starting to ease. Wages growth is not as weak as it was last year and there are several signs that the modest lift in pace so far will accelerate with labour shortages showing in a widening range of occupations.
As one cloud hanging over the household sector is showing signs of evaporating another is in the process of forming in the shape of a weakening housing market. The problem is not so much one that a correction is occurring in housing. That was always going to occur with the excess of new home building activity occurring in the major cities of the Eastern States coinciding with lending regulatory authorities acting to quell the frothiest part of demand for housing by investors. An improving economy would accommodate without too much damage less robust housing for a year or two.
A major and prolonged downturn in housing, however, is a different matter and could potentially tip the economy in to recession. Housing data so far in 2018 is still mostly consistent with a modest (less than 10% price correction) and comparatively short-lived (around 2 to 3 year) downturn in housing, but there are one or two signs that the downturn could be sharper and more prolonged.
One worrying sign is that the total value of housing finance commitments has fallen for nine months in a row including the latest reading for April 2018. That run looks set to extend to ten months with the May housing finance report due this week. One saving grace is that the monthly falls have been modest for the most part and despite the falls the value of total housing finance commitments was up 3.3% in April 2018 compared with April 2017.
The reason for the modest monthly declines in the value of housing finance commitments is that housing finance commitments to investors in housing and owner-occupiers are moving in opposite directions. The value of investor housing finance commitments fell by 15% between April 2017 and April 2018, whereas housing finance commitments to owner-occupiers rose by 4.2%, a healthy annual increase.
Investors in housing have borne the brunt of tightening lending conditions under the direction of the lending authorities. Some of the changes in lending conditions such as the much lesser availability of interest only loans will have a long tail influence on housing investors with a proportion likely to reduce their exposure to investment housing to cope with higher servicing payments on principle and interest loans.
It is probably fair to say that most of the decline that has occurred in house prices so far in the previously frothiest housing markets such as Sydney is down to the changing behavior of housing investors. In contrast, the behavior of owner occupiers, based on rising value of home loan commitments in that sector, has not changed. Owner-occupiers are cautious net buyers taking advantage of lower house prices. This “bargain-hunting” behavior is evident particularly among first-time home buyers accounting for 15% of all home loans in April, the highest proportion of total loan commitments in several years.
This evidence of “bargain hunting” in the housing market by owner-occupiers is insufficient to offset completely the weakness in investment buying but it is a hopeful sign that the housing correction will be moderate rather than severe. Nevertheless, the continuing downturn in investor housing activity and the approaching over-supply of new home units in parts of the Brisbane-Melbourne-Sydney markets bares watching and at worst could still turn a modest housing correction in to something rather worse.
Yet it is worth keeping in mind that a severe housing downturn is a risk factor in what is otherwise an increasingly promising Australian economic growth outlook. However, because the rest of the economy is performing better with all that implies in terms of strong employment growth, better wages growth and improving investment spending in general, the risk of a severe housing downturn diminishes.