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House prices have fallen but don't expect a housing affordability bonanza - Australia


06-23-2016

 

House prices have come off the boil and yet the economy hasn’t tanked. Where does that leave the Liberals’ scare campaign on negative gearing?

An auction sign
 
‘In the March quarter, the national average of the residential housing prices fell for the first time since September 2012.’ Photograph: Bloomberg/Bloomberg via Getty Images

Part of the Liberal party’s scare campaign against the Labor party’s negative gearing policy is that it will cause housing prices to fall. And yet the latest housing data suggests that such an occurrence is already occurring, with Sydney housing prices definitely coming off the boil, and the value of housing finance falling sharply as investors cut back their house buying.

The latest residential housing price data released on Tuesday by the ABS makes it pretty clear that the heat has gone out of the market. In the March quarter, the national average of the residential housing prices fell for the first time since September 2012. As ever, the big driver of the fall is the Sydney market which saw prices fall by 0.7% in March.

Coming off the back of a 1.6% fall in the December quarter, this meant residential housing prices in Sydney in March were 2.3% lower than they were in September last year.

That gives a bit of context to the scare campaign by the Liberal party, which has drawn on research by the Grattan Institute and Applied Economics to suggest Labor’s policy would cause house prices to fall between 2% and 4%.

Prices dropped by that amount in six months, and yet oddly, Sydney’s housing market (or economy) has not been destroyed.

While there have been some recent falls in prices, the annual growth remains strong, especially in Melbourne. While Sydney’s annual growth of prices has come down from the 19.9% of last September to 9.7%, Melbourne has taken over as the city with the fastest annual growth of housing prices with 9.8%:

But even with the heat gone from the market, let’s not pretend a bonanza of housing affordability has arrived. Since the end of 2011 when the Reserve Bank began cutting rates, house prices in Sydney have risen by 53%, compared to overall inflation rising by just 8.4% in that time:

The Sydney-centric nature of this latest housing boom is made obvious by a comparison of the median housing prices in capital cities since 2010.

Back in 2010, the median Sydney house price was 1.2 times that of those in Melbourne; now they are 1.5 times:

The initial reason for the slowing of housing prices last year was the drop off in investors. This was driven largely by a requirement for banks to limit the annual growth of credit to investors at 10%

And while the value of housing loans to investors began to fall last year, for owner-occupiers the growth in the size of the home loans continued to rise. But no longer.

In October last year, the value of investor home loans was falling by 8.9% in annual terms and owner occupier loans were growing by 19.5%. Now owner-occupier loans are growing by just 5.6%:

One of the problems with the ABS’s residential housing price index is it is very much in the rear vision mirror. The June quarter is almost finished and yet we’ve only just received the data on the March quarter.

In the minutes of its latest board meeting, the Reserve Bank noted that “prices increased significantly in Sydney and Melbourne over April and May and, to a lesser extent, in a number of other capital cities.”

And this was among the factors which stopped it from cutting the cash rate to a record low 1.5% (something the market still expects to occur by February next year).

But the comparison of the housing finance and housing price data does suggest that unless here is a sharp turnaround the growth in house prices should continue to fall:

One reason the RBA believes that housing prices over the next 12-18 months will ease is the strong backlog of apartment construction. The RBA noted that “the pipeline of residential work yet to be done had remained at high levels”.

Certainly in Sydney and Melbourne this is the case. Prior to 2012, in Sydney it was rare for there to be more than 8,000 non-housing dwelling units which had been approved for building, but for which construction had not commenced. Right now however there are nearly 13,000 such apartments/flats.

The picture is similar in Melbourne where the average level of 2,000 such units sky-rocketed to 4,600 in September last year:

The RBA argues that this “would continue to add to the supply of housing over the next year or so, particularly in the eastern capitals” and as a result, lessen even more the heat in the housing market.

For all the scare campaign about falls in the housing prices, the reality is that at various times housing prices do actually fall – even by the amount which the Liberal party suggests would be calamitous.

The mix of housing data across the nation – where prices are generally holding up in some capital cities but less so in others – has kept the Reserve Bank from cutting rates further. But such reticence may not last for long. The increase in supply of residential apartment in Melbourne and Sydney, coupled with the data showing mortgage growth is slowing is a solid signal that the housing market in the major cities is cooling.

If that is the case, the Reserve Bank will be able to cut rates to stimulate an economy that otherwise lacks much heat. If that occurs the cash rate would be 1.5%, making it twice as close to 0% than the 4.5% it was when the RBA started cutting rates back in 2011.

www.theguardian.com/

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