By Leith van Onselen
I came across an interesting article yesterday by The Cupboard’s Economics Editor, David Uren, entitled: Australian housing market just a jobs crisis away from collapse. It is one of the more bearish pieces we’ve seen in the increasingly circumspect MSM recently. Let’s take a look:
STOCKS of unsold apartments and houses are growing as buyers desert the housing market.
While the rate cuts late last year helped to stabilise property prices, the market remains vulnerable and would be threatened by any rise in unemployment.
Australia has so far been saved from the kind of housing market collapse witnessed in the US, Britain, Spain and Ireland by the lack of forced sellers.
People are putting their houses up for sale and, when buyers do not turn up, leaving them on the market. The numbers of vendors accepting more realistic offers has resulted in the slow downward drift in house prices in the past year.
Turnover in the market is at a 16-year low, with RP Data counting only 375,000 properties sold last year. In more normal times, sales were over 600,000 a year.
While turnover is down, the number of properties listed for sale is climbing ever higher, standing at about 310,000 properties. This is up 23 per cent on a year ago and more than 50 per cent above pre-global financial crisis levels.
The market has about 10 months’ supply of housing for sale, up from a more normal level of four months. If you’ve noticed a number of “for sale” signs in your street for months, this is why.
First, the below chart shows that housing transaction in calendar year 2011 were the lowest in 15 years and 25% lower than it has been on average over each of the last 10 years:
And the below chart shows the sharp rise in the number of homes for sale:
Finally, the lower housing demand and increased supply has resulted in the drift downward of Australian capital city home prices, which were down -5.5% from peak as at February 2012:
Back to Uren:
The situation is worse in the market for new homes. Construction started on only 33,700 new properties in the December quarter. Australia first started building this many houses a quarter in 1970, when the national population was just 12.5 million.
The total has been falling since the financial crisis stimulus-related work started winding down in June 2010, with a 25 per cent fall since then. The Housing Industry Association’s count of new home sales has fallen by one-third in the same period.
There are different state stories. Victoria is coming off an elevated level, while sharp price falls in southeast Queensland have greatly reduced new home building there. NSW has been falling since 2004, while Western Australia suffered serious over-building five years ago.
Indeed, one of the most disappointing features of the Australian housing market has been the complete lack of a supply response as house prices rose and Australia’s population grew. As argued by Uren, and shown by the below chart, dwelling commencements were as high in the December quarter of 1970 as they were in December 2011, despite Australia’s population being nearly twice as large now as it was then:
Of course, Australia’s recent housing construction performance has not been uniform, with Victorian building levels remaining elevated whilst New South Wales and Queensland’s, in particular, has remained depressed:
Back to Uren:
The odd thing about the housing downturn is that it is occurring at a time of low unemployment, healthy income growth and improving housing affordability.
The idea of the cautious consumer has entered economic commentary as an explanation for the sharp fall in household borrowing growth, increased household savings and the weak state of retail spending.
Reserve Bank of Australia deputy governor Philip Lowe has noted that changes in consumer behaviour started to become evident in the mid-2000s. One indicator was that the run-down in the number of people ahead of repayments on their mortgage, which had been under way for the previous 15 years, stopped. The extent of borrowing against the home for spending also fell.
Lowe speculates that the extended period of high debt and spending and low saving was a period of adjustment to the era of low interest rates and financial innovation that had run its course by 2005, and what we see now is the new normal. But the GFC entrenched the change in mood, bringing to an end an era in which people believed they could inflate their earnings and save for the future by relying on capital gains.
As we at MacroBusiness have argued many times before, the run-down in savings over the 1990s and 2000s was an aberation. Household savings rates have now returned to their long-run trend and are likely to remain that way for the forseeable future:
The era whereby Australians borrowed heavily against the equity in their homes is also over, as shown by the below RBA chart:
Back to Uren:
Reduced population growth in the past two years has also dampened demand. Many analysts believe the caution about taking on mortgage debt is repressing the formation of new households, keeping adult children at home longer.
The best indicator of demand in the housing market is the number of mortgage loan approvals. This is down by one-quarter from 2009, when government stimulus programs brought first-home buyers into the market, and from the pre-GFC level.
There had been some improvement in the latter half of last year, helped by the Reserve Bank rate cuts in November and December, but January’s approvals were again weak and the industry expects the increase in mortgage rates by the banks after the February Reserve Bank board meeting to further reduce demand.
Auction clearance rates have come down by about 10 percentage points in Melbourne and Sydney since the banks moved their rates last month, even though the move was just 10 basis points.
Not only are fewer loans being written, people are borrowing less. The average loan size last month of $291,300 was the lowest in two years.
As noted last week, the number of owner-occupied housing finance commitments are depressed at around 12% below the five-year moving average (see below chart):
Later, Uren turns to Australia’s worsening employment outlook and what it might mean for Australian house prices:
People losing their jobs or running into trouble with their own small business is the main cause of people falling behind on their mortgage. Forced loss of employment has been very low until now.
The messages on the labour market are mixed. Job advertisements are gaining strength, but households are increasingly pessimistic.
Westpac and the Melbourne Institute’s unemployment expectations index is approaching the level seen during the introduction of the GST in 2000.
The Reserve Bank and the government expect unemployment to rise slightly from 5.3 per cent to 5.5 per cent. The Reserve Bank is unlikely to be spooked into interest rate cuts by a couple of poor labour force reports, as it already expects them.
The danger for the bank is that it leaves rates too high for too long, and the jobless rate rises further than it expects.
Rising unemployment could unleash a wave of distressed sales in the housing market. With the fundamentals of housing supply and demand already so weak, the price movement could be much larger than the present downward drift, with which the Reserve Bank appears comfortable.
Clearly, Australia’s employment outlook has worsened, with almost no jobs created nationally over the past 12 months and Australia’s two most populous states – New South Wales and Victoria - actually losing jobs:
There are also unresolved questions around whether the official Australian Bureau of Statistics (ABS) measure of unemployment could converge towards the unofficial Roy Morgan measure, which has shown a much larger increase recently:
Uren’s analysis is reasonably argued and there is solid evidence to back his assessment of the risks.