Residex house prices

Residex has released some new stats on the Australian housing market. I tend not to follow Residex to closely. I prefer RP Data’s hedonic methodology. However, in the interests of full disclosure it is always important to get a second opinion.

The latest data from Residex is below. There is nothing remarkable about it and if I was asked to describe it I would use the word “flat”.

What is interesting however is the associated commentary from John Edwards, the CEO. I consider John to be a bit of a housing bull, but his latest statements appear, at least to me, to be quite bearish:

Overall, the outcome for the year ahead will depend on interest rates, the eurozone crisis, inflation, the employment level and the carbon tax.

The recent move by the ANZ bank, which will probably be followed by others in due course, to set its home loan rate independently to any interest rate adjustments by the Reserve Bank has reduced the power of the only economic lever that the RBA had. The banks tell us, and it seems very reasonable to believe, that borrowing rates are not significantly aligned with the Reserve Bank cash rate as banks are significant off-shore borrowers.

Consumer confidence and recent retail activity points to a cash rate reduction by the Reserve Bank in February as the most probable outcome. The issue will then be, will lenders pass on the cut and how much will they opt to pass on. The interest rate separation will probably lead to larger RBA cuts in the cash rate than what would have otherwise been necessary.

For Europe, we are approaching the point where decisions and actions are needed and it is likely that the markets will force an outcome. We expect the 17 nation eurozone to change and that it will spend a significant part of this year in recession; in particular the first part of 2012. Further, Standard and Poor’s has just cut the credit rating of nine countries using the euro, including France. This action has the potential to make things worse as the cost of funds is likely to rise as a consequence.

Domestic inflation will be critical to the actions of the Reserve Bank. Recent inflation outcomes have been favourable and in November, the RBA lowered its inflation forecast for 2012 to 2.5 per cent which is within its target band. Inflation doesn’t appear to be an issue in 2012 and should not be the cause of any rate rises.

The new carbon tax comes into effect from July 2012 at $23 per ton of carbon pollution. Tax payers with incomes of less that $80,000 get a reasonable tax cut but we are not prepared to guess the actual impact on the economy and the resulting behaviour of consumers.

In light of all of the above, it is easy to form a negative view about the likely outcome in 2012. I urge you to acknowledge how lucky Australia is and recognise that if the year does unfold in a negative nature, it also provides opportunity. Australians are much better placed than many other people in the world and the adjustment period we have recently seen, with a clear upswing in our markets in the last few months, means that there is a reasonable chance that our markets will advance positively, albeit by a relatively small amount, in the current year. Additionally, in this situation there will be bargains for the astute house hunter along with quality growth in many suburbs.

As I say , I don’t follow the Residex data , or comment too closely, but those statements certainly don’t instil me with enough confidence to suddenly rush out and buy another property. Lots of downside macro-economic risks versus some historical based hope. Sure you could be lucky, but on balance I think I’ll take a term deposit and wait and see thanks.