Following on from yesterday’s post questioning whether housing construction can recover enough to fill the void left as the mining investment boom unwinds from 2013, Bank of America Merrill Lynch has written an interesting report also arguing that the recovery in building construction will be “relatively moderate” as interest rates are cut. From Property Observer:
The RBA is hoping that when the mining and liquid natural gas (LNG) investment boom tails off in the next few years, the slack will be taken up by a boom in housing construction and a broader recovery in the housing market…
But in a research report, [Bank of America’s] Eslake and Joiner say that despite the RBA being over a year into the current monetary policy easing cycle, “the response from both house prices and residential construction has so far been measured at best”.
“We argue that due to structural and cyclical factors that any upswing in dwelling prices and investment over the coming year will remain relatively modest compared with previous cycles”…
“This underperformance of detached housing approvals in particular is likely to result in the overall recovery in approvals and subsequently residential construction in the coming year being significantly less pronounced than in previous cycles”…
“This is especially true when we note that at least part of the strength in ‘other’ approvals was prompted by regulatory changes and alterations to state governments’ first home buyer grants (which will nonetheless boost dwelling investment growth in the short term).”
“Our rationale for this is that despite easier monetary policy and Commonwealth and state government initiatives designed to boost the supply of housing (first home buyer grants, negative gearing etc) several factors are conspiring against any significant and sustained addition to housing supply”…
“However, with approvals levels only 10% higher than lows experienced in early 2011 the recovery been less than convincing thus far (levels remain 10% below average levels since 2000).”
“With uncertainty in the labour market high, household caution will likely keep the recovery in approvals levels more modest than we have seen in previous monetary policy easing cycles. This will cap any recovery in housing credit growth going forward from what is currently historically low on an annual basis.”
“With the debt to income ratio now having ‘plateaued’ at around 150%, households have seemingly recognised a limit to their borrowing capacity.”
“As such, a more modest expansion of incomes will result not only in lower house price growth but also significantly slower growth in housing credit”.
The above Bank of America chart showing the response of house prices to the last four interest rate cutting cycles is similar to one below, which plots the change in the value of investor and owner-occupied housing finance approvals (excluding refinancings) in the latest cycle (commencing November 2011) against the cuts to official interest rates that occurred in 1996, 2001 and 2008:
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Clearly, the response to falling interest rates this time around has so far been historically very muted, which suggests that the housing recovery as interest rates are cut will be moderate. If the status quo persists, the RBA and Treasury will need to find another source to offset the drag on growth, jobs and incomes as mining investment fades.
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
