HIA sees “steady state” housing market


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By Leith van Onselen

The Housing Industry Association (HIA) has today released a Research Note entitled “Perspectives on Australian House Prices”, which attempts to review the state of the housing market with a view to establishing the likely future direction of prices.

The HIA first plots house prices and the number of house transactions between 2002 and 2012 across the state capital cities, noting that both prices growth and turnover have been weak over the past couple of years, with sales volumes also trending downwards over the past decade. By way of comparison, around 240,000 transactions occurred in 2002, compared to just 160,000 in 2012 (see next chart).

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The HIA then plots house prices as a multiple against average weekly earnings, noting that:

On average, house prices have been a multiple of about 4.5 times average annual earnings (as shown by the grey line). Over the last decade, the ratio has been consistently higher than this, particularly around early 2008 and again in mid-2010. Price falls followed in both cases and the ratio currently stands at about 5.7. This is higher than the long term average, but the gap is not of hugely significant magnitude. Accordingly, the most likely scenario is that prices will remain largely stable with no sizeable upward or downward movement taking place.

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Finally, the HIA plots mortgage repayments as a % of earnings, noting that:

…since 1990, average mortgage repayments have accounted for about 40 per cent of earnings. There has been considerable fluctuation around this figure. The ratio bottomed out during the late 1990s, with brisk growth in house prices following. These rises combined with interest hikes brought the ratio to a peak in mid-2008. Falling house prices and sharp interest rate cuts then caused the ratio to fall considerably. Currently, the ratio is slightly above its long term average. This suggests that the relationship between earnings, interest rates and house prices is balanced and consistent with stability in the market. Accordingly, any large price swings are probably unlikely in the near future.

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The HIA concludes its assessment arguing that Australian housing market is in a “steady-state”, whereby significant price movements are unlikely:

Overall, the analysis presented here indicates that the Australian housing market is relatively weak by historical standards in terms of transaction volumes and anaemic price growth over recent months. This state of affairs underlines one of the key features of housing markets generally, whereby low levels of transaction and turnover tend to accompany periods of subdued prices. Consequently, the return of sustainable price growth to the market would add welcome fuel to activity in the residential construction sector.

Our analysis also sought to establish whether any significant price movements were likely in the market going forward. The relationship between earnings and house prices is broadly consistent with its long term tendency which suggests that any significant movement in prices is unlikely. This is corroborated by our comparison of mortgage repayments and earnings, which are also in line with the long term trend.

In my view, the HIA’s assessment is justified if one believes that the Australian economy is also in a “steady-state”. The obvious fly in the ointment is a possible disorderly unwinding of the mining boom (i.e. sharp falls in both commodity prices and mining-related investment), which would adversely affect incomes, employment, growth, government finances, and potentially bank liquidity.

Full HIA report below.

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HIA – Perspectives on Australian House Prices (March 2013)

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    • The demographic headwinds are likely to mean a huge swing to apartment construction, but no less a total number of houses required.

      It depends of course on the projections for total population but most show some growth in the house owning/preferring age demographic (small in lower growth scenarios) but high to huge growth in over 65s who tend more to units as they age.

      • People want to age inplace and the move to units will not be as big as you think.
        Our death rates double over the next 2.5 decades and already we have many city burbs that have had a declining population from 2001 to 2011. That can not end well.

  1. What? An article on housing without a reference to restrictive planning? Don’t tell me MB is going off message 🙂

  2. If the long run average is 4.5 then logically the ratio has to spend some period below the average in order to maintain the average. The HIA seems to be making the case that house prices are near the average and therefore don’t face much downside risk, as though the average has now become the bottom. There’s an implied belief in that statement that higher multiples will be the new normal. Afterall, if you settle on the long run average being the new bottom of the range, then the next boom will surely go much higher.

    Unless I’m missing something??

  3. Only a spruiker could look at three very distinctly downtrending charts and declare a “steady state”.

    I think the moment I read the HIA capitulate, and declare that the market has “significant further declines”, I’ll buy 5 houses. It’s sure to be the bottom.

  4. While the unwinding of the resource extraction/processing/exporting investment boom will require managing, it is likely to be quite orderly in that it is unlikely that the best way to move forward will be to leave well-progressed projects incomplete.

    I expect treasury might be expecting and planning for the challenges of the wind down in that investment and have strategies in place.

    I also expect that state and federal governments will have seen the need to maximise employment from their grants to FHBs and industry and will tailor them accordingly, with income tax and GST offsetting the costs of grants.