Please find below Residex’s latest housing market update, which includes house and unit price results as at end-February 2013, whereby house prices rose at the national level (+0.96%) and unit prices fell (-0.15%).
In this month’s report, Residex’s founder, John Edwards, sees continued improvement in the housing market. There is one big fly in the ointment, however, with housing transaction volumes falling to their lowest level since 1999 across January and February. When combined with the recent collapse in first home buyer demand, it is difficult not to view this recovery as anything but tentative.
Things in the financial world and the Australian housing market are looking fine and I am pleased to be delivering a positive newsletter. The Westpac Melbourne Institute Index of Consumer Sentiment rose from 108.3 in February to 110.5 in March. This follows the 7.7% jump in the Index which printed in February and marks the fifth consecutive month that it has registered above 100. Much of the population is feeling positive about the current situation.
The housing market is presenting growth on an Australia wide basis and the trend is moving in an upward direction (see Graph 1). The only negative is the political situation but this does not seem to be causing any significant problems for the time being. The population appear relatively confident about the likely outcome given the recent polling.
Graph 1
Overall, I was in a positive mood, then the unthinkable happened – The European Union announced that it will only provide the required funds for a Cyprus bailout if the government imposes a new tax on depositors’ funds.
In reality, the tax is a one-off government confiscation on the savings of ordinary people where their funds are held in the apparent safe haven of a bank. Parliament rejected the proposal; however, if you are in Greece, Italy or one of the other countries currently subjected to austerity programs, you would have to worry that your money may also be subjected to a government imposed confiscation. It certainly is a quick way to solve problems and move to a more normal based economy; however, the downside of the process is that it significantly undermines confidence in the banking system and potentially causes a run on the banks.
It is speculated that one reasons why the probable German-led imposed tax was implemented is the widespread belief that the Cyprus banking system is used by Russians to launder funds. Be that as it may, the approach could well be the beginning of the unwinding of the EU.
The Cyprus Government turned to the Russian Government and it seemed logical that President Putin would back a proposal to sort the problem. President Putin is said to be a very savvy politician and the requirement was for a relatively small amount of funds when considered in relation to the total Russian economy (it is said to be about 12 billion euro). Help from Russia would significantly increase its political influence in Europe.
The solution is restructuring the banking system. Significant amounts of funds will be lost by depositors and Russia will be involved in restructuring. Reports on the extent of the situation are sketchy and overall it is too early to understand what consequences may follow. However, the process will undermine the confidence in the banking sector in Europe. Only time will identify the extent of the collateral damage.
So perhaps I jumped the gun in saying this was an unthinkable event. It is probably more likely to be a bump along the rocky road to a solution in the eurozone and therefore my attitude to Australian property markets remain as it was a week or two ago.
In last month’s newsletter I promised to provide information on and take a closer look at the relationship between Consumer Sentiment and dwelling growth. Graph 2 presents the relationship, commencing in December 2009.
Graph 2
Naturally, movement in sentiment has to be significant for considerable growth to occur in the housing market. The impact of falling or increasing sentiment only manifests in housing growth numbers some time after a period where the change has occurred. Further, movements are not significant and it can be argued that the events causing sentiment to improve or deteriorate are in fact the cause of the changing growth pattern in the housing market.
Overall, while sentiment has been a major issue with respect to housing market performance recently, I am inclined to believe that this indicator is not significant enough to be a meaningful capital growth predictor of housing over the longer term.
Table 1 presents housing market performance to the end of February 2013.
Table 1
While my confidence in the market is increasing given the trend in the data and improving auction clearance rates, markets are not strong and affordability needs to improve further before there is any significant increase in capital values. Interest rate reductions will help and I remain of the view that there will be further cuts later in the year. However, improved consumer sentiment and steady employment statistics released by the ABS this month suggest that the Reserve Bank won’t move to adjust rates in the near future.
In many cities there is a dwelling supply overhang, which will mainly be found in the unit market. This is having a negative impact on the unit market growth rate. Melbourne has the worst oversupply issue and I expect this market to adjust somewhat over the balance of the year.
Rental yields are increasing; however, not to a level that indicates any significant market competition for rental properties among consumers.
While capital values are recovering, sales volumes remain very low. In fact, sales in January – February 2013 were the lowest seen on an Australia wide basis since 1999 (see Graph 3). In many respects, the Reserve Bank and other managing agencies of the Australian economy should be more focused on this number than auction clearance rates and the upward trend in capital values. It is volumes that drive wealth generation and the economy. Without volume, real estate agents, lenders, mortgage brokers and even goods and services industries supporting home improvements etc suffer.
Graph 3
Overall, there is every indication that the market is improving but it has some way to go. If you are currently intending to invest or buy a new home, now is the time to start looking as downside risks are reduced.
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.
