Has the housing recovery arrived at last?

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There seems to be a bit of angst in the comments around today’s housing finance numbers representing some new surge in property prices. May was a good month but to my mind the recovery remains muted and vulnerable to reversal.

The current uplift in mortgage issuance was foreshadowed in the RPData Mortgage Index (RMI), which seems to work quite well, and it is currently indicating that the next few months will see housing finance retrace:

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Some caution is warranted because the index does not isolate mortgages for existing dwelling purchases so there is room to miss on the measures that actually drives house price growth. Not to mention it is difficult to determine the seasonality at work.

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Moreover, the key chart remains average loan size which hasn’t budged:

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Until this chart changes, I see no way that house prices can rise to anything like new highs. Remember the correlation between this and prices is spectacular:

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Sure, different cities are doing better or worse. Sydney and Perth are running away a bit while everyone else trades sideways:

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But Perth isn’t going to last. The property fundamentals are deteriorating fast and there is an increasing risk of a bust as mining goes ‘pop’ (this will be the subject of our July Members Report) . Victoria, the ACT and TAS are all about to lose their FHBs owing to the pulling if their grants the same way QLD and NSW already have. Sydney has better fundamentals than everywhere else so it could run for a while. That’ll leave it Sydney versus the rest.

So I’d still be cautious. It’s obvious that the economy is slowly but surely deteriorating so house prices will be held back on that basis alone. The upwards pressure on unemployment will remain as mining investment unwinds. Sure, interest rates are going to be cut again. Probably next month too. But if they haven’t worked terribly well yet, I’m not sure why that would change. I would couch the current property price rally as a good chance to lighten your exposure…

Find below a good Westpac report on today’s release that I largely agree with.

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Er 20130712 Bull Housing Finance May

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.