Yesterday afternoon, I bumped into an elderly neighbour walking her dog. We had a quick chat about the weather and football before she brought up the Federal Election result, where she mentioned that she was happy that Tony Abbott was elected because now her house would rise in value. I felt like asking if such an outcome was in the best interests of her daughter (a renter apparently) and her future grand kids, but not knowing her very well, I didn’t bother, and we soon went our seperate ways.
No doubt, the perception that Australian house values will surge under a Coalition Government stems from the experience under the Howard years, when Australian house prices rose by around 175% (just over 100% in inflation-adjusted terms), according to the Australian Bureau of Statistics.
Indeed, looking at the past five election results, home prices and sales volumes tended to increase after the Coalition’s victories, but fell after the last two Labor victories, according to RP Data, although there were obviously other important issues at play:
Over the past five elections, home values and sales increased in 1998 when the Coalition held office for their second term and in 2004 when they took office for their fourth term. When Labor took office in 2007, values fell by 1.2% over the next year and volumes fell by 27% of course, they also had the financial crisis to deal with at that time. In 2010 following a hung parliament, values fell 3.0% over the next 12 months and sales volumes declined 5.7%…
Logically, one would attribute factors like: the decline in nominal interest rates, eased lending standards following financial deregulation, and the huge run-up in household debt; the halving of the rate of capital gains tax in 1999; the increased share of dual income households; benign global economic conditions; and the pursuit of urban containment policies by state and territory governments, for the surge in home values under the Howard Government, rather than any particular “Coalition effect”.
Still, common misconceptions can be hard to shake, and there is the possibility that the “sugar hit” to confidence from the Coalition’s decisive victory at the polls could spur some increased housing-related activity, albeit probably at the margin and only short-term.
Ultimately, the housing market is likely to be kept in check by the headwinds following the dual unwind of the credit and mining booms, which will act to constrain growth in jobs, incomes and GDP, despite the near record low nominal mortgage rates. RP Data seems to agree:
Housing affordability, low levels of growth in housing credit and high levels of household saving are no doubt likely to be barriers to a breakout in value growth and a surge in sales volumes. Not to mention the forecast that the national unemployment rate will reach 6.25% by mid next year which would be its highest level since September 2002. Despite all these constraints, home values have increased by 4.9% over the past 12 months on the back of the lowest mortgage rates in more than 50 years and rising levels of consumer, but not business confidence.
One caveat to the above is if the newly elected Abbott Government implements new stimulus measures, such as expansion to the First Home Owners’ Grant (FHOG). The Howard Government, in which Abbott served, used such stimulus measures. However it did so to offset a problem of its own creation in the post-GST housing slump. At this stage, such an intervention looks unlikely in light of recent moves by Coalition state governments channeling the FHOG towards newly constructed dwellings over pre-existing.
A change of Government does not change the underlying headwinds facing the economy and housing market and the greater likelihood is that government in general will continue to weigh on housing activity. With the terms of trade likely to fall next year, resulting fiscal instability will pressure government revenue and prompt further cuts to public spending. With the senate results, repeal of the carbon tax is distant still and, as H&H has argued, is unlikely to be very stimulatory anyway.
Housing activity will continue to be a battle between a soft economy and low interest rates.
