Find below a new note from Westpac on housing markets:
The last few months have seen a significant shift in Australia’s housing markets with a surge in auction activity and signs of a quickening in price growth. The recovery, which up until now has been a mediocre, uneven affair that has been slow to respond to lower interest rates, may finally be gaining momentum.
We say ‘may’ because, as positive as recent developments are, there remain questions over the scope and degree of the pick-up, and doubts about how well it will be sustained.
The latest auction data is unambiguously strong. Clearance rates are available up to the most recent weekend and are easily the most timely real data on housing markets. They show a big surge over the September quarter with a 70% clearance rate nationally and the September month clearance rate in Sydney of 78% a record high. That’s coming despite a strong rise in the number of auctions, up about 30% over three months. Auction activity does have regular seasonal variations with Spring typically stronger. The figures quoted above and in the chart opposite however are adjusted for these fluctuations.
More generally auction activity only captures a portion of the market and is heavily skewed towards Sydney and Melbourne. Nationally, only about 10-15% of property sales are via auction. That rises to 15-20% for Sydney and Melbourne which account for 80% of auctions nationally. The skew partly reflects market density – sellers in the big capital cities are willing to incur the extra costs involved and are clearly confident about rustling up enough bidders to ensure a successful auction. It also reflects market norms – Newcastle for instance regularly has more properties sold via auction than Perth. The bottom line of course is that the data is mainly about Sydney and Melbourne rather than the nation as a whole.
In the past, auction clearance rates at these levels have presaged strong growth in prices – double digit annual growth rates in the case of Sydney. And indeed some of the more timely monthly measures suggest there has been a significant quickening in price growth. RP Data-Rismark’s monthly home price index reported a 1.6% rise in September following gains of 0.5%, 1.5% and 2.0% over the previous three months. That in turn followed declines of 0.5% and 1.1% in April and May. Together the run produces a sharp uplift in the three month growth rate to a double digit annualised pace in the 15-17% range.
Again, caveats are required. All dwelling price measures exhibit significant volatility and seasonality. Our preferred ‘benchmark’ for price growth is the 6mth annualised growth rate. We also look for consistent signals across measures – although most other providers only have data up to the June quarter, Residex monthly figures to August have not picked up the surge reported by RP Data-Rismark. The fact that 6mth annualised growth rates are also very close together (ranging from 6.1% to 7.4%) could indicate that the 3mth burst in the RP Data-Rismark measure is a statistical ‘catch up’ for weaker reads earlier in the year. Alternatively it may be that the RP Data-Rismark measure is picking up a new development that has yet to be captured by the others – there have been instances in the past when this index has been a month or two quicker to pick turning points. The bottom line on prices is that a pick up looks likely but a few more monthly readings and corroboration from other measures is needed to confirm the pace of growth.
The picture from dwelling and housing finance approvals is less gung-ho. Again, this data is less timely – figures are up to August and do not capture the full impact of the RBA’s latest rate cut. However, they reiterate the theme of the upswing to date, i.e. a ‘middling’, stop-start recovery that is uneven by segment and by state. A consistent sub-theme across all of the housing data at the moment is the strength of conditions in Sydney compared to the rest of the nation. The pick-up has been more uneven in Melbourne; has been strong in Perth but now looks to be waning (under pressure from the mining downturn); and has very weak in Brisbane and Adelaide where price growth is only just tracking inflation.
The strong auction and price data has led some commentators to warn of potential for a housing bubble. While the source of excitement is genuine the current situation should be kept in perspective. Prices nationally have only just regained their previous peak. Our “Australian housing: the bubble myth” report in 2010 argued strongly that if there was a bubble in house prices at the time it would also have been present in 2007-08 and would have been very unlikely to have survived the ‘stress test’ of the GFC. Given where prices are now, the same broad argument would seem to apply. Moreover, while activity has strengthened over the last 3mths, current conditions are still a world away from the booms that have seen overheating in the past. In 2003 for example, the value of housing finance approvals rose 37%pa for 3yrs and prices increased 63%.
On balance we expect Australia’s housing recovery to continue to be a ‘stop-start’ and uneven one. There are headwinds that are yet to fully impact with some markets facing a significant increase in the supply of new dwellings (Vic, WA) and the mining downturn yet to play through fully to housing (WA, Qld). More generally, we expect Australian households to continue to exercise balance sheet restraint, showing a reluctance to increase debt that will ultimately limit the extent to which strong price growth can be sustained. Housing credit rose 18%pa in the 3yrs to October 2003. It has risen 4.7% over the last year.
I quite sensible note. I would only add that all comparisons with past cycles of credit growth should be taken with a grain of salt given the risk in this cycle is building through compositional changes in the mortgage pool away from owner occupiers and towards investors, not aggregate growth. And, moreover, that this cycle is building on an existing bubble that was grown through those previously high rates, so any acceleration at this point is a concern.
