Bust over but no boom ahead for house prices

Via Michael Janda at the ABC:

The game is rigged and the fix is in. The east coast housing market downturn is over … at least for now.

Don’t take my word for it. A veritable army of tipsters have called the bottom over recent weeks. They include property analysis firms SQM Research, Domain and CoreLogic, AMP Capital chief economist Shane Oliver — who was one of the first to tip the big downturn — BIS Oxford Economics, ANZ, and even the Reserve Bank.

“Conditions in the established housing markets of Sydney and Melbourne had improved a little since the previous meeting,” RBA board members noted at their last meeting.

“Housing prices had stabilised in June in these cities and auction clearance rates had picked up further, albeit still on low volumes.”

The RBA is the closest thing to “the house” in the casino that the Australian market has become — not because it stands to profit from rising prices, but because the economy and financial system it manages stands to lose their shirts if the market goes bust. It’s also one of the few institutions that can dramatically alter the odds at the stroke of a pen, through interest rate moves.

Reserve Bank officials clearly believe the current downturn has run its course, barring an international shock that hits the Australian economy or financial system.

ANZ — one of the four high rollers that bankroll Australia’s housing market — agrees.

“Policy easing and an associated lift in sentiment looks to have helped drive a sharp improvement in auction clearance rates,” the bank’s economists Felicity Emmett and Adelaide Timbrell wrote this week.

This graph of seasonally adjusted monthly house price moves, based on CoreLogic data, tells the story.

Housing price falls in both Sydney and Melbourne have moderated significantly over recent months.

Indeed, some forecasters are tipping that the recent 0.1 and 0.2 per cent monthly price increases for Sydney and Melbourne — in Sydney’s case, the first increase in almost two years — portend further, bigger rises later this year.

“Our view is that dwelling price rises may materialise from the second half of the year as demand increases as a result of the expected improvement in confidence,” SQM’s Louis Christopher wrote in late May.

And it’s not just the experts. More consumers now agree that house prices are about to turn around. And where expectations go, prices usually follow.

A graph showing house price expectations alongside dwelling prices

The house generally wins

Mr Christopher attributes his forecast change to three factors, all policy-related, and most other analysts agree.

The first is the Coalition’s election victory, which took Labor’s likely changes to negative gearing and a reduced capital gains tax discount off the table — at least for the next few years, and possibly permanently.

The second was (then expected, now implemented) cuts to the Reserve Bank’s cash rate, leaving both it and mortgage rates at record lows, where they will almost certainly stay for a long time.

A recent paper by two Reserve Bank economic researchers, Trent Saunders and Peter Tulip — who were not representing the bank’s official views — estimates that with interest rates already very low, a percentage point drop in the expected long-term real mortgage rate would boost housing prices by 28 per cent in the long run.

Those effects are significantly reduced if rates are expected to be lower only in the short-term.

But Australians must surely have been lowering their long-term expectations for interest rates, having seen zero, or even negative, rates in many other developed countries for the best part of the decade since the global financial crisis.

We’ve also just witnessed two interest rate cuts in two months, following three years where rates were already at record lows and nearly nine years since the most recent rate rise, with every indication that it will be many more years before the Reserve Bank next hikes borrowing costs.

The final boost for housing was the banking regulator’s decision to remove a 7 per cent floor on banks’ mortgage serviceability tests, meaning borrowers can take advantage of the lower rates to get much bigger loans than when the floor was in place.

A graph showing mortgage serviceability rates

How much bigger? About $60,000 more for a family earning about $110,000 a year, according to RateCity.

For those on other incomes, UBS estimates that removing the floor could increase maximum borrowing capacity by up to 14 per cent, although it expects the real effect to be much smaller due to tougher income and expenses assessments.

And this analysis doesn’t even consider the Government’s planned deposit scheme, which could see thousands of extra first home buyers get into the housing market with deposits as low as 5 per cent.

How much might prices rise?

With all these factors in favour of higher prices, you might think the east coast is set for another house price boom.

But the expert consensus is that it’s not.

BIS Oxford Economics tips a rise of just 6 per cent in Sydney between now and 2022, still leaving prices 13 per cent below their previous peak. Its forecast for Melbourne isn’t much different, with a 7 per cent rise and prices remaining 10 per cent lower than the peak three years from now.

ANZ takes a similar view, tipping prices to bottom and rise only modestly this year before increasing around 3 per cent nationally next year, with Melbourne expected to see bigger increases than Sydney.

A graph showing recorded and forecast house price changes in Australian capital cities

“While the outlook definitely looks more positive, we do not expect a V-shaped recovery for prices,” noted Ms Emmett and Ms Timbrell.

“Our view for some time has been that the tightening in credit has been the major driver of weakness, and while there has been some easing at the margin, changes to the use of household expenditure measure (HEM) and the introduction of comprehensive credit reporting will offset some of the impact.

“Moreover, there is still a substantial amount of supply coming onstream, particularly in Sydney where the rental vacancy rate is at a 15-year high.

Aside from more responsible home lending and far greater housing supply, the sheer scale of Sydney and Melbourne’s previous price booms/bubbles means that another similar take-off is unlikely, especially as incomes keep growing slowly.

Although Mr Christopher isn’t as certain that another boom/bubble isn’t possible.

“A combination of loosening credit restrictions plus a cut in interest rates increases the risk of another housing boom, which I am sure that is not what the ‘powers that be’ would want, but they may well yet get.”

Are you feeling lucky?

Another boom would only exacerbate the risks that remain in Australia’s housing market, casting a shadow over the whole economy.

The biggest risk is the debt pile accumulated to fund higher home prices.

“While mortgage repayments generally are affordable given low interest rates, high household debt leaves householders vulnerable,” ANZ observed.

The most obvious risk is rising mortgage defaults, which would lead to more forced property sales and, therefore, another leg-down in home prices. Rinse and repeat.

However, there are also less direct threats from one of the world’s highest debt mountains looming large over the household sector, which accounts for around 60 per cent of economic activity.

Research from three RBA economists — again not necessarily reflecting the bank’s official view — shows that high debt levels weigh on consumer spending, even if asset prices are going up.

This adds to the long-established “wealth effect” on consumption. When people’s asset values are going up, they spend more. When their net worth is falling, households spend less.

Now it seems we have to overlay a “debt effect”. If households have higher debt levels they tend to spend less, and Australia has never had higher household debt levels than it does at the moment.

Weaker consumer spending growth is already putting pressure on retail profits and contributing to job losses in the sector.

The RBA suggests that more debt will make that situation worse, even if it results in a new leg-up for house prices.

Then there’s the construction sector, where ANZ forecasts a 15 per cent fall in residential building.

Construction employs well over a million Australians, so that’s a lot of workers potentially looking for jobs elsewhere, many of whom would have home loans they’d struggle to pay if it is too long between paid gigs.

Jobs at risk as house prices fall

Massive state transport infrastructure projects on the east coast are aiming to soak up many of these workers and ensure unemployment doesn’t jump.

But there’s several wildcards in the deck and no-one knows if, and when, they will be played.

They are international developments: the US-China trade and technology war, the slowing Chinese economy, overseas rate cuts and global currency wars, a potential conflict with Iran affecting global oil supplies, Brexit and the future of Europe.

And these are just some of the risks that former US defence secretary Donald Rumsfeld would have labelled “known-unknowns” capable of delivering that “negative shock driving unemployment higher” in the Australian economy.

All of which must leave prospective buyers asking themselves this question before rolling the dice on a home purchase: do I feel lucky?

Well do ya, punk?

It was MB that called the bottom and outlined the base case for an L-shaped recovery first but let’s not split hairs. I still think that that is the case despite the fiscal stimulus, Hong Kong hopes and easier money. Without the mortgage fraud and Chinese that drove the last bubble there’s just not enough fuel on the fire.

That said, neither the upside nor downside risk cases are negligible.

The upside is that the above stimulus efforts combine with the apartment quality control crisis to so narrow options for buyers to existing stock that we get some kind of low volume price spike. It would be very vulnerable to reversal.

The downside case is more certain as an outcome but the timing is unknowable. It is that an external shock crashes Aussie income, exposing monetary and fiscal limitations. It could come soon via a global recession or, more slowly, into the 2020s as the inexorable Chinese slowdown drags iron ore back to $20.

But come it will. And when it does, there are many years of falling house prices still ahead, though perhaps more in real than nominal terms.

David Llewellyn-Smith

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.

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  1. “But come it will. And when it does, there are many years of falling house prices still ahead, though perhaps more in real than nominal terms.”

    Wheeee, so prices will never be lower, in Australian dollars. Sounds like Sukkar might be right and peeps are well advised to buy now.

    • Top comment.

      It was MB that called the bottom and outlined the base case for an L-shaped recovery first but let’s not split hairs.

      There has been no bottom. Lets make that really, really clear. Prices “not falling as much” is not a bottom – prices are still falling.

      It has been 2 months since the election and slash and burn interest rate assault from the RBA.

      The tsunami – the absolute avalanche of unemployment coming through the apartment construction collapse will be unprecedented and has only just begun.

      Normally no one I know has even heard of things like the “Royal Commission”, certainly not APRA or ASIC. But not one person – not even the old drunk guy who turns up to help the kids get changed at footy training and no one knows who he is – hasn’t heard about the problems with apartments.

      No one is buying. Not people from Hong Kong, not people from China, not people from Kensington, not people from Toorak or Double Bay. NO ONE.

      This no longer means apartments wont be started – it actually means apartments that have already been started will be stopped – and that is already happening.

      Now consider this – everyone who is trying to sell an apartment, like EVERYONE – can not sell. Apartment prices are being slashed like a nightmare on Elm st. Do you know what that is doing to apartment construction ? Yeah – they are being abandoned in droves.

      Every single housing crash has this temporary blip – without exception – things start to recover, that is until all the people getting laid off suddenly can’t pay their mortgage.

      Unemployment is going ballistic. 500 jobs created last month.

      If in September there is a sustained increase we can talk – no chance right now.

      School holidays just finished and from my sources pretty much every single resort town in the country just threw up their hands and walked out.

      • and see the header from down the blog *the law comes calling for a dodgy CBA*…..the takeaway is it is NOT the law enforcement regulators ..who?…mainstreet thats who!nice wholesome cleancut ambulance chasers on mainstreet

      • BubbleyMEMBER

        I agree with most of your post but I think you underestimate the power of “stupid” in this country.
        The government will continue to encourage voters to overload on debt and when interest rates are at zero they will bribe first home owners with deposits or being able to access their super for deposits. They will continue to kick the can.

        Here in Darwin we are having a spectacular Dry season, beautiful warm days with low humidity, while the rest of the country is shivering with cold. The State Government is throwing everything at tourism, trying to stimulate the economy and hotels are doing crazy affordable deals. It’s a great year to visit the Territory.

        Yet there are no tourists. There’s hardly any Apollo or Britz camper vans. There are hardly grey nomads, no ladies up from Perth/Melbourne/Sydney for the Darwin racing season and curiously, hardly any shirtless backpackers wandering around. The missing backpackers are a surprise because the Aussie dollar is at affordable levels.

        Right now Darwin feels like we have put on catering, got a DJ and disco ball and nobody has showed up for the party – just like the other tourism places mentioned above.

  2. “But come it will. And when it does, there are many years of falling house prices still ahead, though perhaps more in real than nominal terms.”

    Downturn in the job market is what will bring it crashing. When people cant service their debt and their asset bubbles go negative then the real downturn will happen.

    You got job layoffs left and right. Tradies out of work and cant find work. They cant service their debt bingo Financial Crisis. Its starting.

    • This is not how the Australian system works. Scomo will not allow house prices to crash. His government and the RBA will do everything possible to keep prices rising.
      There are still quite a few policy levers left to pull – lower rates, QE, lower buffers and increased immigration.

      • Thats not going to help the job market and layoffs….. got to have jobs to service debt.

      • macrofishMEMBER

        Ah i see, The Australian government will do something! If only all the other countries governments tried this when they had a crash it would be have been fine.

      • Narapoia451MEMBER

        This time it’s different eh? Gotta say, given the brazen incompetence and corruption we’ve seen over the last 6 years from the clownshow LNP I’m genuinely curious what you think they know that escaped the Irish, Spanish, US and Japanese govts in the last few decades?

      • yes because ScoMo thus far has prevented Perth prices from cratering lol… Sydney / Melbourne are different.

      • How does increased immigration help when job loses are occurring, it’s not like our immigrants are cashed up, overall they’re lower middle income SE Asians coming here to get away from a crappy life. They have to get work that pays enough for them to leverage up as much as the locals if they’re going to fill in that role!

        This is nothing but a vested interest confidence game, most people I know get their view on how the economy and RE prices will go from the 6 o’clock news and msm etc. We must pretty much be on a knife edge, what with the lowest ever cash rate / IRs with massive household debt, any tightening up when it comes to employment or a generalised global downturn and it will turn to shit and nothing the gov or the RBA do will prevent it.

      • @dennis, agree, if you have to lower teh rates, and open teh gates, you’re already done. It was over some time ago.

      • Lowering Rates, QE etc IS NOT going to help Australians or immigratns when they dont have jobs to pay that debt. The Irish, American, POMS, Spanish etc……. couldnt pay their debt during their financial crisis because they had no income (NO JOBS).

      • nexus789MEMBER

        Some influence to delay but will more than likely make the eventual decline and fall worse. Treating the symptoms and not the debt illness.

    • BubbleyMEMBER

      Many are of the opinion that unemployment is a trailing indicator not a leading one LBS.

      Its a valid point because the reason for the increase in unemployment is the real cause of downturn/recession.

      In Australia’s case, its because the consumer has too much debt. People are tapped out and can’t afford to buy things – so they don’t. Retailers go bust (small biz is the country’s biggest employer) and the numbers start to go up. If a casuals hours are getting cut back, they cut back on their spending and it creates a vicious downward spiral leading to more unemployed people.

      Which is why its a trailing indicator.

  3. Mining BoganMEMBER

    I have a question. Assuming the bust is over and there’s not going to be a boom, what are we waiting 18 months for?

    • For people to once again hit a credit ceiling, just like what happened in 2017. Won’t take long.
      If you remember back then the RBA cut by more than 3% to get that rocket under the real estate market. So a 1% cut won’t do too much.

    • innocent bystander

      to see their prediction of an increase in Perth houses in 2020 is total BS

    • So that in 18 months the commenters on here can say that prices have risen 10% in the past 18 months so definitely don’t buy now.

  4. GeordieMEMBER

    The whole concept of bailing out the housing bubble via re-inflating the housing bubble is complete and utter insanity.

    Why put effort into keeping the tumor alive that is killing the host, and when it finally ruptures, will definitely do so?

    You’d think the only course forward would be to accept we’ve caused a malignant growth and then do everything you can to isolate, extract and prevent any chance of recurrence. Instead, we’re trying to pretend this swelling pustule is going to develop into a rather lovely second head for twice the pleasure at a property investment inseminar after-party (paid for with AfterPay).

    WTF is wrong with people?!?

      • And if the ignorance disappears then there is still the denial to get past. Even if that did happen the greed will still be there. It will still be fed with messages from most parts of society. Cutting out that tumor will require Blackjack and he’s picky regarding which patients are deserving of his attentions.

      • Mining BoganMEMBER

        I like how greed remains remarkably consistent but if the ignorance is deliberate can it ever really disappear?

    • Figuratively speaking, the govt and RBA really, truly are hoping that another rainbow hits us up the arse. Fair hope, too, as it already has a fair bit in the last 20 years (mainly via China stim-stim-stimulus). Hence, the powers that be hope that kicking the can down the road again will increase the probability of rainbows and bums meeting.

    • Salty Millenial

      “WTF is wrong with people?!?“

      About 27 years of continuous economic growth with a declining quality economy is what.

      Australia has done everything dumb, turned its back on manufacturing, completely trashed the science sector and gutted funding everywhere, failed to invest in productive and emerging industries, made life increasingly harder for youth, trashed higher education the list goes on. What happened? Nothing, we’ve kept growing and the on paper statistics have looked great, so we’ve begun to believe our own bullshit.

      Except much of the growth has been fake, with insane amounts of debt building and a shockingly bad underlying economy when the immiponzi and specufestors are taken out of the equation.

      Basically, the only thing that MAY get the powers that be in this country to actually start thinking is a deep recession and quite a bit of misery. Not nice, but it will be the “recession we needed to have”

    • nexus789MEMBER

      It’s the only thing they know…a couple of generations have had this rammed down their throat. Also the venal politicians have skin in the game as Federal politicians have a combined property portfolio of over $320m as I understand.

  5. reusachtigeMEMBER

    Anyone who now still can’t see boom times ahead have mental deterioration issues eroding them.

  6. With all these factors in favour of higher prices, you might think the east coast is set for another house price boom.

    But the expert consensus is that it’s not.

    These experts predict no boom? Well….that means we’re fvcked…prices to the moon. Time to capitulate, get a giant loan that I’ll never pay off and buy a mansion.

  7. “Don’t take my word for it. A veritable army of tipsters have called the bottom over recent weeks. They include property analysis firms SQM Research, Domain and CoreLogic, AMP Capital chief economist Shane Oliver — who was one of the first to tip the big downturn — BIS Oxford Economics, ANZ, and even the Reserve Bank.”

    Yeah, and they all said that prices would fall, blah, blah, blah. Not saying they’re not right, but I’d take what they all say with a bag of salt. Nothing but vested interest.

    • It is possible to have a vested interest and yet have an honest opinion. Just be a little more cautious accepting it.

      • Sure, but all of the above denied there was any problem with housing re affordability and denied there was any possibility that prices would fall etc, and all depend on the housing market. For me, they play their interests and it’s only because of the odd site like this that you see the bs they come out with.

        Not one of the above would I pay any heed to when it comes to the economy.

    • i would like to see the land value component of those sales and what improvements and renovations the subject properties had in recent years

      • innocent bystander

        fair observation.
        I can tell you Menora has a very high land content. Close to CBD. Fairly prestigious area. Same goes for Peppermint Grove.
        On the other end of the scale Glen Forrest is up in the Hills and established homes have other price drivers. eg new regs around building new/extending in bushfire prone areas means established homes can fetch a premium because of very high costs to comply with new regs.
        I would think each of those areas mentioned in the article has its own unique drivers – not sure about South Yunderup, I mean that is Mandurah area – maybe Martin North knows 🙂

    • Know IdeaMEMBER

      If history is any guide, you will have to wait until he gets to the urinal at the bowlo.

  8. flat prices are not possible. The system has very strong positive feedback (prices grows only because they grow and fall only because they fall) so having them flat is impossible.
    This will either turn into another mini boom or just collapse after a tiny bull trap

    • Thanks been tryong to say that. Though it is not that it is entirely impossible, it is at these levels of debt that it is impossible.
      But math. Meh what is it food for…