Bill Evans at Westpac:
The housing market upturn that emerged in the third quarter last year has strengthened and broadened materially through year-end with all aspects now showing strong gains. Turnover is up 25% over the year, prices nationally are pushing above their pre-COVID levels, dwelling approvals surged 22% in the final quarter of 2020, and new lending for dwellings lifted by 16% in the December quarter following a 20% gain in the September quarter.
Some of this reflects transitory factors – a catch-up on last year’s virus disruptions, an unusually active holiday period for markets (no doubt in part due to many Australian’s staying home due to travel restrictions), and a temporary pull-forward in construction associated with the Federal Government’s HomeBuilder scheme.
However, even allowing for this, the picture is unambiguously strong. Most tellingly, buyer demand has run well ahead of ‘on market’ supply, with sales outstripping new listings by 34% over the last six months and ‘stock on market’ down to just 2.5 months of sales – the long run average is 3.8.
A lift in new listings will no doubt be forthcoming but for now this is clearly a seller’s market. Coupled with the very high auction clearance rates recorded in Sydney and Melbourne over the first half of February (averaging 85% and 76% respectively, the latter despite another brief virus lockdown) and what looks to be a 1%+ rise in prices for the month, the picture is of a strong lift in momentum carrying into 2021.
Price detail suggests limited drag from weakest sub-markets
The geographic mix is also notable. Gains are strongest in the smaller capital cities and in regional areas that have been largely unaffected by virus disruptions and in many cases have benefitted from related shifts in internal migration flows.
These areas also have limited direct exposure to the drop-off in international migration inflows. Rental vacancy rates are very tight, again pointing to substantial ongoing price momentum.
The performance of sub-markets within Sydney and Melbourne also suggests that the wider drag from the drop-off in migration and apartment oversupply may be quite limited. Unit prices in these markets are clearly underperforming, especially in areas with high concentrations of ‘high rise’ apartments.
However, unit prices look to be moving towards stabilisation and houses – which account for 80% of the dwelling stock in these cities – are showing consistent, robust gains. While there have been periods of relative underperformance for units, to date there are no instances in which unit and house prices have moved sustainably in opposite directions (one falling, the other rising).
That suggests we are unlikely to get a material further correction in unit prices while house prices in these markets are seeing gains.
It is also worth noting the wider make-up of the Australian market. Across the five major capital cities ‘high rise’ in Sydney and Melbourne accounts for about 5% of the total stock of dwellings while other units account for a further 10%. Houses in the Sydney and Melbourne market account for just under 60% of the total with dwellings in Brisbane, Adelaide, and Perth accounting for the remaining 25%. The weakest sub-markets – Sydney and Melbourne high rise – are comparable to Adelaide in terms of their overall share of the dwelling stock across the five major cities.
Expiring loan deferrals less threatening
The stronger than expected momentum in markets means they are better placed to absorb any additional headwinds from the end of temporary loan deferrals. These headwinds also look likely to be much milder than previously feared. As at December, around 120,000 housing and SME loans (worth $50bn) were still in deferral. That compares to 460,000 ($167bn) in September and a peak of 630,000 ($240bn) back in May.
Above-trend economic growth
This positive market momentum is combining with a positive outlook for the economy. Australia is expected to see growth well above trend this year and next. The unemployment rate is forecast to decline steadily to 6% by end 2021 and 5.3% by end 2022.
Activity is already rebounding strongly from local COVID disruptions. For consumers, a large savings buffer built up over the last year – estimated by the Reserve Bank at $200bn, or 15% of annual income – suggests they are well-placed to cope with the withdrawal of fiscal support measures such as JobKeeper. With an election on the horizon, no political pressure to bring the Budget back to surplus and clear evidence that sectors affected by the foreign border closure are still struggling there will likely be more significant support measures in this year’s Federal Budget.
It is also pertinent to recall that the estimated ‘cliff’ over the first half of 2021 will be around $20bn compared to the ‘cliff’ at the end of the September quarter in 2020 of around $70bn when job support measures and other direct subsidies were reduced.
Westpac expects the December quarter to show 2.2% growth in the economy – a view supported by hours worked and partial data available to date. Momentum is coming from the reopening of the economy; a drawdown in household savings; and strong confidence that has more than filled the fiscal ‘gap’.
Meanwhile vaccine rollouts, already underway, promise to bring the pandemic under control globally over the course of 2021, providing additional impetus to confidence and growth.
Note that the vaccine developments will also influence the relative performance of different housing markets. The smaller capital cities and regions are well placed to continue to outperform in 2021 but growth will swing towards the three eastern capitals – Sydney, Melbourne, and Brisbane in 2022 as the end of the pandemic allows international borders to reopen.
The upswing is also likely to see a rebalancing towards investors, particularly as affordability constraints re-emerge for owner occupiers, including first home buyers. The investor segment accounted for less than 25% of new home loans over the second half of 2020 but usually averages over 35% and rises in periods of
housing upswings. Some tentative early evidence here is the 15% increase in new lending for investors in the last two months.
There are also some early signs of a shift emerging in housingrelated consumer sentiment. As we noted in the latest Westpac Melbourne Institute Consumer Sentiment survey, the House Price Expectations Index – a key gauge of investor sentiment – is at a 7year high but the ‘time to buy a dwelling’ index, which is more reflective of affordability assessments and owner occupier sentiment, is positive but off 8% from its high in November.
Monetary policy to stay highly stimulatory but prudential policy to tighten in 2022-23
The monetary policy backdrop will remain highly supportive. The RBA has committed to keeping the cash rate unchanged at 0.1% for an extended period – indicated as likely to be at least through to 2024.
Other policy measures are also supportive of housing.
The Term Funding Facility, which provides 3year funding for banks and other financial institutions at 0.1%, is still to be fully drawn down with around $100bn available until June. It is then set to expire but will be maintained in the unlikely event that there are concerns about disruptions to credit supply.
We expect the RBA’s Yield Curve Control policy to be extended through 2021 with an adjustment likely in 2022H1. That will see some lift in the Reserve Bank’s 3-year bond target (it is possible the target may be phased out altogether) with a spill over impact on fixed mortgage rates.
That said, any associated lift in term rates is likely to be relatively small. Even if the Bank is no longer prepared to continue committing to ‘three years on hold at 0.1%’ rhetoric in 2022,\ our analysis of their forecasts for inflation and wages suggests official guidance at that point will still be to expect rates to remain on hold ‘for a number of years’.
This adjustment will increase fixed term mortgage rates and may take some heat out of the market at the margin but is unlikely to derail what will be a very well-established price upturn by 2022.
That in turn points to the RBA and APRA needing to revisit macro prudential policy to rein in the cycle. They have clearly developed more confidence in these tools following their successful deployment in 2015 and 2017 and the RBA has already indicated these policies are an option if housing market concerns resurface.
Note that these concerns are not directed at price growth per se but rather the potential for excessive risk-taking as leverage starts to rise. Housing credit will continue to see robust gains with investor activity becoming increasingly prominent – stoking fears of ‘overheating’. Through 2022 new lending is likely to peak around 50% higher than the previous peak in 2017.
Exactly when and how the Council of Financial Regulators (chaired by the RBA Governor) chooses to deploy prudential policy is not clear. The Governor is clearly comfortable – pleased even – with the housing upturn to date. Our sense is that the Council will remain broadly comfortable with a 10% price gain in 2021 but will start to become uneasy with a similar gain in 2022 and the associated surge in new lending.
The profile of relative strength moving back to the major cities and led by investors will be of particular concern.
We expect the Council to take a measured approach to prudential tightening, much like 2015, when annual growth in new lending to investors was limited to 10%, rather than the more expansive approach we saw in 2017.
The net result is expected to be a ‘successful’, throttling back of price growth, with some small price declines in some sub-markets but without precipitating the sort of price falls seen in 2018- 19 (when macro and micro-prudential tightening inadvertently coincided with fears around potential changes to tax policy for investor housing in the lead up to the 2019 election).
Migration inflows a key area of uncertainty
One aspect of the forward view that is particularly uncertain is the potential for wider market impacts from the slowdown in migration. Aside from the direct effects on specific segments, the slowdown will also mean new dwelling construction will have run well ahead of population-driven requirements in 2020 and 2021.
If borders remain closed for longer or migration inflows are slow to restart that could lead to a market-wide physical oversupply of dwellings by 2022. How that may influence market conditions and price growth is unclear. For example, rental vacancy rates may remain elevated for longer, perhaps even pushing higher, but that may not do much to deter investors seeking expected price gains, particularly as rental yields are likely to remain above funding costs.
The bottom line is that Australia’s housing upturn now has strong momentum that looks to be lifting further and will remain well supported by monetary conditions and an improving economic backdrop. We now expect the upswing to generate stronger, double-digit, price growth near term while our expectation, back in September last year, remains that a policy response can be expected later in 2022 which will settle markets into 2023.