As we’ve highlighted in several Milford blogs over the years, Aussies pride themselves on their property obsession every bit as much as their Kiwi cousins. Given this backdrop, it’s not surprising that another weekend of low auction clearance rates and home sales brings another week of media warnings about the outlook for house prices.
Housing FOMO doesn’t seem to work as well in reverse
On the surface, property transaction data doesn’t look good. Domain, realestate.com and the ABS have clearance rates at around 55% (from 80% in late 2016) and sales down 30%+ year on year (yoy).
However, the number of home sales has traditionally been a poor indicator of the size of future price moves when the market is weak. Volumes sold usually overshoot eventual price declines by a long way (Figure 1) because home owners are less willing to sell when the market is falling.
Figure 1: Home sales are a poor indicator when prices fall
Other signals are more robust
When you look at data that has historically provided a better steer on home prices throughout the entire cycle, the picture is less dramatic. These include:
- new mortgage approvals (-0.4% (yoy) in April, -1.5% yoy in the trailing 12 months)
- dwelling consents (+2.1% yoy in May, +3.7% yoy in the trailing 12 months), and
- the backlog of dwellings to be completed (+2.2% yoy in Q4 2017, -0.1% yoy in the trailing 12 months).
Of course, this data also has its limitations. Dwelling completion statistics are lagged, and from mid-2017 mortgage approvals for NSW first home buyers were also boosted by stamp duty relief (which should result in slower growth over coming months as the effect annualises). But by and large, indicators that have historically given us up to twelve months of reasonable visibility on home price changes are running at a more robust level of flat to low single digit negative rates.
So far this is looking like past property downturns
According to CoreLogic, this low single digit rate of annual decline is largely what we are now seeing across most of the state capitals of Australia. The declines are led by the once red hot (nearly Auckland-esque) Sydney market (Figure 2), and here the sequential declines month to month are already beginning to moderate.
Figure 2: Capital city home prices (June, year on year)
Interestingly, over the past 30 or so years (two housing cycles), Sydney home prices have exhibited a remarkably consistent pattern that is even clearer when removing inflation (Figures 3 & 4):
- slightly down for about 2 years;
- flat for 7-8 years;
- up for around 6 years;
A year after the Sydney market peak, the current cycle appears to be following true to form.
Figure 3: AU home prices (nominal terms)
Source: ABS
Figure 4: AU home prices (real terms)
No smoking gun, yet
This wouldn’t be a financial blog if I didn’t remind everyone that history is not a reliable predictor of future performance. But some things are definitely ‘different this time’. In particular:
- The sheer scale of national housing debt after a long period of record low interest rates
- An ongoing tightening of lending standards (expenses, fewer interest only loans)
- The potential for further restrictions from the banking royal commission
- The increased market share of the lightly regulated shadow banking sector
Own goals can never be ruled out (just ask the Socceroos about their World Cup exit). This is especially so as we approach the next Federal election with the Labour opposition proposing even more housing related restrictions and dis-incentives. But inflation is low, employment is robust, and RBA rate rises seem a long way off. So far, these internal issues are proving manageable, but they will make the market more vulnerable than usual to significant external shocks for some time to come.