A condensed version of a textbook real estate market cycle probably looks something like this:
Downturn – dwelling prices flat or falling, a drying up of construction activity, eventually leading to an undersupply of dwellings;
Stabilisation – interest rate cuts, followed by a lag while pundits list a wide range of reasons why monetary policy doesn’t work (“land prices too high”, “too much debt” etc.);
Upturn – rising sales transaction levels, dwelling prices start rising moderately again, construction projects begin to pick up;
Boom – improved yields, prices rise strongly, construction takes off until the market is saturated by oversupply.
Return to downturn phase.
I recently discussed how to recognise the various phases of the property cycle in much more detail here.
As is typically the case we had a long lag period in this cycle where every man and his dog was listing reasons why prices wouldn’t recover in this cycle.
[sam id=40 codes=’true’]Yet prices have returned to all-time highs on a national basis, albeit with a very soggy recovery in cities such as Adelaide.
And indeed, the 2014 outlook for Canberra appears to be one of falling rents and prices, while rents are also now falling in Western Australia after a 10% jump in dwelling prices in 2013.
The Reserve Bank wanted to kick-start a construction boom with low interest rates, which typically requires prices to be rising.
Housing Finance data from the Australia Bureau of Statistics (ABS) revealed that the construction boom is well on track, and growth is steadily rebalancing away from mining construction…both into dwelling construction and other public and private sector infrastructure spend.
Sometimes too much data is presented which confuses the issue of what is actually happening in housing markets.
Let’s run through what we can learn from this data about what is going on in three simple steps, starting with…
1 – Owner occupiers
The headline data showed the value of financing for owner occupied dwellings falling slightly by 0.7% in May, leading to a mad rush to report the end of the housing market recovery.
Hmm. Firstly, the value of owner occupied financing still remained 11% higher than a year ago, and on a rolling annual basis is only a fraction behind the all-time record high it reached in April:
The headline figure also disguised the fact that the value of financing was higher in most states in May, though this was offset by a bit of a drop in Victoria and in Tasmania.
When we split out the financing data by state for the five main states and run the data on a rolling 12 monthly basis, a clearer picture emerges.
As I noted some years ago, you cannot disaggregate a property market from the strength (or weakness) of its underlying local economy, which is why prices in Adelaide have stagnated so badly.
Recommending that people buy or invest somewhere because houses are ‘cheap’ does not mean that houses cannot become cheaper if the economy is not adding jobs, the unemployment rate is rising and population growth is weak.
In the four main states owner occupier financing has been trending strongly higher, in particular in New South Wales:
That said, while it doesn’t pay to get excited about one month’s data, lending for owner occupiers may indeed be showing the first signs of softening a little.
And that is not necessarily a bad thing.
Low interest rates are designed to spur higher dwelling prices and higher household consumption, and we have seen both over the past year.
But the RBA doesn’t just want buyers to continue squabbling over existing stock of dwellings – what the bank really now wants to see is…
2 – Construction
What the Reserve Bank of Australia really wants to spur following on from the uplift in dwelling prices, is a boom in dwelling construction to help offset the corresponding decline in mining construction.
Well, it’s underway.
I didn’t get around to blogging about it in the event, but the AIG-HIA construction index printed at well above 50 recently (51.8), indicating expansion, particularly for the homebuilding subindex (56.6).
The print for May showed the moving annual value for owner occupier construction finance cruising towards all-time record highs:
Meanwhile, construction finance for investment housing is fairly ripping upwards on a moving annual basis:
Purchases of new dwellings continue to rise, it is at long last dawning on all concerned that the so-called “first homebuyer strike” was bunkum as noted in more detail here, and dwelling construction is set to go on a tear – and not only in Sydney now, but also in Melbourne, Brisbane and elsewhere.
Number of construction loans
Now you may argue that rather than the value of construction finance, we should be looking at the number of loans for the construction of dwellings, and we’d be hard pressed to disagree with you on that.
The number of loans for the construction of dwellings jumped to the highest level in 52 months in May.
It’s worth noting that the increase in the number of loans for construction was driven by five states over the last quarter in particular: Queensland (+7.6% q/q), Western Australia (+8.0%), New South Wales (+2.1%), Tasmania (+13.8%) and Victoria (+0.6%).
However, South Australia is now fading out (-4.4% q/q), as are the Northern Territory (-9.9%) and the Australian Capital Territory, where the housing market and local economy appears to be in a real tizz (-12.4%).
Financing for alterations and additions is also now rising again, after a lull in February.
Overall, the dwelling construction boom looks to be well on track in the main states.
3 – Investors
Finally, a quick look at the role of investors.
The value of investment loans in May was right up there at close to the highest level seen in Australian property market history:
And, on a rolling annual basis, the value of investment loans is at the highest level in Australian property market history.
Last month I noted here how the value of investor loans in New South Wales hit a rolling annual level of an unprecedented level $46,346 million.
So, no slow melt happening here in Sydney then.