ANZ Bank’s latest economic update explains their views on the direction of the economy, interest rates and property.
Their decision last week to lower the outlook for the cash rate to 1.5% by mid-2016 was partly driven by the expectation that housing activity will soon cool.
Forward indicators show that housing construction is either at, or close to, peaking and is set to stabilise (at best) over the next few years meaning the impetus to growth will wane.
They felt easing housing investor demand, slower population growth and solid additions to supply also imply slower house price growth, especially in the recently very strong Sydney and Melbourne property markets.
As a result the bank thinks there will be a weakening in the ‘wealth effect’ that has provided some sustenance to consumer spending.
- Support to aggregate employment growth from hiring in construction and a range of services industries benefiting from housing activity is also expected to wane.
- State government revenues from property transfers will weaken as house price growth slows and housing turnover declines.
- These factors suggest to us that above-trend growth in the non-mining economy will likely remain elusive for some time, especially as the AUD depreciation also fades as a source of stimulus.
- Combined with disappointing global economic growth and the decline in mining investment only roughly half complete, we think more monetary stimulus will be needed next year.
- One of the key obstacles to lowering rates will be removed when softer house price growth in Sydney and Melbourne and cooler housing investor activity assuages Reserve Bank and APRA concerns about macroeconomic and/or financial stability risks from rising household leverage.
- ANZ have pencilled in 0.25% rate cuts in February and May 2016.
HOUSING HAS BEEN A KEY DRIVER OF GROWTH
Dwelling investment has increased by a cumulative 14% over the past two years, making it one of the strongest performing areas of expenditure in the Australian economy (albeit small at around 5% of output).
High levels of demand have resulted in dwelling approvals booming, particularly in the higher-density Sydney and Melbourne segments.
By contrast, total business investment has fallen 11.3%, and public investment 7.1%, over the same period.
Strong demand for housing has been underpinned by several factors.
- Firstly, monetary policy has successfully done its job. Record low interest rates have attracted owner-occupiers and especially investors to the market.
- Secondly, formerly strong population growth has exacerbated the underlying shortage of housing nationwide.
- Thirdly, foreign investors have been enticed into the market, including by the sharp drop in the AUD, which has kept housing prices relatively low in many currencies, including the renminbi.
But these drivers are set to unwind, with a number of indicators suggesting that housing construction is peaking now.
While dwelling approvals have remained high, there has been no further growth since the start of the year.
The ANZ-Property Council indicator of housing construction suggests the very optimistic outlook across the sector has also past its peak (Figure 1).
Most major banks have increased mortgage rates, and tightened lending criteria, on housing investment loans in response to tighter regulatory guidelines.
Recent data shows that investor borrowing is beginning to retreat.
Australia’s population growth is also slowing and that too takes pressure off the demand for housing.
From a recent peak of 1.8% y/y at the end of 2012, growth has slowed to an estimated 1.35% y/y at the start of 2015 (Figure 3).
Net immigration has slowed as the Australian economy is no longer outperforming.
Population growth is now expected to settle around its longer term average of 1•••–1•••% y/y which will eventually slow the demand for housing.
That said, the level of housing construction is expected to remain elevated due to solid underlying demand (and supported by low interest rates) – it’s just that we don’t expect further growth in housing construction.
The third source of recent strong housing demand – foreign purchases – is more difficult to predict
We expect that the stimulatory effect of the falling AUD for foreign investors is also likely to wane once the currency stabilises, which in our view is likely towards mid-2016.
In addition, tighter controls on Chinese capital outflows will also weigh on the market if they persist.
House prices in renminbi terms have been little changed over the past five years and according to our forecasts will remain there (Figure 4).
This means there will be no new price incentive to attract foreign buyers but the relative price attractiveness of Australian residential property will remain.