What are the economic factors to watch for in 2015 that may impact the housing market?
The combined capital city housing markers have seen values increase by 7.0% over the first 11 months of 2014.
Throughout the whole of 2013, capital city home values increased by 9.8% indicating that the rate of home value growth is likely to be lower this year than last.
On an annualised basis, combined capital city home value growth peaked at 11.5% in April of this year and has slowed to 8.5% over the 12 months to November 2014.
As we enter 2015 it is our expectation that the housing market will see another year of home value growth, but not likely at the same pace as experienced over the 2014 or 2013 calendar years.
Although this is our base-case scenario, there will still be plenty of potential headwinds to watch out for that may impact on the housing market.
The national unemployment rate was recorded at 6.3% in November 2014 which is the highest unemployment rate since September 2002.
The Mid Year Economic and Fiscal Update (MYEFO) was released earlier this week by the Federal Government.
In the document the Government revised up its forecast of the unemployment rate to 6.5% at the end of the current and the next financial year.
It isn’t just the high rate of unemployment which remains a concern.
Over the past year, the majority of new employment has been part-time positions which have increased by 2.5% over the year compared to a 0.7% increase in full-time employment.
This is reflective of the strong growth in part-time employment, many working part-time would probably like to be working more hours or in full-time employment.
The data also showed that in November 2014 the underemployment rate had increased to 8.6% which was its highest on record.
With comparatively high rates of unemployment and growing underemployment it has the potential to impact on housing demand.
If employees become concerned about job security they will be less inclined to commit to purchasing a home.
Furthermore, if employees can work as much as they like and subsequently earn as much as they’d like they may also not be able to purchase a home.
New APRA steps to reinforce sound residential mortgage lending practices
Last week APRA (the Australian Prudential Regulation Authority) wrote to all Australian authorised deposit-taking institutions (ADIs).
The letter highlighted further steps that will reinforce sound lending practices.
Although the note didn’t indicate that any macroprudential tools would be formally implemented, the letter noted that APRA will be increasing supervisory surveillance to reinforce sound lending practices.
This is in response to specific prudential concerns which are detailed below:
- Risk profile – higher risk lending such as high loan to income and high loan to valuation ratios, interest-only lending to owner occupiers for lengthy periods and long term lending are of specific concern. APRA is concerned about lenders undertaking larger than normal volumes of lending in these areas
- Investor lending – fast or accelerating credit growth in this space can be a key indicator of growing risk. APRA highlighted that annual investor credit growth that was materially above 10% per annum will be an indicator of increased risk.
- Serviceability assessments – APRA is of the view that mortgages should have a serviceability buffer of at least 2% above the loan product rate and with a minimum floor assessment rate of 7%
Through these guidelines they have advised the ADIs of the lending environment they expect.
Although there have been no blanket macroprudential tools, the letter is pointed and notes that ADIs that do not adhere to these rules will be under review to stricter lending limits.
These guidelines are likely to have an impact on the residential housing market.
Firstly the very strong growth in investor housing demand over the past two years will likely taper to a more moderate pace.
Secondly, some borrowers who are stretching themselves financially to enter the market may find accessing home loans increasingly difficult due to the new serviceability guidelines.
Household income growth
While home values have increased by 8.5% over the 12 months to November 2014, real household incomes have increased by just 0.8%.
One wonders how long home value growth can continue to outpace household income growth.
Over the 10 years to September 2014 nominal home values have increased 52.4% compared to real household income growth of 36.4%.
These two figures are not significantly different and real home value growth has actually been lower than growth in household incomes.
This would seemingly suggest that the current surge in home values, which has started to slow, cannot continue all that much longer without income growth.
According to the Westpac and Melbourne Institute’s monthly measure of consumer sentiment, consumers have been more pessimistic than optimistic for 10 consecutive months.
To put that in perspective, consumers haven’t been this consistently gloomy since the depths of the financial crisis in 2008 and early 2009.
Further highlighting the consumer gloom the data shows that when respondents were asked about the wisest place for savings 40.3% chose a banks, building societies and credit unions.
This was the highest reading since September 2012.
Over the past 15 years, an average of 27.5% of respondents have chosen this segment, highlighting the heightened sense of consumer anxiety.
The level of consumer anxiety is more confronting when you consider that those with savings in a financial institution are currently earning virtually no interest with the cash rate sitting at 2.5%.
Consumer sentiment is closely correlated with housing demand.
If consumers are feeling less confident about the overall economic conditions, they are going to be much less likely to make high commitment decisions such as taking out a new mortgage.
Housing finance commitments
We have already highlighted that APRA is concerned with the heightened level of investment lending and have provided stricter guidelines for Australian ADIs regarding to this segment of the market.
Housing finance data shows that investors are currently the primary driver of housing demand.
In October 2014, there were $11.7 billion in housing finance commitments to owner occupiers for new loans, $5.4 billion to owner occupiers for refinancing purposes and $12.1 billion to investors.
Year-on-year, owner occupier new loan commitments are 0.8% higher, owner occupier refinances have risen 18.1% and investment loan commitments are 19.8% higher.
Owner occupier new loans and investor loans are a much larger driver than refinances.
With the new APRA guidelines it looks as if lending to the investor cohort will slow in 2015.
It is unlikely this can simply be replaced by lending to owner occupiers for new loans. In fact, new lending to owner occupiers has been trending lower since it peaked at $12 billion in lending in November 2013.
If lending to investors slows as owner occupier lending is already doing, it seems that there will be less mortgage demand and subsequently less property transactions.
In turn, this is likely to result in lower levels of capital growth across the housing market.
Dwelling approvals have lifted significantly throughout the past two years, providing a significant pipeline of new construction.
Although dwelling approvals have eased over recent months, over the 12 months to October 2014 there were 197,529 dwelling approvals which is hovering around the highest annual number on record.
On a monthly basis dwelling approvals peaked in January 2014 and although they remain high, they have trended lower.
An important feature of dwelling approvals is that the number of multi-unit dwellings being approved is at near record highs.
There is growing demand for inner city units however, a unit development is typically a riskier development proposition than a detached house and ultimately multi-unit dwelling approvals are less likely to proceed into the construction phase.
If growth in home values slows throughout 2015 along with a slowdown in housing transactions, we may see some of the pipeline of approvals, particularly unit approvals, not actually make it to construction.
In order to commence construction developers typically require a certain level of pre-sales to begin.
If sales slow, achieving a sufficient level of presales may become more difficult and may potentially jeopardise some of the progress of these projects.
Recommendations for new foreign investment rules
The House of Representatives Standing Committee on Economics recently released its findings and recommendations following a review of foreign investment. The four key findings of the report were:
- Recognising there is no accurate or timely data that tracks foreign investment in residential real estate, the Committee recommended the establishment of a national register of land title transfers that records the citizenship and residency status of all purchasers of Australian real estate.
- Improving the inner workings of the Foreign Investment Review Board (FIRB).
- Bolstering the compliance and enforcement regime of the foreign investment rules.
- Recommending an application fee of $1500 for each approval application made to FIRB by non-resident foreign investors in order to fund improved administration and monitoring of the foreign investment rules undertaken by FIRB.
The report also recommends the following civil penalties for breaches of the foreign investment framework:
- Financial penalties to be calculated as a percentage of the property value, rather than restricted to $85,000 as is currently the case; and
- The regime applies to both foreign investors and any third party who knowingly assists a foreign investor to breach the framework.
Although these are just recommendations at this stage, one would hope that the committee’s recommendations do get implemented.
More timely, accurate and reliable data about foreign buyers would certainly seem to be valuable and penalties for those who skirt the rules seems appropriate.
Importantly, it is unlikely that any of these recommendations would act as a disincentive to foreign investment rather they would result in improved transparency about such investment.
In Australia we generally like to compare our currency to the US dollar.
After the end of month peak in the exchange rate of $1.08 in February 2012, the exchange rate has now fallen to $0.849 at the end of November.
Importantly, most of the fall has occurred recently, six months earlier the exchange rate was $0.93.
The fall in the trade weighted index (TWI) has not been as large as the fall relative to the US Dollar.
The TWI was recorded at 68.2 at the end of November, down from 71.5 six month ago and a peak of 79.2 in February 2012.
Nevertheless the Australian dollar has weakened.
The lower dollar should provide some support for the Australian economy, making our exports more attractive and providing heightened demand for the struggling manufacturing sector.
We suspect that demand from foreign buyers has grown over recent years.
Furthermore, if the Australian dollar continues to depreciate, it is likely that Australian residential property will potentially become even more attractive for overseas buyers as the relative cost improves.
Official interest rates were recorded at 2.5% in December 2014, with no meeting of the Reserve Bank’s board in January they will remain at that level until at least February.
The average standard variable mortgage rate is currently 5.95%, discounted variable rates are 5.1% as are three year fixed rates.
The RBA has repeatedly stated that they believe a period of interest rate stability is the most prudent course.
In an interview with the Australian Financial Review last week Glenn Stevens remarked that any change in interest rates would have to help boost confidence while a cut may do the opposite.
Nevertheless, over recent months there have been a growing number of economists predicting the next movement in rates would be lower as the overall economic performance slows.
The cash rate futures market is now also pricing in a 25 basis point rate cut to interest rates by June next year.
A lower interest rate would seemingly make investment in housing even more attractive as returns on cash savings reduce further.
Of course, if this were to occur it would likely take place in the face of slowing growth in housing demand and limits on just how much Australian ADIs can lend to the investment segment of the market.
As the RBA has previously stated, there are limits to what monetary policy can do.
Given this, a further 25 basis points cut to official interest rates may make little material difference to the residential property market….of course it could also make a substantial difference.
At CoreLogic we are of the view that home value growth will continue in 2015, albeit at a more moderate pace than what we have seen in 2014.
As the above analysis shows there are plenty of factors which will impact on the housing market in 2015, not to mention potentially hundreds of other factors which could impact on the direction of the market.
It will be important to keep track of the broader economic trends and consider how that may impact on your property in 2015.