What’s ahead for property in 2018?
Over the last 3 days we’ve taken an in depth look at the state of play of the Australian housing markets.
Today we’ll look at:-
- National Accounts
- And draw some conclusions
The Australian economy grew by 0.8% over the second quarter of the year.
The national economy expanded by 0.6% over the September 2017 quarter to be up 2.8% over the year.
The 2.8% annual increase is up from 1.9% the previous quarter but remains below long-term average levels.
Per capita GDP rose by 0.2% over the quarter to be just 1.3% higher over the year highlighting that headline GDP is expanding more rapidly than it is for individuals.
Nominal (or inflation adjusted) GDP rose by 0.6% over the September 2017 quarter to be 4.5% higher over the year.
The total output of the national economy over the 12 months to June 2017 was $1.706 trillion.
Australia has now seen the longest period without a recession on record (defined as consecutive quarters of GDP decline) for a developed country.
Private capital formation and exports drive the GDP expansion over the September 2017 quarter
Over the September 2017 quarter, the percentage point contributions to GDP growth were: +0.0% from government expenditure. +0.1% from household expenditure, +0.9% from private capital formation, -0.4% from public capital formation, +0.2% from inventories, +0.4% from exports and -0.4% from imports.
Looking at the annual change in the value of these components: government expenditure rose 2.4%, household expenditure rose 2.2%, private capital formation rose 4.6%, public capital formation rose 12.2%, exports increased by 6.4% while imports increased by 7.7%.
According to data in the National Accounts, the household saving ratio was recorded at 3.2% over the September 2017 quarter.
The household saving ratio has now been below 10% for 21 consecutive quarters.
Given that interest rates, are so low, as are riskfree returns, it is little surprise to see that households are saving less and are increasing borrowings however, sluggish wage growth is probably also contributing to households saving less.
Both headline and underlying inflation remains below the RBA’s target range.
Although official interest rates remain at their lowest levels since the 1960s, inflation remains stubbornly low.
Headline inflation increased by 0.6% over the December 2017 quarter taking it 1.9% higher over the 12 months to December 2017.
Headline inflation was within the RBA target range over the March quarter but has slipped lower over the past two quarters, it has been below 2% for 12 of the past 13 quarters.
The RBA’s preferred measures of underlying inflation; the trimmed mean and weighted median both increased by 0.4% over the December 2017 quarter.
The trimmed mean was 1.8% higher over the year and the weighted median rose 2.0% resulting in underlying inflation increasing 1.9%.
Underlying inflation has now been below the RBA’s target range of 2% to 3% for two years.
Costs associated with alcohol and tobacco, health and housing are escalating at the fastest rate
Inflation is being dragged lower by substantial annual declines in the cost of communication (-3.4%) and clothing and footwear (-3.0%) along with more moderate falls in furnishings, household equipment and services (-0.8%) and food and nonalcoholic beverages (-0.2%).
The components of CPI that have recorded the greatest increases over the 12 months to December 2017 were: alcohol and tobacco (7.3%), health (4.0%) and housing (3.4%).
Across the remaining sub-groups the annual increases have been recorded at: 3.3% for transport, 3.2% for education, 1.3% for insurance and financial services and 0.6% for recreation and culture.
Electricity, utilities and gas costs power housing costs higher
The housing component of CPI has the greatest weighting, reflecting the fact that housing costs tend to comprise the greatest proportion of household budgets.
No housing expenditure classes recorded a fall over the past year.
Costs associated with: rents (0.7%), maintenance and repair of the dwelling (1.6%), other housing (2.1%), property rates and charges (2.6%), new dwelling purchase by owner occupiers (3.2%) and water and sewerage (3.2%) increased at a lower annual rate than the housing expenditure class.
Electricity (12.4%), utilities (9.2%) and gas and other household fuels (7.8%) costs increased well in excess of the other housing costs.
The annual increase in electricity and utilities were each the largest rises recorded since June 2013.
The Westpac-Melbourne Institute Consumer Sentiment Index was recorded at 105.1 points in January 2018.
When consumer sentiment is above 100 points it indicates that consumers are more optimistic than pessimistic.
The January 2018 result marked successive readings above 100 points and the highest index values since November 2013.
Despite the recent increase, sentiment has remained at a fairly neutral settings over recent years indicating that consumers are neither overly optimistic nor pessimistic at this time.
The components of the Index indicate respondents are still more pessimistic about family finances over the past year however, respondents now have greater confidence about their finances and the economy over the coming year and five years.
Throughout 2015 and early 2016 the rate of value growth across the housing market was slowing as the availability of credit to investors was being rationed.
Around the middle of 2016, investors became much more able to access credit and the Reserve Bank cut interest rates two times by a total of 50 basis points which contributed to a rebound in demand and subsequently, value growth.
Throughout 2017, further macroprudential policy changes were made which resulted in a widening gap between mortgage rates for investors and owner occupiers.
In fact, investors on a variable rate mortgage are now, on average, paying an additional 60 basis points on their interest rate.
This, together with more focus on loan servicing and a reluctance to lend on interest only or high loan to valuation ratio terms, has led to slowing demand from investors and subsequently, the rate of value growth has slowed quite markedly over the second half of the year.
Over recent years, dwelling values had risen at a rate well above household income growth which made it more difficult for those that don’t already own a home to save a big enough deposit to purchase.
Subsequently, first home buyer participation has been hovering around historic low levels.
Since the beginning of July, the NSW and Vic governments have removed stamp duty for first home buyers under certain price thresholds.
This has resulted in a substantial increase in first home buyer demand in each of these states at the same time as we are seeing a cooling of demand from the investor segment.
For Sydney and Melbourne in particular, favourable economic and demographic trends have been a major driving force behind the ongoing strong increases in dwelling values.
These cities have also seen underbuilding of new housing in recent years as well as insufficient infrastructure investment.
These factors along with the ongoing decline in the number of properties available for sale over recent years has resulted in high levels of housing demand and relatively low levels of available supply.
More recently, Sydney has seen a lift in stock available for sale, NSW has seen the outflow of residents to other states and territories accelerate and is seeing its rate of value growth slow.
Melbourne has also seen growth slow but the slowdown has been more moderate than in Sydney.
The Hobart and Canberra markets have each seen an acceleration in the rate of value growth over the past year.
Canberra is seeing an improving economy along with a relatively low volume of stock available for sale which is creating upwards pressure on values.
Hobart’s tourism sector is booming however, population growth and migration to Tasmania is not particularly strong (although trending higher).
Housing in Hobart are substantially more affordable than in all other capital cities and this is likely to be one of the key drivers of the recent growth in values along with very little new housing supply and very little stock being listed for sale.
Dwelling values in Brisbane and Adelaide have recorded only moderate increases in values over the past year.
The weaker economic performances of these two cities and the lower levels of migration have certainly curtailed growth.
For Brisbane, interstate migration to Queensland has lifted over recent quarters and is now the strongest of any state or territory, this additional housing demand could potentially lead to a moderate lift in value growth. In Adelaide it looks as if the moderate rises in values are set to continue in 2017.
Perth and Darwin have continued to experience declines in dwelling values over the past year.
Each of these cities continue to be hampered by a high volume of stock available for sale and relatively few buyers.
Population growth has slowed dramatically across Western Australia and Northern Territory; during the mining boom these regions were attracting people from other parts of the country they are now just as quickly leaving.
Perth is seeing some early signs that housing market conditions may be past their weakest levels with listings falling, sales volumes rising and a moderate increase in values over the final quarter of 2017.
To date, there is no such evidence of an improvement in the Darwin housing market.
In CoreLogic’s view the slowing of growth in the housing market which became much more prevalent over the final quarter of 2017 are likely to persist in 2018.
Particularly within Sydney and Melbourne where the run-up in housing costs have been substantially greater than elsewhere.
The drivers of the expected weaker housing market conditions include.
The near record-high pipeline of housing stock currently under construction, the majority of which are units, will be completed over the coming years.
There is already evidence suggesting that in certain areas and markets settlements are taking longer and valuations are coming in below or at the purchase price.
Recent data also shows that approvals and commencements are no longer at peak levels however, approvals in particular, have rebounded over recent months and the number of dwellings approved but not yet commenced remains at a high level.
There will still be many new properties built because so many are currently under construction however, it is clear that settlement of these projects is likely to become increasingly challenging.
Furthermore, it will be interesting to see just how many of those new projects in the pipeline get built.
In fact, CoreLogic’s hedonic home value indices are already showing that in many cities the value of houses over the past year has increased at a much faster pace than that of units.
With a relatively high proportion of off-the-plan unit valuations coming in below the original contract price in certain cities, if the decline is less than or similar to the deposit amount it is unlikely buyers would walk away.
If the differential between contract price and completion valuation grows we may see an increasing number of buyers unable or unwilling to settle their contract.
Overall we expect dwelling value growth to slow further in 2018.
As we have seen over previous cycles, housing market conditions will continue to vary significantly from region to region and across housing types.
We are expecting the unit market to underperform relative to detached houses and over the coming year the underperformance of units may potentially increase further.
Keep in mind that the volume of unit stock remains significantly lower than detached houses so any weakness in the unit market won’t necessarily impact on the detached housing market.
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