Are we really in for a soft landing for property?
Recently ANZ Bank forecast that house price growth was set to accelerate in the second half of the year, but recent data showed a renewed decline in prices and an easing auction clearance rate, possibly due to tighter lending criteria being applied to owner occupied mortgages over the past month or so.
The ANZ is cautious about changing their view on the future direction of our property markets on just one month’s data but momentum looks to be softening.
This matters because of the impact that house prices have on household wealth and thus the household saving rate.
Here’s what the ANZ had to say in a recent research report to their institutional clients:-
SO MUCH FOR THE WORST OF THE HOUSE PRICE DECLINE BEING BEHIND US
Developments in the housing market are of critical importance for the economy.
Dwelling construction is an important source of employment, for instance, so the evolution of the dwelling investment cycle matters both directly for activity and for the labour market.
With houses being by far the biggest asset for Australian households, movements in prices matter a lot for personal wealth.
And there is a clear link between the cycle in household wealth and shifts in the household saving rate (Figure 2).
This means that changes in house prices can materially impact the outlook for household consumption.
Finally, there are issues of access and equality linked to the affordability or otherwise of housing.
In 2017, these two key aspects to the housing market — the outlook for construction and the direction of house prices — both improved somewhat.
On the former, the strong bounce in housing finance for construction and the purchase of new dwellings signalled that the downturn in building approvals that started in 2016 would most likely be shortlived.
And so it was, with building approvals recovering strongly from early 2017 (Figure 3).
This recovery means we expect a positive contribution to GDP from residential construction in the first half of 2018, before a slow downturn in residential construction in the second half of this year.
The emphasis is on the word slow, however, with the level of residential construction activity expected to remain elevated for some time.
As far as house prices are concerned, by early this year we had concluded that the bulk of the house price decline was most likely already behind us.
This reflected both the house price data itself — which by the end of 2017 had basically stopped falling once we seasonally adjusted the monthly data (as per Figure 1) — and the stability then improvement in the auction clearance rate from late 2017 into early 2018 (Figure 4).
Historically the auction clearance rate has been a leading indicator of annual growth in house prices, both nationally and regionally.
By early 2018 it was also suggesting that we might see a stabilisation of house prices in the weakest market, namely Sydney (Figure 5).
On the other hand there looked to be some potential downside in Melbourne, where the market had been holding up much better (Figure 6).
Still, overall, we characterised the market as most likely ‘gliding to a soft-landing.’
This is still the expectation that is built into our forecasts.
But renewed weakness in both the auction clearance rate and prices in March and April is challenging that view.
At the national level, the recent downturn in the auction clearance rate mainly reflects a sharp slowing in Melbourne.
Reflecting this Melbourne dwelling prices fell by more than Sydney in April, which is the first time in this cycle that has occurred.
We would, however, also highlight that the last week of April saw the Sydney auction result drop to just 55% — the weakest weekly result since 2012.
THE SLOWDOWN IN MOMENTUM IS BROADENING ACROSS SECTORS
We have previously highlighted diverging price performance across market sectors as well as between capital cities, with the lower end of the market outperforming the overall market (Figure 7).
In Sydney and Melbourne this has, at least in part, reflected the surge in first home buyers (FHB) entering the market following the introduction of stamp duty relief for the purchase of established dwellings in New South Wales and Victoria.
Housing finance approvals for FHBs are up 100% y/y in Sydney and 38% in New South Wales.
Nationwide, FHB housing finance accounted for 12.4% of total finance written in February, the highest proportion since mid-2013.
Worryingly, though, the lower end of the market is now losing momentum in both Sydney and Melbourne (although still outperforming the overall market). In Sydney, prices in the lowest quartile fell in April (by 0.1% m/m in seasonally adjusted terms) following four months of consecutive rises.
In Melbourne, prices in the lower segment of the market continue to rise but at about a quarter of the pace seen in late 2017.
Looking at price developments for units versus houses reveals similar trends with prices of units continuing to outperform detached houses, but losing momentum.
In Sydney, the apartment market gathered some momentum in early 2018, but this looks to have faded with prices flat in April (Figure 8).
Melbourne apartment prices rose in April (up 0.1% m/m seasonally adjusted) following a fall in March, but the trend has clearly slowed from late 2017.
We will be monitoring housing finance approvals for FHB in coming months for any sign that activity from this part of the market is moderating.
While stamp duty relief in Victoria and New South Wales has clearly energised the market, history suggests that these type of measures bring forward purchases by the marginal home buyer rather than supporting a net increase in purchases.
The March housing finance data will be released on 11 May.
In Brisbane, the unit market has been weaker than in Sydney or Melbourne, but the prices have not weakened as much, or as rapidly, as many have feared given the amount of supply coming on-stream.
Brisbane unit prices rose by 0.6% m/m seasonally adjusted in April, following two months of declines but are still down 0.6% y/y.
In contrast Sydney unit prices are up 1% y/y and Melbourne unit prices are up a still healthy 5.7% y/y.
The pace with which new units are being released in the Brisbane market will peak in coming months, but evidence to date suggests this is being absorbed fairly comfortably (although we will continue to monitor this carefully).
One factor behind this is population growth, with Queensland’s population growth picking up from a low of 1.2% y/y in September 2015 to 1.6% in Q3 2017.
In part this reflects a lift in interstate migration to Queensland, possibly reflecting relatively affordable housing compared to Sydney and Melbourne.
HOLIDAY TIMING MAKES INTERPRETATION DIFFICULT, BUT WE ARE ALERT TO THE POSSIBILITY OF A RENEWED TIGHTENING IN CREDIT
We note that the two weakest results in recent weeks for Sydney were the last weekend of March and the last weekend of April.
Both were impacted by holidays — an early Easter in late March and the last weekend of later than normal school holidays in April.
The pattern of holidays in late March and then April may explain the very volatile auction results seen in Sydney over this period.
There was also volatility in Melbourne over this period.
This means we are a little cautious about concluding a renewed slide in house prices is definitely under way.
The fact consumer confidence has been lifting in recent weeks according to the ANZ-Roy Morgan survey suggests there hasn’t been a downturn in sentiment over April that might explain a sudden weakening in the housing market.
At the same time we have highlighted in recent research the prospect that the atmospherics around home lending lead to at least a temporary tightening of credit availability.
There have been a number of reports over the past few weeks about a significant increase in the number of questions being asked of borrowers.
We also note the recent comment by the CEO of ANZ that one consequence of the Royal Commission could be slower loan growth and the comment by the Governor of the RBA that it is “possible that lending standards in Australia will be tightened further in the context of the current high level of public scrutiny.”
It is possible that the renewed weakness in housing in April reflects this increased focus.
If so it has come earlier than we thought would be the case.
Still, we have noted that the auction clearance rate will be one of the first data to show up any credit tightening.
If this is the cause then the question is whether this is temporary indigestion for the market as it adjusts to the new criteria, or something that is more permanent.
We will be watching the auction clearance rate over the next few weeks as the most up-to-date indicator of this.
A sustained downturn in house prices will have implications for our outlook for the consumer and the economy more generally.
Of course there may be offsets that work the other way, such as the tax cuts likely to be announced in next week’s budget.
Source: Report for ANZ’s institutional, professional or wholesale clients, and not for individuals or retail persons.
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