Improving credit outlook drives sentiment higher

The worst of the house price falls are probably behind us.

That’s the suggestion from the recent ANZ  Property Council Survey for the September quarter shows a solid bounce in sentiment in Australia’s property sector.

Confidence in Australia’s property markets leapt in the wake of the federal election, as sentiment around credit availability surged and expectations for economic growth turned positive, according to the ANZ/Property Council Survey.

Property Research Statistics

The headline index of confidence made its second-biggest leap in the eight-year history of the survey, jumping to 128 from 115 three months earlier.

·Just as recent weakness in the property sector was more pronounced in the residential sector, the bounce in sentiment was also more marked in residential.

And that improvement was apparent across the broad suite of indicators. In particular, the marked improvement in credit availability was especially encouraging given our view that restricted credit has been the key factor behind the downturn.

·Confidence improved broadly across the country, with NSW, Victoria, Queensland, Western Australia and South Australia all posting gains.

The lift is encouraging and suggests the worst of the house price falls are probably behind us.

With ongoing constraints on credit availability, however, we expect that the bounce in prices and construction will be more muted than the rebound in residential indicators suggests.

Sentiment also bounced in the commercial property space and is well above confidence in the residential sector. The outlook for the office, industrial, aged care and accommodation segments all improved.

ANZ Head of Australian Economics, David Plank, comments:

“Since April, we’ve been flagging that there were emerging signs of stability in the residential property market.

In particular, we noted that the pace of house price declines was slowing and that the auction clearance rate was beginning to rise.

Over the past month, lower interest rates, the proposed change to the interest rate floor by the regulator and the removal of uncertainty around the impact of the possible tax policy changes have boosted sentiment toward housing.

This boost is reflected in the rise in the auction clearance rate in Sydney and Melbourne to the highest level in more than a year.

The results of the latest ANZ-PCA survey capture this shift, with most parts of the survey showing material improvement.

Of particular note is the marked improvement in credit availability.

This measure has proved to be a reliable indicator of shifts in housing activity in the past and, if it remains so, it suggests better times ahead.

It seems safe to say that the worst of the house price declines are well and truly behind us.

This doesn’t mean we are expecting a shift back to dramatic increases in house prices.

This is not something we see as desirable, given the still stretched levels of affordability in Sydney and Melbourne.

Nor do we think it is likely, with the more stringent credit policies that are in place.

Also encouraging for the economic outlook was the lift in sentiment in the thecommercial property sector.

This provides some reassurance that the recent weakness in the domestic economy and the more negative global environment hasn’t flowed through into a sharply weaker outlook for business investment.”

Optimism in the residential sector returns

The September quarter ANZ-Property Council survey shows that confidence in Australia’shousing sector has bounced solidly following four straight quarters of declines (Figure 1).

Economy RiseThe bounce follows a number of developments over the past couple of months, which have together helped turn housing sentiment around after a period of significant weakness.

Interest rates cuts, both actual and prospective, regulatory easing and the removal of uncertainty about tax arrangements together appear to have driven an about-face in confidence.

There is some supporting evidence of this in the hard data, with auction clearance rates improving since the start of the year and house prices broadly stabilizing in June.

While the extent of the rebound in some of the indicators in the ANZ-Property Council survey is a positive sign, our view is that the recovery in housing is likely to be relatively subdued.

Crucially, firms are now reporting that they expect finance to become more readily available.

A1

This is critical in the current environment, where macro-prudential policies and tighter bank lending conditions have, in our view, been the main drivers of the slowdown in the housing sector.

In the September quarter survey, firms reported a sharp improvement in their expectations of the availability of finance over the next 12 months.

This is close to the high seen in June 2014 (Figure 2).

A2

We expect this turnaround is a response to both the APRA announcement in early May flagging the easing of the interest rate floor used in serviceability assessments as well as the RBA rate cuts (actual and prospective).

Interest Only Loans DropWhether these expectations of easier access to credit will be met remains to be seen, but they are an important factor in the broader lift in sentiment.

Many respondents are now counting on lower interest rates.

A net 51% of respondents across the country expect interest rates to be lowered over the next 12 months (Figure 3).

This is consistent with our view and market expectations, with at least one more cut priced in after the cuts in June and July.

A3

With this sharply improved backdrop, the bounce in the outlook for house prices and construction is not surprising.

Median Price2New South Wales and Victoria, where pessimism was greatest, are the states where the bounce has been largest.

While price expectations remain negative in the two largest states, they have improved sharply from the lows seen in the June quarter.

Of the respondents that operate in the residential sector in New South Wales and Victoria, a net24% and 17% respectively expect housing prices to fall in the next year (compared with 71%and 72% in the previous survey).

For the country as a whole, only 8% expect housing prices to fall (Figure 4).

A4

The lift in the outlook for residential prices is consistent with the improvement across a number of housing market indicators.

Auction clearance rates have been picking up since the beginning of the year.

Home prices, after nearly two years of declines, managed to eke out a small rise in Sydney and Melbourne in June.

house-money-balance-tax-property-negative-gearing-decline-homeAnd housing finance is showing tentative signs of stabilization.

While easier credit and lower interest rates have clearly buoyed sentiment in the housing sector, we are cautious of being overly optimistic about any rebound.

Our view for some time has been that restricted credit supply has been the most important driver of the downturn, so while APRA’s relaxation of the interest rate floor will provide a modest easing, it is small compared with the range of other more permanent tightening measures implemented over recent years.

Accordingly, this suggests that the turn in the housing cycle is likely to be relatively subdued.

Alongside the overall bounce in sentiment, the construction outlook has also bounced, although not to the same extent as the prices outlook.

While a net 24%, 41% and 18% acrossNew South Wales, Victoria and nationwide respectively expect construction activity to fall over the next 12 months, this is an improvement from the 48%, 42%, and 29% respectively in the the previous quarter (Figure 5).

A5

The improved outlook for construction is consistent with tentative signs of stabilisation in building approvals.

Urban ViewWith construction much more heavily tilted towards high-rise apartments than has been the case historically, the lags between approval and construction are longer; so a quick turnaround in work done looks unlikely.

While the bounce in the outlook for construction activity and forward work schedules is encouraging, we expect that activity is likely to continue to decline in coming quarters, given the fall in building approvals to date before picking up around mid-2020.

Domestic considerations seem to be driving the improvement in sentiment in the residential sector, with foreign interest declining.

After edging higher in the past two quarters, the share of residential property sales to foreign buyers declined in the September quarter to its lowest level in the history of the survey (Figure 6).

A6

Commercial property confidence also turns up

Confidence in Australia’s commercial property industry also bounced in the September quarter, but remains well below the levels seen through 2018.

Commercial-PropertyAt this level, firms remain significantly more positive than their residential counterparts.

The improvement in sentiment in the September quarter occurred across all segments of commercial property (Figure 7).

The retail sector saw the most modest bounce and remains by far the weakest sector with conditions well below the long run average.

This likely reflects a number of headwinds the sector is facing, including persistently weak household income-growth, a record high household debt and strong competition from international and online retailers.

That said, retail property firms remain positive about the construction outlook, with a net 37% of firms expecting a rise in construction activity over the next 12 months (the highest since June 2017).

A8

The accommodation segment posted the largest bounce in the September quarter, although it remains well below the peak seen in the September quarter 2018.

The fundamentals for the accommodation segment remain positive, and new building approvals for the sector have been growing strongly.

Hand With KeyWhile growth in the number of tourist arrivals has slowed, the gradual depreciation in the AUD since early 2018, with further depreciation likely over coming quarters, will provide support to tourism demand going forward.

Elsewhere in the commercial space, the industrial and office segments rose.

Office property survey respondents suggest that the outlook for construction activity has declined slightly, while industrial property respondents were slightly more upbeat than in the previous survey.

In both cases, though, the construction outlook remains solid.

A9

A10

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


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