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Predictions lead market performance

Once asked by a reporter what is the best lead indicator of the housing market, my answer was not as expected. Anticipating a response indicating auction clearance rates, sales activity or even perhaps sales listings, it was to his surprise that my answer was related to our own Residex Predictions Reports sales and website traffic.

Residex Predictions Reports are purchased once an investor has made a decision to look for property to buy. This is the starting point.

The majority would view auction clearance rates and sales activity as appropriate indicators; however they are indicators as to what is happening at that point in time. This information, in many respects, is after the fact and potentially of little use to property buyers.

The changing pattern in report sales can give us an insight as to what we might expect to occur in about six to nine months time, not what is currently happening. You may be able to spot the relationship between growth and report sales activity in the trend mapped in the graph below.

I also believe that investor activity is a lead indicator in our housing markets because investors have a tendency to follow markets more closely and be more opportunistic than general home buyers. Home buyers are more likely to be followers, simply driven by need and affordability rather than having significant regard to current market conditions.

Once a market is moving strongly in a positive direction, home buyers have a tendency to move and buy to ensure they are not kept out of a market due to cost and affordability.

We can consider each state and look at investor activity from our sales activity and draw some conclusions also.

In the graph above, Residex Prediction Report sales have been mapped against house growth trends. As you can see, report sales have dramatically increased since mid-2011, indicating that our housing market is about to start moving forward as activity increases.

If the sales activity for each state was equally spread based on housing population, we could assume that all markets in Australia are about to move forward and that the worst is over, however as it turns out, our Predictions Report sales activity is limited in some states.

Currently, interest surrounds Western Australia, New South Wales and Queensland, while activity for the Melbourne market is about 50 per cent of that in both of Sydney and Brisbane. Perth is exhibiting an increase in sales activity also, but only at 15 per cent of the sales activity occurring in Sydney and Brisbane.

The western capital city has experienced such a significant downturn that investor recognition of a pending upturn will probably be a little slower in this market compared to others, however it is moving to growth more quickly than we envisaged and we have been advising that this is the market to watch for a number of months now.

In the graph ‘Trend: Australian Housing’ I present the position based on capital growth. This graph is indicating that there is more correction to come on an Australia wide basis and that we are yet to reach the bottom of the corrections phase.

This position is more probably than not confirmed by the fact that the ABS released its finance approvals figures for January, which indicate that housing finance approvals for owner occupied dwellings fell by 1.2 per cent in January. If we were to remove the refinancing that occurred during this period, we would have a total fall in activity of 2.8 per cent, which is larger than the increase we saw in December, 2011 (2.0 per cent).

The encouraging statistics that December growth in finance with respect to investment activity was 7.4 per cent has been negated by the negative adjustment in January of -7.1 per cent. These numbers suggest a very sluggish start for our housing markets in 2012.

The graphs ‘Potential Leaders: Houses’ and ‘Potential Leaders: Units’ I provide monthly trends for Perth, Sydney and Brisbane.

The graphs suggest that Brisbane is moving out of its correction phase slower than Perth and Sydney. Perth is by far doing the best and is clearly in growth again, albeit very modest.

In conclusion, the lead indicator (Prediction Report Sales Index) suggests we are about three plus months away from any Australia-wide pickup. I believe it is this indicator that leads actual market activity by about nine months. The data series for growth and rent indicate that, in most capital cities, we have further corrections to come but we are very close to the bottom of the cycle if we have not in fact already passed it (see Australia as a Whole for February 2012 capital city statistics).

Perth is leading the way in Australian property and its move to growth has been relatively rapid. This should not come as a surprise given the expansion in the economy that is occurring as a result of the mining boom. We have a high level of interest in the average household income in Western Australia, which will be published once the 2012 Census data becomes available.

We suspect that affordability of housing in this state is much better than what many of us suspect. We continue to anticipate significant future growth in Perth and believe it may well become the most expensive housing market in Australia, exceeding Sydney and Melbourne who have traditionally held this title at various points in time.

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About

John is Consulting Analyst for Onthehouse, Australia’s most comprehensive real estate portal, and Founder of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and the general public. Visit www.OnTheHouse.com.au


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