Signals show that property outlook is unpredictable

By Trevor Hoey. Published at Aug 3, 2018, in Features

It could be argued that picking the property market is at least as difficult if not harder than picking stocks on the sharemarket. One would be hard-pressed to find a time in history when there was so much conflicting information.

There are glaring disparities in recent data relating to housing finance approvals, building approvals, new home starts, new house sales, residential land prices and trends in the affordability index.

Not only does the residential housing market appear to be in a state of flux, but there are sharp variances in trends between states with some regions experiencing increases in building activity and/or house prices while others are in decline.

Traditional lead indicators prove unreliable

In a stable and/or mid-trend market you often find there is a strong correlation between housing finance approvals and new home starts/new house sales for example, with the former normally being a reasonably reliable lead indicator for the building industry.

However, it isn’t just the building industry entrepreneurs that are scratching their heads at the moment – it is the average homeowner, or those trying to break into the market to snare their first ‘great Australian dream’ who are watching with a mix of anticipation and trepidation.

Just mustering up the money for a deposit on a house or a standard bank loan is a challenge in itself for young Australians, particularly at a time when we have gone through such a lengthy period of low wage growth.

Hence, the emergence of the Bank of Mum and Dad as Digital Finance Analytics calls it.

The Bank of Mum and Dad

The latest Digital Finance Analytics analysis shows that the number and value of loans made to first home buyers by the “Bank of Mum and Dad” has increased, to a total estimated at more than $20 billion, which places it among the top 10 mortgage lenders in Australia.

As DFA points out, Mum and Dad loans were so few up until 2010 that they really didn’t get a mention when weighing up the state of the housing market.

However, expect this to get more airplay as banks are required to insist on a greater upfront contribution from borrowers and our ageing population transitions into a situation where spare capital is available.

You even have a strong inverse relationship supporting this trend with empty nesters downsizing from valuable properties and recognising the capital on their homes that have appreciated substantially, while desperate first homeowners (those who have left the nest) are wondering whether they will ever break out of the rental cycle.

This is a dynamic which wasn’t in the mix in the past and certainly has some impact when analysts are looking to join the dots between housing finance approvals (from traditional banks) and housing starts.

Is long-term renting a viable option?

In some quarters there is the suggestion that it is going to be more financially viable to be a lifelong renter than a homeowner.

Thinking back to when the interest rate on my home loan was in the order of 18 per cent, I can’t imagine how a new homeowner would cope with the rapid escalation in interest rates that occurred in the 1970s.

Rates for a 30 year fixed rate mortgage increased from less than 8 per cent in the early 1970s to a high of 18.6 per cent in 1981.

Imagine if rates doubled from where they are now to early 1970s levels - mortgage stress would turn to mortgage mayhem, triggering a raft of panic selling and potentially driving down house prices to levels not seen for decades.

So perhaps renting, at least for a reasonable period of time, is a consideration.

Long-term renters who while renting set aside cash for a potential home purchase could find themselves perfectly placed if the property market imploded, snapping up a house for well below what they would be paying at the moment.

Does the bubble need to burst?

Some would argue a sharp decline in property prices would be a healthy correction – in Paul Keating’s words “the recession we had to have.”

This snippet shows the profound impact that the recession had on interest rates.

Looking retrospectively though, that recession wasn’t really Paul Keating’s call – consumers and home owners were hurting and big business was drowning in debt – Keating’s decision was reactionary.

One could argue that a similar set of circumstances could be in the making even though interest rates are at all-time lows.

It is well documented that homeowners are working longer hours to make ends meet, and that includes what is normally the biggest household expense – paying the mortgage.

Based on Reserve Bank of Australia (RBA) research the period between 2018 and 2022 could be crunch time.

In February, noted that the RBA found that the risk of mortgage stress for investors could increase between 2018 and 2022, which is when a significant proportion of existing interest only loans are due to expire.

This could lead to some borrowers failing to meet the requirements to extend their interest-only period, but struggling to afford principal and interest repayments.

The bigger the bubble, the greater the trouble

So what is the data telling us?

The housing industry experienced a strong month of approvals in June, with the number of new home approvals up 4.0 per cent on the previous month.

Comparative monthly data wasn’t quite as buoyant with the number of building approvals in June 2018 only 1.6 per cent higher than in same month last year, perhaps pointing to a more subdued fiscal 2019.

Housing Industry Australia (HIA) Principal Economist, Tim Reardon noted that the increase in building approvals for the end of the financial year makes 2017/18 the third highest year on record for building approvals – after 2014/15 and 2015/16.

This indicates that boom conditions have practically been in play for approximately four years.

Reardon said, “This sustained boom in building activity is unprecedented.

“The growth in the number of new homes available is a major reason why house price increases have slowed over the past year.

“The affordability challenge can only be addressed by allowing the industry to grow to meet the demand for new housing.

“This includes making more residential land available and reducing the taxation burden on new housing.”

Victoria leads the way with NSW on a slippery slope

Reardon noted that the strength of new home building in Victoria has been the largest driver of the national picture with approvals in that state rising by 16.0 per cent during 2017/18, surpassing the record performance of 2015/16.

Even a month on month 9.6 per cent drop in June was not enough to offset the strong performance over the year.

Reardon expects these strong conditions in Victoria to moderate over the remainder of 2018 as the population growth rate slows and the pent-up demand for new housing in Victoria is met.

Approvals in South Australia grew strongly, rising by 11.1 per cent in fiscal 2018, despite a decline of 15.9 per cent for the month of June.

By contrast, building approvals in New South Wales rose 3.0 per cent during June 2018, but still fell back by 2.0 per cent overall during 2017/18.

“This result is consistent with other indicators showing that the market in NSW peaked toward the end of 2017.

Mining money could trigger WA recovery

“Western Australia and the Northern Territory have experienced one of the worst years on record with falls of 9.2 per cent and 25.8 per cent respectively for 2017/18.

However, both of these markets have seen growth in recent months and hopefully this is a sign that they have passed the worst of their downturns.

So, perhaps new homeowners could get their foot in the door in these markets.

What this data does indicate is the strong correlation between disposable income and the building industry.

Note the strong outperformance against long-term trends in Western Australia and New South Wales on the HIA Affordability Index.

It is evident in Western Australia and the Northern Territory that the uptick in the mining sector is generating wealth in those regions, potentially providing new homeowners with a deposit and the capacity to make repayments, the two essential elements in terms of being granted a home loan.

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