No Housing Bubble on the Horizon
by John Edwards
All is going well for Australia relative to most developed countries of the world. The Reserve Bank and the government should be comfortable with the transition process taking place as the country moves away from the mining boom to a more normal economy.
There has been a surge in business confidence since the announcement of the Federal Election, which seems to have carried forward into the first few weeks of the new government’s term. Notwithstanding this, business conditions remain weak and the next quarter is important in determining the actions of the government and the Reserve Bank.
The Westpac-Melbourne Institute of Consumer Sentiment Index is now 9.2% above its level 12 months ago. There was a solid 4.2% jump in consumer confidence in September and the index stands at 108.32 in October. This means there are more people with a positive attitude to the future than previously.
The current national unemployment rate is 5.6% (seasonally adjusted). Although this is higher than the level seen during the mining boom period, the unemployment rate is still relatively low. While a full employment situation is ideal, the current unemployment figure is significantly lower than the median and average rate for the period from 1978 to today, which is 6.5% and 7.0% respectively.
Improved consumer confidence and lower interest rates have been good news for Australian housing markets. I find it hard to support the bullish press about a potential housing bubble developing and the market powering ahead. While markets are improving and “red ink” is nowhere near as prevalent as it was this time last year, growth is patchy and there are still markets that have not recovered from the adjustments that occurred over the last three or so years.
Graph 2 displays the combined house and unit trend for Australia wide. While the trend is encouraging, it does not point to anything other than a market presenting modest recovery.
Table 1 presents the position for capital city and regional markets to the end of September 2013. The patched nature of the recovery is evident in the table.
Sydney is the standout performer with its house and land market performing strongly. On the other hand, Sydney’s unit market is only performing slightly above inflation (1%). The reason for this is a surplus supply of unit stock. The majority of new stock in Sydney can be found in the unit market, while the house and land market cannot keep up with demand.
The position across Australia is similar. Unit developments are the preferred option for developers and as a consequence, supply is sufficient to ensure growth in the unit market is kept to a relatively low level compared to the house and land market.
Sales activity also confirms that the market is not overheating and we are not entering boom times. Graph 3 presents the total sales activity for dwellings across Australia. The data indicates that while things are improving, there is some way to go before we reach a historically ‘normal’ market. Total sales activity is still lower than it was in 1999.
Growth in the markets has basically been driven by a shortage of stock for sale, particularly in Sydney. However, as the “Spring Selling Season” gets underway, there has been a significant increase in property listings which is helping growth rates to moderate. The slight downturn in the market’s growth is evident in Graph 2.
The predicted forecast average capital growth outcomes over the next five years have been provided in Table 1. You will notice that the predictions are modest average growth rates. Residex models are suggesting that growth in 2014 will be similar to what has been seen this year and that growth will moderate once interest rates start to move up to more normal levels.
I believe that while the economy is doing relatively well and sentiment is improving, it still needs a further boost as interest rate reductions have not stimulated business activity sufficiently. I think there will be a further interest rate reduction, which will probably be the last in the cycle, in the order of 0.25%. It is unlikely that the RBA will move on the rate position until February as it will want to assess the impact of the new government, see what flows from the Christmas trading period and if the improved sentiment in the business sector flows into improved investment activity and employment. Inflation does not look as if it is an issue for the RBA as a wage blow-out is unlikely given the potential for a deteriorating employment situation.
For those who are in the market or who can afford to purchase, we are looking at a period of reasonable growth and an increasing cash return from rentals. In short, an attractive and reducing risk profile investment asset class is likely.
Until next month,
John E Edwards.
Founder of Residex Pty Limited and Consultant to Onthehouse.com.au