We waited with anxious anticipation for consumer sentiment to improve last year as housing markets should have been performing well in early 2013, but this was not the case. Interest rates were low, which has historically caused property growth spurts. Gradually, sentiment improved and property markets started to show strong growth moving into the last quarter of 2013.

However, recent data indicates that Sydney, the lead indicator market, is starting to look soft and as though it has peaked (see Graph 1).

The current employment situation will be impacting on sentiment with the degree of concern around job security being very high.

The Westpac-Melbourne Institute Index of Unemployment Expectations rose by 5.5% to be 13.6% above its November level. At 164.4, the Index is at an extreme high, only eclipsed by readings during 2008-09 and the recessions in the early 1990s and early 1980s. Higher readings indicate more consumers expect unemployment to rise in the year ahead. The surge in the Index reflects a severe loss of confidence around job security that can be expected to impact upon consumers’ financial decisions.

The Westpac Melbourne Institute Index of Consumer Sentiment declined by 0.7% in March from 100.2 in February to 99.5 in March, indicating that consumers are again becoming cautious.

Westpac Senior Economist, Matthew Hassan stated that, “The Index has now fallen 10.9% from its November peak of 110.3 and is at its lowest level since May last year”.

So, what does 2014 have install for our property markets?

Without strong consumer sentiment, the property market is unlikely to stretch much beyond its current level as it will be getting far too unaffordable for the masses.

Historically, Sydney has been the lead indicator for other markets around Australia. Graph 1 presents Sydney’s growth pattern over the short term.

Graph 1

There are a number of interesting points evident in the graph:

·         The market seems to have peaked and is now presenting as if it is going to revert to a period of much lower growth.

·         The data indicates that the high points in growth are reducing with each growth period.

I believe both points correct.

Graph 2 presents Sydney’s growth pattern since 1980. The downward growth trend over the longer term is clearly evident.

Graph 2

In fact, going back to the 1950′s when the highest period of growth in Australia’s history was recorded, the downward growth pattern is even more evident.

The logical reason for this pattern is, growth in any asset value will at some point reach a level that is unaffordable for the masses, particularly where there is some type of limit on supply. When this happens competition for the asset diminishes, as does the bidding war, and hence the extra amount that one party is prepared to pay to secure the asset above another also decreases.

While most people have a tendency to measure a market’s performance in capital growth percentages, this does not provide the necessary understanding on cost limitations. It simply encourages the market to believe that, as a market historically grew at a particular rate, it will do it again. However, this is an incorrect assumption as the dollar cost is always the limitation. Yes, the assumption would have a chance of being right if house price growth and household income grew at similar rates, but historically this has not been the case.

If you don’t accept that the limitation is cost and growth rates can just keep repeating themselves, consider a situation where wages are not increasing but houses are growing by 5% per annum. Assume a house a few years ago was worth $300,000 and grows by our 5%. The house increases in value by $15,000. As time passes, the house grows to be worth $700,000 and again grows 5%. Its value now increases by $35,000. Clearly, as wages have not grown, the house is going to be far more difficult to purchase and the annual uplift as it grows makes the problem larger each year. The market cannot keep increasing at the historical growth rate unless wages growth is equal to or better than house price growth, which has not been the case.

Given the above, the trend in Sydney’s growth pattern is not abnormal. It is simply a function of an asset that is increasing in value and constantly outperforming wage growth. This coupled with current levels of low affordability leads me to believe that Sydney house prices, in dollar terms, are reaching their peak value in this growth cycle.

The silver lining in this situation is that while house price growth in Sydney will probably slow for the remainder of the year, other states and capital cities still have some growth to achieve before reaching their peak value for this growth cycle.

We had held concerns about the Tasmanian market but it seems that Tasmania is about to be open for business again with a pro-business Liberal Government about to be swept to power.

In South Australia, the position is less clear. Should the Liberal Government come to power then we will have a Liberal Government in all states and it will be very interesting to see what actions the Federal Government takes to improve productivity.

Table 1 presents the February results for Australia’s major markets.

Table 1

Until next month,
John E Edwards.
Founder of Residex Pty Limited and Consultant to Onthehouse.com.au