A special end of year housing market wrap up from John Edwards
CEO Residex and FMAH Founder
In early July 2009 our Governor of the Reserve Bank was still cautious but was noting that housing prices were moving forward as were borrowings. He said “Economic conditions in Australia have been stronger than expected a few months ago,” the spectre of increasing interest rates was starting to be a topic in our papers and thoughts. The first home buyers grant had started to become less attractive as prices had now largely absorbed it. We were at the top of the growth cycle. By the 28th July our Governor was starting to recognise that we were not generating stock but just running up prices and potentially generating a problem. In his speech of that day he said “A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices.”
By the 4th August the tone was clearly starting to change.
The Board’s judgment is that the present accommodative setting of monetary policy is appropriate given the economy’s circumstances. The Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target
The RBA were starting to assess and speak about the “appropriateness” of the then current monetary policy. Our news papers through the eyes of the expert economists are starting to clearly indicate that interest rate increases are on the horizon. They are at this stage also starting to speak and warn of a “bubble” developing in the market.
We get to September and the RBA release now says “The Board’s judgement is that the present accommodative setting of monetary policy remains appropriate for the time being.” The critical words being “for the time being” The population is being primed for an increase and our media are telling us all to be ready for an increase as better than expected economic data unfolds.
In October and November it happens and again in December we have another 0.25% increase. So let’s look at the housing market over the same period. See the graph above.
Until September 30 this year, first home buyers were eligible for a government grant of $14,000 to purchase an existing residential premises and $21,000 for a new house. That grant was scaled back to $10,500 for existing homes and $14,000 new homes. It will be reduced further to $7000 for existing homes and $10,000 for new homes on December 31
It is clear that the RBA’s potentially greatest tool is probably not just the blunt weapon, interest rate increases but the spectre of its use.
The slowing of values occurred almost immediately that the threat of rising rates began to surface. Yes there were also other things like the run off of Governments spending spree via cash handouts but you can’t escape the evident relationship between the adjustment in growth rate and the RBA rhetoric and actions.
The one thing, which to me, is very important to note in all of this is the fact that the market did react relatively quickly to the early May announcement but took considerable time to gather a full head of steam. Having moved forward it took very little to dampen the markets activity. The market could not be described as any other than fragile. Yes demand is there and there is a shortage of new stock and so actions which deliver affordability drive it forward. Diminish affordability and it quickly slows which is what is happening. We can see further evidence of this in the auction clearance rates.
In my view there, should be no further interest rate increase for the moment until employment picks up. I am looking for a period of increases in the permanent employment numbers not the overall numbers which are influenced by part time positions. I suspect that market forces (affordability) will take care of any potential excessive growth in the housing market and that coupled with further rhetoric from the RBA will achieve their objective. It does not provide supply but action to assist developers accessing credit and low interest rates will assist them in delivering lower cost product.
The slowing of the market has brought with it a return to growth in the rental cost of housing. At this stage it is almost not measurable other than the fact that there are no further falls in rental prices. Rental yields on an annual basis are now all but stable and in some markets providing some growth. This is against a background of house price growth in the last 12 months. Additionally, in some markets there are small increases. This increase in rental yields I can almost guarantee will be a feature of the next 12 months.
Yes, there is a slowing in growth in our markets but it has to happen as Government brought forward growth and condensed it into a few short months to maintain economic activity. Provided interest rates are not advanced by more than about 0.5% there should not be any negative adjustments in housing prices across Australia.
During the last few months Melbourne is indicating it is moving to being very sensitive to interest rate increases due to affordability issues which are newer as is the ACT and Sydney due to chronic supply issues while un-affordable and slowing is more seasoned and not presenting the same level of volatility.
As can be seen from the best performers last year in Table 2, clearly no matter what happens there will always be areas which move forward strongly and provide investors with opportunity. It is imperative that in making our investment in this climate, we look forward not to the present or recent past. We are looking for the suburbs that are about to move forward where we can do but well.
I wish all readers of the Homesales newsletter a happy Christmas, and prosperous new year,
John Edwards
