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Housing starts will build again

19 Nov 2012 THE AGE - MATTHEW KIDMAN


CAN the Australian housing market recover as it has in the past or is it different this time?

Ask any foreign money manager what scares them about Australia's stockmarket and they will invariably say the risk of a housing collapse because of gross overvaluations. It makes a lot of sense. Virtually all the Western world has seen house prices crumble since 2007 while Australia's residential market has defied gravity, recording only gentle declines. The median house price in Australia is six times the median household income - 30 per cent greater than the US and the long-term average.

Does this mean that a housing recovery in Australia is a pipe dream? Is housing going to be a handbrake in the coming years rather than the path to economic prosperity? No one has a clear answer but they will arguably be the crucial questions for stockmarket investors as we enter 2013.

The bulls like myself believe that history will repeat itself and lower interest rates will eventually trigger a building cycle that in turn will drive domestic economic growth. The bears counter this by saying it is different this time because household debt still sits at a lofty 172 per cent of gross income. They believe any spare income from lower interest rates will be used to pay down debts and not ploughed into the property market.

In the early 1990s, household debt was only about 50 per cent of gross income, providing a sturdier platform for a housing boom.

If the bears are right, the Australian economy has a real chance of falling into recession as the peak of the mining and energy boom passes. We may talk about developing new areas of growth such as education, technology, tourism and high-level manufacturing, but the reality is these are niche industries that will take many years to develop into major engines of growth.

Housing is our only realistic hope of avoiding a protracted period of substandard economic growth.

Last week, building materials group CSR said it was optimistic that a recovery in housing activity was in its nascent stages. It pointed to a spike in housing finance as a strong lead indicator for future building activity.

Housing starts in Australia have sunk to a multi-year low of about 125,000 and are predicted to spike to 140,000 in 2013 with the moribund Sydney market, surprisingly, leading the charge. The long-term average for Australia is about 150,000 starts, but underlying demand is currently closer to 170,000 given population growth.

Goldman Sachs wrote earlier this year that if the Reserve Bank managed to reduce official interest rates to 2.75 per cent by 2014, housing starts could exceed 180,000 by 2015. That would be a full-blown recovery and a major boon for the economy as the tailwinds from the mining and energy booms drop off. A jump in housing starts drives growth for banks, construction companies and retailers. It is also a major employer.

In previous economic downturns in the early 1990s and after the global financial crisis, building activity led the recovery. In simple terms, lower interest rates unearth the first home buyer who is always in the market if they can afford a house. It also entices investors looking to achieve a return on their money rather than be stuck with cash in a low interest rate environment.

As RBA governor Glenn Stevens suggested recently, it is time to look at riskier assets.

This time around it may be different, though. Just as in the US, lower interest rates are taking an inordinately long time to have an effect. The RBA has lowered rates by 125 basis points over the past year and we are still waiting for a tangible increase in housing starts. The lead indicators such as approvals, finance and auction clearances are heading in the right direction but 2013 will be a key year in working out whether the old rule that lower interest rates automatically fire housing activity still applies.

It seems a gradual housing recovery is at last taking place in the US - more than five years after the peak. Zero interest rates and a dramatic decline in prices have taken several years to have any meaningful impact. The US market was in a different position to Australia, with supply of housing outstripping demand by several million. This excess has been slowly whittled down and supply and demand seem to have realigned at last. Fortunately for Australia, this supply and demand imbalance never really existed and so the country was saved from a 40 per cent collapse in prices.

I believe that lower interest rates will eventually lead to an increase in starts even if more gradually than in the past. My view depends heavily on the RBA continuing to lower rates in 2013, allowing first home buyers to get in. With a surge of people entering the first home buying age of 30-34 in the next five years, starts may reach a record.

matthewjkidman@gmail.com