In my pre-Christmas piece I mused that house prices could rise by around 10 per cent this year.
There was not a lot of opportunity in that column to expand on the background to that forecast but it is apparent that such a bullish call in house prices is unpopular with a range of other forecasters thinking that house prices will be closer to flat through 2013. Some of the usual suspects expect prices to fall again, an expectation that would mean a never before seen three straight years of falling house prices in Australia.
While the daily house price data from RP Data is clearly volatile and prone to reversal when viewed in small increments, it is somewhat interesting that house prices in the first ten days of 2013 have already risen by 0.6 per cent. It would be premature to get too enthused about these sorts of very short-term moves, and there are some quirks in the daily data, but something just might be afoot with such a significant rise already.
The reasons behind my expected strong rise in house prices this year (The top 10 big issues for 2013, December 24) are linked to issues associated with housing affordability (interest rates, current house prices and wages) plus the consistently low unemployment rate, a tight rental market and a likely positive wealth effect from what has been a strong lift in the stock market. An acceleration in population growth is another factor that is likely to add to underlying demand for housing.
The HIA-CBA Housing Affordability index shows that national affordability in the September quarter 2012 rose to the highest level since 2009 to be just shy of the highest level in a decade. When the December quarter data is available around the middle of February, affordability will have had a further significant boost, perhaps to be at near multi-decade highs.
This is because during the December quarter, mortgage interest rates fell by around 40 basis points as the Reserve Bank sliced the official cash rate by 50 basis points. The level of interest rates is a critically important aspect in determining whether or not buyers are able to step up in the housing market and borrow more and pay more for houses. It is also clear from the agencies that calculate housing data that house prices were probably a touch lower in the December quarter, aiding the level of future affordability and setting the scene, somewhat perversely, for a house price rebound. While data on wages growth for the December quarter is not yet available, even a conservative guess would be that wages rose around 0.7 per cent or so in the quarter to provide yet another element to boost affordability and with that, the prospect for a sharp rebound in house prices this year.
Adding to these bullish factors is the fact that the unemployment rate has remained low, below 5.5 per cent. This means that the scope for a rising appetite for borrowing is favourable. Added to that, consumer finances are in sound shape. Saving levels have been replenished over recent years and many borrowers have taken advantage of the current interest rate cutting cycle to pay off the principal in their current mortgage. This robust balance sheet for consumers frees them up to ramp up borrowing and bid up house prices in the not too distant future.
There has also been a strong wealth effect for households from rising stock prices on the ASX. This is boosting wealth and the financial position of the household sector. While the link between rising stock prices and buoyancy in house prices is only very general, there have been periods where a reallocation of investment cash out of a strongly performing asset (stocks) and into one that has significantly underperformed (housing) has boosted the underperformer. The same scenario could be unfolding now with the ASX up a hefty 20 per cent since the middle of 2012 to be near fresh 19-month highs.
Furthermore, in 2003 when mortgage interest rates were under 7 per cent (like now) and the unemployment rate was at 6 per cent or less (like now), annual house price growth averaged over 15 per cent during a two-year period. In other words, house prices rose by more than 30 per cent in just two years.
Even the GFC-inspired dip in mortgage interest rates in 2009, coincidently when the unemployment rate was anchored below 6 per cent, saw a peak 18.8 per cent annual lift in house prices unfold during 2010.
All the fundamental factors are aligned to support higher house prices in 2013. The fact that so many people are bearish on house prices only adds to the scope for a sharp rebound in prices as there is a rush to catch up through pent-up demand needing to be satisfied.
If there is a 10 per cent rise by the end of 2013, it will come on top of a cumulative fall of around 5 per cent in house prices in the prior two years. This will mean that the average increase over a three-year horizon will be a lousy 1.5 per cent per annum, hardly the stuff of a blow away housing bubble. What happens in 2014 and beyond may be a different question.
Some say "this time it’s different” but I suspect it isn’t. Australian consumers still love housing, the tax system favours individuals having a highly-geared house and the core underpinnings are very supportive of housing.
Favourable affordability, low unemployment and interest rates, and some pent-up demand point to what could be a corker of a year for house price growth.