Architects of housing fortune

House prices are surging and the rate at which prices are increasing is, if anything, accelerating. This should not only kill off the remaining iota of hope for a further interest rate cut, but it could see the Reserve Bank of Australia move to a bias to hike interest rates before year end.

According to RPData, house prices in the five major cities have risen a stonking 1.4 per cent so far in March (annualised pace of close to 20 per cent) and are now are up a solid 2.7 per cent year-to-date in 2013 (annualised pace of 12 per cent). It seems uncontroversial to be thinking, given this strength, that house prices will rise 10 per cent this year. The risk is building that the rise could be significantly more.

And when house prices pick up in Australia, they usually have a year where the rise is 15 to 20 per cent. With interest rates as low as they are now, the unemployment rate anchored at a remarkably low rate and real wages registering solid gains, there is no reason why there shouldn’t be a rise well above 10 per cent by year end.

It is important to again take account of the fact that there have been several years of weak housing construction, while at the same time there is still strong population growth. These dynamics of low supply and high demand are underpinning prices. With rents also relatively high and borrowing costs low, the motivation for people to buy is strong.

The base from which the current bullish outlook for house prices comes is important to recall. House prices fell moderately in 2011 and 2012 – the peak to trough decline during this time was around 7 per cent. This means that the first part of the current price rebound is only recapturing these losses. This translates to a picture where even with a 10 per cent rise in 2013, the rolling three-year gain will be a trifling 3 per cent per annum. This context is important for hosing down the house price bubble proponents or those who are taken with a phobia every time they see house prices tick higher. 

This fundamental background to house price changes makes it hard for the Australian house price bears to hold their ever erroneous view.

Another guide to the buoyancy on the housing market is the high level for auction clearance rates, particularly in Sydney and Melbourne. Since the start of the year, the auction clearance rates have generally been between 65 and 75 per cent, a success rate that is indicative of buoyant prices. This time it looks to be no different.

Also supporting house prices is the jump in wealth that has been delivered via the stock market surge since the middle of 2012.  The ASX has lifted around 25 per cent from the low point, which has added some $300 billion to the stock market’s capitalisation and simultaneously, boosted wealth that can be transferred to house prices. The correlation between household wealth and financial well-being and then house prices remains strong.

Further house prices gains are ahead and prices should remain strong at least until the Reserve Bank not only moves to a bias to tighten interest rates, but when it has hiked at least a couple of times.

While general inflation is low, the eurozone continues to provide headwinds and the Australian dollar is so high, those rate hikes are likely to be later rather than sooner. 

If the interest rate futures market is to be believed, interest rate hikes are not even on the agenda until well into 2014 and even then, no economists – even the headline grabbers – are forecasting even a 1 percentage point cumulative hiking scenario through to the end of 2014.

These market forecasts and the economists will inevitably be wrong and will be repriced, but interest rate hikes in the near term, say out six to nine months, are unlikely. 

It will take an unexpectedly hawkish stance for the Reserve Bank to arrest what is increasingly likely to be the next Australian house price boom, which looks to have started as 2012 came to a close.