House prices under the microscope

This week it's all about house prices! How much will they fall? And how dangerous is this for the economy and for investors generally?

For the answers, I turned to:

• Tim Lawless, Head of Research at CoreLogic;
• Alan Oster, Group Chief Economist at NAB;
• Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital; and
• Lyndal Curtis, Former Parliament House Bureau Chief for Sky News Australia and ABC News 24 Political Editor updates on the week's political news.

Hello and welcome to Talking Finance, I’m Alan Kohler.  This week I’m focusing on house prices which are now down 5-6% in Sydney depending on who you talk to.  The question before the house, so to speak, is how much will house prices fall in total and how dangerous is this for the economy and for investors generally.  For some answers on that I turn to Tim Lawless of CoreLogic who compiles the house price data, Alan Oster, the Chief Economist of NAB and Shane Oliver, Chief Economist at AMP Capital. 

Speaking of questions before the house, how about politics this week?  What, with David Leyonhjelm and Tony Abbott both going troppo, to discuss the issues behind the theatrics as well as the theatrics themselves of course, I turn to Lyndal Curtis, former Parliament House Bureau Chief for Sky News Australia and ABC News 24 Political Editor.

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Now, for our monthly house price discussion with Tim Lawless, the Head of Research at CoreLogic, talking about the June house price results.  Tim, I feel like it’s once a month we catch up with the latest fall and what are we up to?  That’s the question, what are we up to now in terms of the fall of the Australian median house price?

TL:  It is a bit like that, isn’t it?  We’re seeing month on month falls, in fact this is the 9^th consistent month where we’ve seen national values fall and over GN they were down 0.2% which means we’ve seen dwelling values fall by a little bit more than 1.5% since they peaked out late last year.  But of course Sydney is really where the largest falls have been from since when they peaked in July last year.  Sydney values are down by 4.8%, but it’s looking like Melbourne is just starting to catch up a little bit now. 

We saw Melbourne peak a little bit later than what Sydney did, it was actually November last year, but Melbourne was the worst performing capital city over the June quarter.  We saw Melbourne values fall by 1.4% and they’re now down 2% from when they peaked.  

Sydney and Melbourne went up the most, so it’s off a high base of course.

TL:  Yeah, absolutely.  Keeping this in context is really important.  Prior to say, Sydney moving into a decline we saw values rise by about 70%.  Melbourne, not quite as much, up by about 62% during the growth phase.  So it’s really only those buyers that have bought in over say the past year or so that may be seeing some slippage in their overall property value. 

Do you have a view of what sort of total fall we’re likely to see both nationally and in Sydney and Melbourne?

TL:  Well, there’s a couple of different views and we do have a formal forecast which is based on the Moody’s analytics macroeconomic model that we overlay against [2:59.7] Index, and that shows that Sydney and Melbourne are likely to bottom out early into next year at least on an annualised basis.  In that sense, the market downturn looks quite shallow but when you start looking at the credit environment and the fact that we probably aren’t going to be seeing any loosening in credit even though we’re seeing the 10% investment speed limit being lifted this far.  We’re not really expecting the credit environment to loosen up and that’s really the main driver of what’s keeping a lid on housing prices at the moment is the fact that credit availability is much tighter and that of course is affecting investors more than owner-occupiers.  With that in mind, I think we probably will see a more sustained downturn than what those formal forecasts are showing. 

What amount?  What do you think is the percentage we’re going to end up with?

TL:  We’ve already seen Sydney values fall by nearly 5% and I think another 5% fall on top of that probably wouldn’t be too surprising, so a peak to trough decline of around 10% in Sydney once again and the context of values rising 70% or so prior to that.  Melbourne looks a little bit more resilient, we may not see values fall by quite that much, but of course, outside of those two large cities we are seeing much more stable conditions.  In fact, markets like Perth are starting to show signs of bottoming out.  Even though we did see another month of decline in June the trend rate of decline is much less now than what it has been over the previous years.

Would you say that Perth is the best environment for investors at the moment?

TL:  No, I wouldn’t say that.  I think Perth, even though the market is levelling, it’s not really showing a lot of growth prospects simply because we’re still seeing migration rates very much in the negatives, particularly interstate migration.  The economy is starting to improve and jobs growth is improving but I think it’s going to take some time before the market really starts to accelerate.  I think better investment opportunities will be found around Southeast Queensland where we’re seeing really strong migration trends, the labour market’s improved substantially and we’re also seeing rising demand coming from New South Welshmen crossing the border, as well as sea changers who are very much attracted to the Southeast Queensland pocket for the lifestyle and the weather and so forth, particularly the Gold Coast and Sunshine Coast markets. 

In fact, a lot of the momentum at the moment is in Hobart, are you surprised at the extent of the boom there?

TL:  Yeah, a little bit.  I’m probably surprised by the sustained level of growth in Hobart.  Values over the past 12 months were up 12.7% across Hobart, roughly the same as what it was a year ago.  The previous FY values were up 12.8% so about the same.  I would have thought that Hobart would be slowing down in that rate of growth by now.  Maybe we are seeing the first signs of that, that the month on month figures for Hobart was up 0.3% which is still quite robust, but certainly much weaker than what we’ve been seeing over previous months. 

But if you’ve got to look at Hobart in the sense of demand has been very strong so migration rates have really picked up but there’s been no real supply response, so we are still seeing housing dramatically undersupplied.  In fact, listing numbers in Hobart are down about 30% from a year ago which means buyers don’t have a lot of choice, there’s a lot of urgency in this market and homes are selling very rapidly, in less than 30 days.

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Well a fair bit went on in the economy this week and to go through it all, here’s Alan Oster, Chief Economist at NAB.  Alan, there’s a bit of ABS data out this week, retail sales and trade and also the RBA of course, but I think most people are looking at house prices at the moment and that was also out this week.  I just wonder, how dangerous do you think the decline in house prices is getting? 

AO:  I don’t think it’s that dangerous at all.  Let me put it a different way, if you’re looking at Sydney down about 6% from the recent peak and Melbourne’s more like 2 or 3% down, but if you go back to the previous trough, i.e. two to three years ago, they’re up about 40%.  So, yes, house prices are softening, but there’s still significant buffers, if you like, that we’ve seen over the last two to three years.  Then probably more fundamentally, I look at supply and demand, particularly Melbourne and Sydney in terms of the housing market and what I see is an undersupplied market.  I don’t see interest rates going up any time soon and I also don’t see high levels of unemployment, so overall a softening but not a crash. 

I think the standard decline in house prices in Australia after a boom is somewhere between 10-15%...

AO:  Yeah.

Do you think there’s any reason to think this time is likely to be more than that?

AO:  No and I think if you look back and you’d say, as I was just saying, if you’re 5-6% down, if you take another 5% down from where we are now, you end up with falls in house prices across Australia of 2-3% and maybe flat the year after, which after a pretty strong period I think is healthy to be brutally honest.

I suppose the difference between this time and previous periods was household debt is much higher, so do you think that raises risks in the economy that weren’t previously there?

AO:  I think what it does is it means the consumer is more cautious.  If you’re looking at GDP, we know LNG exports are going to go up, we know that infrastructure spending is jumping up a lot, but we also know that retail doesn’t look like it’s doing that well.  The consumer will buy things they think they have to have like their iPhones and whatever or with the doctors and that sort of stuff, but they won’t go to the discretionary retail shops and that I think is an important problem because until you get wages growth, consumers are going to stay cautious. 

Once you get through some of these lumps and bumps with infrastructure and LNG exports, you end up with growth momentum to 2.5% and that makes life a little bit more tricky.

Speaking of consumers, we saw retail trade on Wednesday, but pretty anaemic annual growth rate at 2.5%.  What you seem to be saying is we’re not going to see that increase much if at all?

AO:  That’s basically where we’re at.  We’ve got total consumption which includes retail sales as well as the services sector of something like 2.5% going forward.  Once you get the special falling out you don’t really have much left.  I think you’re in a situation where the economy will be okay, but most people will think, gee this is tougher than what the GDP numbers are saying and I think they’re going to be right. 

And the trade data basically confirmed that we’re back to being a quarry! [Laughs]

AO:  [Laughs] Well, yeah, an LNG exporter obviously, but it’s going to add to GDP, we think, 0.2% which is pretty similar to what it did in the first quarter.  The domestic economy might travel at about 0.5% or thereabouts and you add a bit more so you get a 0.6-0.7% maybe for total GDP in the second quarter.

Obviously the rates on hold decision on Tuesday wasn’t a surprise at all but was there anything at all in the statement that surprised you?

AO:  They changed the wording a bit but I think broadly, the short answer is, no.  Everybody focuses on the last paragraph which is where they talk about what they think needs to happen and the wording did not change.  So, I think they’re feeling relaxed about the idea that house prices are coming off a bit.  They’re sort of saying that APRA has helped in that context and generally they’re fairly confident about their forecast which is for growth of around 3% and I think that’s roughly right.  But as I was saying before there’s some specials here that are basically not going to last long and you and me, unless we own LNG platforms, etcetera or own infrastructure aren’t really going to feel it.

Do you think that the tax cuts that have just come in will make any difference to the economy?

AO:  Short answer is not a lot because if you’re looking at the personal tax cuts they don’t actually apply until the end of this financial year, so you can’t get your tax refund back before the end of the financial year.  Sure, they’ll spend it, but I think they’re reasonably small.  On the business side, at this stage anyway, we’re not getting the main players, if you like, involved for a while and business, I think is essentially paying down debt rather than investing.  I think government cuts to corporate tax will cause more investment and ultimately then cause tightness in the labour market but I think that’s a fair way down the track.

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And here’s Shane Oliver, Chief Economist at AMP Capital, to talk about house prices and the markets.  Shane, house prices out this week, you said in your note on the subject that we’re likely to see a top to bottom fall of around 15%, which I suppose is kind of normal for this, national average of 5%, and you reckon that a crash landing is unlikely although it’s a risk because of the royal commission, tell us what you mean? 

SO:  Well, I guess for some time I’ve been thinking, well we’re due a bit of a pullback in house prices, we’re now starting to see that particularly in Sydney and Melbourne and as you say, I’m looking for a 15% top to bottom fall in those cities.  Other cities probably not a reasonable shape, they haven’t had the boom so you’ll probably see modest growth in those other cities so that’s why you get that 5% top to bottom for the national average.  I think that weakness will be spread out over a couple of years. 

For a while I’ve been thinking, well we’re unlikely to have a crash landing and of course a lot of people do fear that given the extent of the gains, but I felt we were unlikely to have a crash landing unless we get much higher interest rates, much higher unemployment or this supply boom goes on for several years and I still don’t see those things as likely.   But obviously we’ve got the Royal Commission going on and I think the Royal Commission is doing a lot of good work.  One risk though is that it has the effect of making banks overly cautious. 

They go from being too easy and friendly and making their loans, if you want to call it friendly, but two are lax with their lending standards to being overly tight with their lending standards and consequently that tightening leads to a situation where there’s a big constraint on buyers coming into the market and that sees the falls in prices turn into a much sharper decline.  That’s the risk I’m keeping an eye on at the moment.  At the moment I’m sticking with the base case, 15% top to bottom in Sydney and Melbourne but that risk is certainly there.

I think we’ve seen a pretty big decline in interest only loans and high loan to value ratio loans, but I think overall there hasn’t been a credit squeeze has there yet?

SO:  No, I think it would wrong to say there’s a credit squeeze at the moment.  We are seeing a slowdown in lending growth, housing related credit has been growing around 6% but we’ve seen a stalling in investor loans and of course, as you say, we’ve seen a sharp decline in interest only lending as well.  Some of the breaks might come off interest only lending because the financial regulator, APRA has sort of shifted focus away from that, but there’s now a more significant focus on making sure that borrowers do have the income they say they have, that their expenses estimates are accurate and more importantly that banks limit their lending to households with high debt to income ratios and the common thought there is that total debt to income ratio is around 6 times annual average household income.

That sort of restriction, if anything, is going to impact cities like Sydney and Melbourne where the price to income ratios are typically around 10 times, so it’s going to be very hard, I think, for borrowers to sort of get the size of the financing they used to get in the past and also for investors to get multiple to fund multiple properties like they did in the past.  All those things will start to impact.  Right here, right now, have we got a credit crunch?  No, but we’re yet to see the full impact of the credit tightening which is currently underway flowing through.  My feeling is it won’t turn into a credit crunch, I don’t think the banks will go that far but obviously I do think we’re going to see a further slowing in credit growth to come. 

You put out a second note this week just looking at the investment outlook, what do you think the outlook is for markets?

SO:  I think it’s okay.  I must admit, I was surprised by the last 12 months when you look back at the numbers.  Particularly after the experience of the last 6 months you think well that’s been kind of volatile, the worries about the Fed, inflation in the US, the worries about trump and tariffs and trade and all those sorts of things that cause a lot of volatility, but we did see pretty good gains in the latter half of last year, last calendar year, so that sort of set us up for a good financial year to start with.  Then of course our share market really got a spurt on in the last month.  The Aussie share market returned 13%, global shares was around 11%, but if you allow for the fall in the Aussie Dollar, that pushed that up to 15% out of global shares.  Pretty good gains out of share market there even though bond returns were a lot more constrained. 

Overall, pretty good financial year that we’ve just seen but I do think it’s going to slow down in the next 12 months.  We do have these issues about trade still impacting, obviously concerns about inflation, interest rates in the US, all those sorts of issues are still swelling around.  And of course share markets are no longer as cheap as they used to be, that’s also a bit of a constraint.  I think we’ll probably get okay returns but I think it’s going to be a lot more constrained once it’s certainly this thinking single digits for Aussie shares, more like 7-8% number rather than the 13% we saw in the last financial year.

I was interested you listed the storm clouds as you saw them and you put trade war as third and the US economy at risk of overheating as first, is that the order you see the problems?  I mean, do you reckon the US economy overheating is the biggest risk?

SO:  I think the US economy probably is the biggest risk and maybe that’s the economist in me putting the economics ahead of the politics.  I think at the end of the day if the US economy remains strong, even if the trade war goes on for a little bit longer then that’s probably something the markets might be able to bear.  But if the US economy overheats and then sees a sharp breaking by the Fed, the Fed gets a lot more aggressive than that would be a bigger problem for financial markets than the ongoing trade war.  But you could debate these things back and forth.  Obviously the trade war impact is significant as well, it’s just that I tend to think that the main driver, the main thing to keep an eye on is the state of the US economy.  Historically, if you look back through time, whenever we’ve had significant bear markets, and I mean where your market comes down 20% and keeps going, it’s 9 times out of 10 that occurs when the US economy has gone into recession.  Think the GFC, think the tech wreck and so on. 

Whereas, most other setbacks we’ve seen in markets due to all sorts of things tend not to be quite as bad if the US economy avoids a recession.  For me that’s the main issue, the extent to which the US economy overheats, how much the Fed tightens, how much inflation goes up in the US.

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[Parliament audio clip]

I’m joined now by long term political journalist and now freelance, Lyndal Curtis, to talk about the week in politics, and what a week it’s been!  Lyndal, I think it’s been a fascinating week because a couple of really important issues have been dealt with through personal conflict.  Obviously Sarah Hanson-Young versus David Leyonhjelm and energy policy has been kind of expressed through Tony Abbott versus Malcolm Turnbull but can we just talk about for a moment, Sarah Hanson-Young and David Leyonhjelm, how do you reflect on what’s been going on there and how we end up?

LC:  Look, there are times in politics, Alan, where you really feel the need to bring out your mother voice and just tell everyone to calm down and go to their rooms for a bit.  I think Sarah Hanson-Young has a point that whatever she said was not a personal attack on David Leyonhjelm in the Senate but he responded with a personal attack.  As ever these days, there’s a very heavy overlay of politics to everything that happens.  It’s kind of politics before policy and he is enjoying his time in the sunshine, his time in the spotlight.  He needs name recognition being a minor party senator to get re-elected, whenever the election happens and he’s sticking to his guns. 

But it doesn’t help the body politic to have people throwing personal insults and it certainly doesn’t help to have insults that are very heavily gender based like these ones are.  It damages the whole body politic.  I think people do expect a higher level of behaviour from their elected representatives who of course are being paid by the tax payer.

Of course, those sort of personal attacks have been going on for years, but have you seen anything like that in your years reporting politics?

LC:  Occasionally attacks do get very, very personal but that is the exception rather than the norm.  People tend to know, politicians, tend to know where to draw the line and they also tend to confine those sort of attacks generally to the floor of the parliament where they get usually stomped on pretty quickly either by the speaker in the house of representatives or the president in the senate.  But it is the exception, it’s not the norm.  They’re not edifying when they happen and politicians should know by now not to do it. 

Just moving onto Tony Abbott and energy policy, obviously there’s two levels to what he’s been up to.  One is his kind of very interesting attacks on Turnbull but also his attempt to overturn the national energy guarantee.  The stuff he’s been saying to Turnbull, he says, ‘I don’t want to knock off the sitting Prime Minister.  Turnbull does that, I don’t.’  Which I thought was amazing.  How do you think both Abbott and Turnbull come out of that?

LC:  Well, it’s hard to get a more pointed remark isn’t it?  I think part of the problem for Tony Abbott is he’s been waging this campaign against any form of what he says is a price on carbon against any reform to the energy market which seems to promote or favour the proponents of the national energy guarantee, so it doesn’t favour renewable energy but his attacks are being seen by his colleagues as an attempt to at some stage regain the leadership.  He made this as part of his – I can’t remember, I don’t think it was a 10 point plan, but a multi-point plan for what he wanted that included things like reform of the senate quite some time ago now. 

But I think now he has to paint himself as not being after the leadership in order to get some more support from his colleagues because interestingly he doesn’t have a kind of wave of support from these colleagues, certainly not publicly and behind the scenes that isn’t there.  I don’t think there’s the will for another fight over energy policy to repeat what they’ve been doing for more than a decade with very little success.  He’s right, he hasn’t overturned a sitting Prime Minister, but he has overturned a sitting leader on the question of policy and it was very similar on the question of Malcolm Turnbull’s talking to Kevin Rudd’s government over the CPRS. 

I think Malcolm Turnbull probably comes out of this fight better than Tony Abbott because whenever the government’s doing well it has a tendency to shoot itself in the foot and people who cause problems when the government’s doing well for themselves aren’t looked on very kindly.  At the core of this though is the politics over the National Energy Guarantee.  The nationals are making some noises about wanting funds for coal fired energy, so it shows there’s a massive political internal fight for the government to have and also they have to keep an eye on the numbers on the floor of the parliament.  If it can’t get Labor to support it then it really has to keep all of its own troops in line.  

Do you have any kind of betting on whether the NEG guarantee will get up or not?

LC:  Well, there are quite a few hurdles for it to jump, one of those is the states, that’s clearly the first hurdle for it to jump.  Then is whether Labor wants to support it in the form the government proposes or in some sort of negotiated form.  You would think although if Labor supports it it’s handing something of a win to a government.  For Labor, the benefits of supporting whatever form it ends up in is that it puts a kind of a floor under the debate on energy and means it can build on that if it wants to in the future. 

You would think after many, many years of fighting over this, some resolution is good that allows you to move forward with what you want, but that’s a decision for the future.  At the moment, Alan, I really stopped predicting things in 2009 when politics went a bit weird, so actually trying to figure out what will happen with yet another energy debate I think is probably above everybody’s pay grade.

Just finally, do you think there’s any chance of a change of leader in either of the two main parties?

LC:  Again, with my no prediction since 2009 hat on, you never say never because the thing that’s been happening in politics for the last decade is often the thing you think is least likely to happen.  It’s difficult and both sides know the damage a leadership change causes.  Now, we are within spitting distance of an election, a House of Representatives and half Senate election can be called any time from now.  It’s due by the end of May next year, so we’re within a year of an election.  It does tend to focus the minds of the parties on what their electoral fortunes are.  Both sides have had people nibbling at leadership questions, Anthony Albanese making his pitch for Labor to be nicer to business on the Labor side and of course, Tony Abbott making his pitch to go back on the Paris Accord which he himself signed up to when he was Prime Minister.  But like I said, both sides know the damage a leadership change causes, there’s a very high bar in the Labor Party because of the rules that were implemented to have a change and for the government I think they’ve had enough kind of little rays of sunlight in the last few weeks to think that they may be okay.  But these are decisions for politicians to make and they are less predictable than toddlers.

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Happy Birthday, Sir Richard Starkey, AKA Ringo Star, who turns 78 tomorrow.  He was the drummer for the Beatles of course but as Paul McCartney said, I think, he wasn’t even the best drummer in the Beatles and he can’t sing for nuts either but that didn’t stop him and he made the others let him sing a few tracks including this one.

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That’s all from me this week, enjoy your weekend!