PORTFOLIO POINT: THE evidence is clear from the latest housing finance data that there is a residential property recovery underway.
If you want to see one clear signal that something more positive is happening in the housing market, take a look at this week’s housing finance approvals data published by the Australian Bureau of Statistics (ABS).
Excluding refinancing, housing finance rose by 2.6% for the month and up 5.7% for the year. The 2013 housing recovery I predicted is well and truly on track.
This series is no doubt one of the few indexes I highly regard. I like to closely follow the housing finance approvals data due to its timeliness and accuracy.
As I told Eureka Report readers last month (click here), I have been convinced for some time that residential house prices have started to tick. More recently, Adam Carr (click here) offered a compelling economic overview that also supports this view.
Moreover, as you can see from the charts, the series clearly illustrates the turning points in the overall market. Right now, the series has just broken above its 12-year trend line.
As the name suggests, housing finance approvals measure the total number of home loans approved by the banking sector. So, when you think about it, it really is a good measure of total demand for housing. It’s important though to strip out refinancing, and fortunately the ABS does give enough free data to be able to do that. Too many more “bullish” analysts have been caught out in the recent past quoting a surge in this series, only to be wrong because they included refinancing data.
That said, the ABS could serve us all well by providing the number of approvals for investors. We know they have that information, as they kindly tell us the total value of approvals done by investors. That’s fine, and it gives some insight, but knowing the number is better as data on value can be skewed, depending upon what segment of the market investors bought into.
As can be illustrated, what we do know from this series is that so far the recovery is being led by owner occupiers, and mainly first home buyers. Investors so far have not participated and are not likely to until it is well documented that house prices are rising. That’s very normal.
Historically investors don’t come into the market until the market is well and truly into its upswing, and that will be the case this time round as well. Housing investors tend to be momentum driven rather than bottom pickers.
So what does this series reveal over time? Well, quite clearly, one can see the bust/boom/bust conditions we went into starting from 2008. That was first driven by rising the interest rates of 2007 and early 2008. Then the aggressive rate cutting later that year and the federal government’s attempts to stop a housing crash with the First Home Owners Grant boost. That stimulus effectively bought in two years’ worth of demand from first home buyers into early 2009.
But, as with all stimulants, the drugs wear off, as happened in late 2009 and into 2010. The downturn of the last two years was a direct result of the repealing of that grant and the rate rises of 2010. Most notably, the rate hike of Melbourne Cup day 2010 – a rate rise that should never have happened.
You can also see now why I hate grants that stimulate demand for existing housing. It’s nothing but a short term drug-like fix which actually reduces affordability for home buyers and negatively distorts the market over the medium term. But that’s a separate story for another time.
Right now, housing finance approvals are 9% from the bottom, which was reached in February 2011, yet they are more than 30% below the peak, which was June 2007. In theory, this series should be increasing over the long term as the population increases. So when one sees approval numbers below the 2008 lows, which at the time equated to a 5% decline in house prices, one should have seen a greater drop this time in the market. And, yes, we have had a greater drop.
Peak to trough the market (as measured by the ABS) has fallen 5.5%. In a number of cities, the falls have been more severe. Perth, Brisbane and Melbourne all at one stage recorded peak to trough declines approaching 10%. The only reason why the national average decline is less severe is because Sydney has only recorded marginal decreases, thereby pulling up the capital city average.
The state-by-state data tells a compelling story. Most states are now recording some type of lift from the bottom, with NSW and Western Australia recording some fairly strong increases in approvals.
It’s interesting that this has not yet translated into concrete house prices rises for Perth. But given what we know is happening with demand and, at the same time, supply, it’s only now going to be a matter of time before the ABS reports rising dwelling prices for that city. I recently predicted between 6%-12% price growth for Perth in 2013.
Louis Christopher is managing director of independent property advisory and forecasting research house SQM Research.