Property Observer

With the ability to now get three-year fixed-rate home loans for 5.99 per cent, and 6.39 per cent variable-rate loans, there is understandably excitement brewing about the prospect of a recovery in the Australian housing market. If the financial markets are right, and the RBA cuts rates another six to seven times by the middle of next year, we will get a very healthy rebound indeed. But in terms of actual near-term data flows, don't expect too much, too soon.

The house price data that is heading our way is still dated before the RBA’s all-important November rate cut. The next tranche of information covers the month of October, and it will not be until the end of December (January) that we get the first, preliminary view of prices in November (December).

While I expect housing activity to revitalise by the first quarter of 2012, this will not flow through to the price data until the end of March or April.

We do, however, have partial, leading indicator data to work with in the interim. We will get monthly ‘seasonally adjusted’ housing finance approvals from the ABS, which lead actual house prices by a quarter or so, and have been trending in the right direction thus far.

The near-term auction clearance rate data will be of limited value since it is not seasonally adjusted and tends to taper off around this time of the year.

I’d venture that the first credible indications of where the market stands will not be available until the February and March auction clearance rate results, which will coincide with the typically more liquid New Year sales season.

On the balance of probabilities, the next three months’ worth of house price data will likely give us more of the same. We know from our listings, auction clearance rate, time-on-market and vendor discounting series that October – ie. the month prior to the RBA’s cut – remained tepid. Clearance rates were low, vendor discounting wide, and there was a sizeable stock of homes on the market available for sale.

While prices were not plummeting, they were not advancing either. The market was frozen in a weak stasis waiting for some interest rate relief.

My current base case is, as a consequence, modest flat-to-negative house price results for the remainder of the year. Here there is a slight complication interpreting the seasonally adjusted data, which may have residual biases from the devastating January/February floods.

In raw terms, national dwelling prices in the month of January were off only around 0.1 per cent. Yet on a seasonally adjusted basis, they recorded a very large 1 per cent fall. When we inspect the raw house price series, we can see a noticeable trend of slowly improving month-on-month conditions since the first quarter of 2011 (specially, slower price depreciation). On a seasonally adjusted basis, however, this disappears. It’s hard to say which series is providing the most accurate insights in light of the natural disasters in January and February.

If you want to answer the question: what are actual house prices doing, rely on the raw index data. If, on the other hand, you want to strip out monthly seasonal influences assuming 2011 is just like any other year, check out the seasonally adjusted benchmark.

Another key question for the housing market will be whether the RBA grants it more interest rate relief in December. According to the financial markets, this is a 100 per cent certainty. That is, another rate cut in two weeks’ time is a bankable outcome.

In fact, financial markets think there is a chance the RBA may pop off 50 basis points in December. I am not so sure, and will firm up my views once we have better information prior to the actual board meeting on December 6. I suspect the RBA will be of a similar mind given that every day is a moving feast right now.

There is no doubt that financial markets are completely besotted by what is happening in Europe. While the eurozone only accounts for a small share of global economic growth, the transmission of a European crisis can have much more far-reaching consequences.

This is a function of three things.

First, Australian debt and equity markets still place a much higher weight on economic developments in the US and Europe than would be implied from either their direct contributions to Australian economic growth, or global growth.

It is a habit that is proving very hard to shake, much to the frustration of the RBA. And it is borne out strikingly in financial market correlations: while the direct economic linkages between Australia and the North Atlantic economies are modest (around 70 per cent of our exports go to Asia), our equity and debt investments are correlated very closely with daily movements in their US and European counterparts.

Second, and partly an artifact of the first point, the wholesale funding that our banking system sources from overseas is currently being choked by the North Atlantic problems.

If banks cannot get access to funding, they stop lending, and growth will be an immediate casualty. Fortunately, we have been through this episode before, and there are now well-established measures to protect domestic bank funding, including government guarantees of bank deposits and liabilities, and new liquidity facilities offered via the RBA.

So, there is no reason to expect any big change in the Australian banking system’s access to funding in the near-to-medium term as long as the state remains the lender of last resort, which it will.

The final transmission mechanism is consumer and business sentiment. It would seem that in today’s much more closely interwoven world, where financial news is telegraphed via the internet instantly across computer screens, shocks in one part of the planet are transferred much more quickly to once far-removed locations. Domestic business confidence and investment decisions appear to be more responsive to foreign events than ever before. While it is less obvious how Australian consumers will react, we can be sure that they are more sensitive to global developments than they have been in the past.

The essential polarisation between the underlying, and positive, economic growth pulse in Australia, and the snowballing turmoil in the eurozone, was highlighted by yesterday’s construction work data. In the third quarter this key component of GDP confounded pessimists, rising by an incredible 12.5 per cent (the largest result on record) in comparison with market expectations of a 2.0 per cent increase. This has the potential to increase the third quarter real GDP print by an amazing 1.7 percentage points, which would be a stunning result if the final numbers get anywhere near it.

Since 2007-08 I have argued that Australian cash and fixed-income should be the preferred destinations for your savings. Nothing since has changed to shift my view.

This article first appeared Property Observer on November 24. Republished with permission.

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Christopher Joye's expectations of rate cuts for mortgage holders contradicts Robert Gottliebsen's comments on a looming credit crisis emanating in Europe. If Germany can't find buyers for its debt, what are the chances Australian borrowers will find money on easy terms? (Breathing life into Aussie property, November 23.)
My Joye seems to avoid facing the fact that the reason interest rates may be heading south is that this is what the RBA see as the most appropriate course of action for an economy approaching crisis (Breathing life into Aussie property, November 24).
Given the reliance by our banks on overseas funding and their recent inability to attract decent rates even when using a "covered" bond, it may unfold that despite the reduction in the cash rate, medium term bank / home loan rates will not be as attractive as first thought. Banks may be forced to be out of step with the RBA.
Mr Joye also seems to say house prices have remained flat (I did skim read). I would suggest that with the (real) clearance rate somewhere below 50 per cent, the discovery of real prices simply has not occurred as vendors have refused to meet the market.
I'm happy to be on the sidelines for now thanks, Mr Joye.
A few more months of even slightly negative house/unit prices and a lot of press about European and probably US recession might persuade buyers to wait for even lower prices no matter how big the rate cuts, particularly if unemployment starts to rise. (Breathing life into Aussie property, November 24)
Total building approvals by value are at about a 12 month low and the 12 month moving average is also well down.
Another three months might see unemployment start to increase which would also act as a negative impact on buyers and increase sellers among those stressed by unemployment or reduced hours.
Not a forecast, just a reminder that rate cuts occur when an economy is recessed and there are other influencing factors on buyers and sellers during a time when recession is being felt by any significant portion of homeowners/buyers.
So... The world is crashing, rates are dropping and our bank's liabilities need to be socialised. But it means more borrowing and more inflation through housing costs, which is a good thing?
Are you serious? (Breathing life into Aussie property, November 24.)
What a ponzi scheme this real estate economy is becoming. We have to entice new greater fools with cheap money to bail out the current holders of real estate (Breathing life into Aussie property, November 24).
Probably, the reduction in rates will only serve to accelerate the repair of many individual balance sheets by reducing their debts. They have cut rates in many Western countries and yet the real estate prices keeps slowly falling. Go figure.
A December cut might put some smiles on people's faces in the shopping centres, but the price of housing hasn't fallen much yet and is at historical highs. Unemployment is the key to this debate.
With all the turmoil surrounding the world and plenty more unknowns this is not the time to buy a house regardless of whether interest rates are cut. Christopher you and all the other property spruikers need to be mindful of constantly pushing property as you just mind find yourselves facing a class action by all those that end up losing if the situation in Australia deteriorates (Breathing life into Aussie property, November 24).
A property insider associating "healthy markets" with price rises. Who'da thunk it? (Breathing life into Aussie property, November 24.) When I think about "breathing life into Australian property" that means increased transactions and a more liquid market. Now that property (the property bubble?) is clearly deflating, clearance rates won't rise (in Melbourne at least) until vendors are more realistic about what buyers are willing to pay.
Christopher Joye appears to have overlooked one important fact (see 'Breathing life into Aussie property', 24 November 2011). The RBA may well "cut rates another six to seven times by the middle of next year", but Australian banks simply can not afford to match or pass on those rate cuts. Whatever the prognosis for Europe, one fact is clear, the cost of obtaining funding will increase and increase a lot. It is not the supply and demand dynamics of the Australian housing market at work, but the supply and demand dynamics of the world's wholesale money markets.
The RBA killed property confidence by jacking up interest rates at mind boggling speeds (Breathing life into Aussie property, November 24). BHP can borrow at 1.2 per cent over 3 years. Where's my 1.2 per cent interest rate? The reality is, debt is a modern form of slavery – just ask Greece.
Where are the usual posters that are asking for the interest rates to rise to control those bad people that borrow money to provide a house for their family? Where are the superannuates screaming for interest rates to rise to protect their incomes? (Breathing life into Aussie property, November 23.) It seems all that are left are those people who will not buy cheap houses in unfashionable areas. Rather they demand that prices drop to meet their budget and expectations. If property prices drop, substantially as they hope for, it will be because we are all in a real pickle with massive unemployment. Unfortunately that will only provide a massive redistribution of wealth to those with employment not necessarily those with great housing expectations.
This whole housing debate is getting rather tiresome. Once again MR Joye fails to mention our alarming levels of household debt and the rising stress levels concerning the repayment of said debt (Breathing life into Aussie property, November 24). I believe the more astute observers can see the writing on the wall, particularly when the worsening global debt crisis is taken into account.
Trying to talk the market up when faced with so many negatives is by any measure a fools errand. Australian Real Estate is a ticking time bomb.
Commodity prices are falling, China's economy is slowing, Europe is a basket case and the US can't get off the floor with very low interest rates. Can you explain to me Christopher, how is Australia going to be immune to all this and house prices increase? (Breathing life into Aussie property, November 24.)
Oh, I forgot. The big miners are also going to reassess investing in Australian mines now that the mining tax has been passed through parliament. Also the carbon tax is on its way. I have got my seatbelt on, strapped tight and hanging on for the ride down the bumpy slope. The next 6-12 months is not going to be pretty, economically, for Australia.
What if rates fall and housing does not respond? (Breathing life into Aussie property, November 24)
This is exactly what has happened overseas.
Clearance rates in Sydney have been lower since the rate cut? This is not positive when Sydney is the strongest property market in Australia by a long way. I think there is a smell of desperation off this article (Breathing life into Aussie property, November 25).
It seems this time around perhaps the author has finally find some common grounds with Dr Keen - after such energetic debates with him since 2008 (Breathing life into Aussie property, November 24).
I have a predicament. Do I advise my son who is a first home buyer to go ahead and purchase his house before the stamp duty concession ends on the 31 December 2011 or advise him to wait until next year when he will have to factor this in when he eventually purchases a property? (Breathing life into Aussie property, November 25)
Buying land and building a modest house on it in the Hunter Valley is still more expensive than a house already built.
So I've rubbed my crystal ball and predict that house prices will drop next year and any savings should compensate for the stamp duty charges as this will put off many first home buyers from entering the market.
With Europe in full blown recession and America a basket case as well the most worrying thing for Australia will be China. If it slows then demand for our resources slows and commodity prices will fall and our dollar will dive.
The MRRT will be a joke by this time as will the carbon dioxide tax.