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Australian house prices: Part 1, how worried should we be?

The current housing figures have been remarkably resilient given the circumstances, as house prices in Australia have fallen by 1.6% nationally in the three months to end July, according to CoreLogic. This is occurring through some of the worst economic conditions the country has seen in the past 70 years. Most forecasts suggest there will be more declines but of a magnitude that is similar to 2019.

This article focuses on the short-term indicators to help determine if this relatively benign outlook should hold. The following article, Part 2, then examines the longer-term drivers.

Chart 1: Australian house price index

Source: Bloomberg, CoreLogic, Nikko AM

Short-term forward indicators: the usual suspects

Three key indicators are particularly useful for the short-term outlook:

1. Auction clearance rates

When the Australian economy was in total lockdown during April 2020, auction clearance rates plummeted. They have since recovered into the mid-60% range, however weak outcomes persist in Victoria. From a historical perspective, this would imply house price outcomes are slightly better than the declines seen in 2010 or 2018, making prices flat when compared to this time last year. To end up flat year-on-year over the next few months, we would need to see a 5% fall in prices to offset the late 2019 strength.

Chart 2: Auction clearance rates and house prices

Source: Bloomberg, Nikko AM

2. Mortgage finance

The most recent data point for mortgage finance is from May 2020, which was highly affected by the lockdown, but nevertheless showed some of the largest declines in finance of the past 20 years. This paints a bleaker picture than the auction clearance rates, with prices pointing slightly negative year-on-year. Mortgage finance has fallen from its lofty levels during late 2019 and we expect this should weigh on prices, potentially in the 5 to 10% range over the next few months.

Chart 3: Mortgage finance and house prices

Source: Bloomberg, Nikko AM

3. Building permits for new homes

This indicator typically moves in the same manner as house prices. The most recent figures for building permits show there’s been a quick decline in the intention to build, which signifies house price weakness in the near term as developers expect sales will be harder to achieve.

Chart 4: Building permits, new houses and house prices

Source: Bloomberg, Nikko AM

In the short term, all three indicators are pointing to the same outcome: house price declines of approximately 5% to 10%. When answering our original question - “How concerned should we be?” - these indicators tell us that we should be at least mildly concerned.

Yet this outlook only reflects what is already known and observable, providing only a 3- to 6-month outlook without making much reference to what could be in store in 12 months’ time. 

So we must also think about how these indicators could move in the bigger picture environment, and whether they generate greater concern. The longer-term analysis is included in the next article.

 

Chris Rands is Portfolio Manager, Fixed Income at Nikko AM Limited. The information contained in this material is of a general nature only and does not constitute personal advice, nor does it constitute an offer of any financial product. Figures, charts, opinions and other data, including statistics, in this material are current at the date of writing, unless stated otherwise. This is not a recommendation in relation to any named securities or sectors and no warranty or guarantee is provided.

The full paper can be viewed here.

 

4 Comments
John Gilbert
August 09, 2020

The auction clearance rate has less utility now than in recent years. Across the country, in the last week, there have been around 350 auction sales out of 500 planned auctions (a 70% clearance rate); but there have been 4100 private sales.

That means that only 8% of sales are now by auction (NSW 14%) and sounds to me like a shift from a transparent, primarily auction-based market to a less transparent private sales approach. You can't tell much about the private sales clearance numbers without also tracking time on the market. Certainly, I'm aware of lower north shore Sydney houses that have been on the market for months...it would be very useful to segment the private sales market by price and property type to look at the time on market for each segment.

Sandgroper
August 09, 2020

The property market in the west is cheap already. With low rental vacancies and cheap
Money some hope seemed eminent to a move forward in price. The government incentives to build will boost housing supply and I wonder what impact this will have on the normal market? Great for developers who quickly absorbed the incentives by removing all of their “extras”. The east coast property market has been in a bubble
And acting irrationally and speculatively for some time. Two bedroom
Apartments on top off kebab shops in western sydney shouldn’t cost $800,000.

RAGHU
August 06, 2020

A lot of data and actual sales figure is masked or hidden in detail. It is quite clear that somethng is not quite right or it defies all logic about the housing data or the resilience shown despite all leading indicators suggesting a grave and negative outlook. Employment, migration, business sentiment, housing debt, etc all looks bad.

Jack
August 06, 2020

How worried should we be? Very. All those people who cannot afford their mortgages flooding the market with sales, but more at the 'up to $1 million' end of the market. Top end more resilient.

 

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