AMP Capital chief economist Shane Oliver says the latest resurgence in property prices will be tempered by weak economic conditions and lending constraints. Via InvestorDaily.
There are plenty of positive indicators to suggest property prices will soon be booming again. The boost from the election result which removed the threats to negative gearing and the capital gains tax discount, RBA rate cuts, positive headlines around the relaxation of the 7 per cent mortgage rate serviceability test and tax cuts have helped provide a bounce in home buyer demand at a time of low listings.
“This is clearly evident in a continuing rebound in auction clearance rates where August saw the best monthly average clearance rates in Sydney since March 2017 and in Melbourne it was the best month since August 2017,” Mr Oliver said.
While this has come on very low volumes, it’s usually the case that improved clearance rates lead a pick-up in volumes and this may already be starting to be seen with listings picking up in recent weeks and is likely to become more evident through the spring selling season.
Australian capital city dwelling prices rose 1 per cent in August, according to CoreLogic. After a 10.2 per cent decline over 22 months average prices have now had their second rise in a row and their strongest since April 2017. However, dwelling prices are still down 5.9 per cent from a year ago.
Sydney dwelling prices rose a strong 1.6 per cent, which is their third gain in a row and Melbourne prices rose 1.4 per cent, which is also their third gain in a row.
“Based on past relationships the current level of clearances points to annual house price growth rising to around 10 [per cent] to 15 per cent over the next 9 [months] to 12 months,” Mr Oliver said. However, he added that AMP Capital’s base case remains that house price gains will be far more constrained than this.
“Compared to past recovery cycles household debt-to-income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged with more to come and this has already pushed up Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak,” he explained.
“So notwithstanding the bounce in Sydney and Melbourne prices seen in August we don’t see a return to boom time conditions and expect constrained gains through 2020.”
But the fact remains that the rapid rebound in Sydney and Melbourne property prices to annualised gains around 15 per cent in August has raised the risk that we may see much stronger gains, Mr Oliver said.
Going forward, the chief economist is keeping an eye on three key indicators: the spring selling season, housing finance commitments and the jobless rate.
“Much higher unemployment is something the RBA is keen to avoid – in fact it wants unemployment to fall to 4.5 per cent or below – so our view remains for further cash rate reductions in November and February next year taking the cash rate to 0.5 per cent.
An obvious issue though is whether the rebound in the Sydney and Melbourne property markets will present a problem for the RBA in terms of cutting interest rates further.
“This will no doubt cause some consternation at the bank,” Mr Oliver said. “But as we saw over the 2011-17 period the RBA will do what it believes is right for the ‘average’ of Australia as opposed to one sector or a couple of cities,” he said.
“However, it may have to return to tighter regulatory controls again if it needs to cool the Sydney and Melbourne property markets once more for financial stability reasons.
“In other words, we don’t see the rebound in the Sydney and Melbourne property markets as a barrier to further monetary easing, but if it continues to gather pace then expect a tightening of the screws again from bank regulators.”
