Australian Markets Weekly

House prices have been rising briskly in Australia since late 2011. They continued to do so at the weekend with RP Data showing that prices were up in nearly all the major cities and auction clearance rates robust.


Housing market to take some hits! Not fatal

House prices have been rising briskly in Australia since late 2011 – they continued to do so at the weekend with RP Data showing that prices were up in nearly all the major cities and auction clearance rates robust.

It’s no coincidence that late 2011 was also the time that the RBA began to cut the cash rate from the 4.75% peak. Lower interest rates discouraged people from keeping their money in the relative safety of say bank deposits and encouraged them into risker assets like housing and the share market – that’s how a monetary policy easing is meant to work.

RBA/APRA now wary of strong investor demand

The RBA’s benign, even encouraging, view on housing has been fraying in recent months and it officially ended last week. In their six monthly Financial Stability Review they flagged they were not happy with what they were seeing in the investor market. They wrote “the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock”.

Now there’s always a bit of truth, hyperbole, and passion mixed up when talking about rising house prices so on page three I lay out some facts, charts and make a few comments. Suffice to say here that we agree with the RBA because: 1) large price gains are mainly a Sydney/Melbourne thing; 2) investors have been a key factor driving activity; and, 3) given nationwide house prices relative to income are only around their last decade average talk of a broad housing bubble is well wide of the mark.

Important to add also that the RBA is not concerned about Australia’s financial system which got a big tick. Their concern is that should house prices fall – and the higher they go the greater chance they might – this would impact negatively on economic growth as households would save more and spend less.

The upshot is that along with APRA they are now looking at measures to reign in investor demand for housing. Known as macroprudential measures, these tools are aimed at either restricting the supply or changing the price of credit while the RBA leaves their cash rate unchanged at 2½%.

We don’t know what measures they will deploy but we expect they will be targeted at investors and designed to not restrict the flow of credit to traditional owner occupiers or first home buyers.

A fair question is why doesn’t the RBA just lift their cash rate if they are concerned about housing? Various answers to this. For one, they are not worried about housing generally but only the demand from investors. Second, outside of these hot parts of housing the broader economy remains subdued and even after its fall in recent weeks the $A is high. So if you can deal with a specific issue with a specific tool then that may be preferable to lifting the cash rate which affects the entire economy and would likely boost the $A.

Illegal foreign buying of housing to be curbed

Meanwhile, down the road in Canberra there is a Government inquiry into the illegal purchase of dwellings by foreigners that looks like it will get some teeth. Foreigners can buy new but not existing dwellings.

The extent of illegal purchases is unclear but what is clear is that 1) it’s happening; 2) most flows are going into Melbourne/Sydney; and, 3) the fact that there hasn’t been a prosecution of a foreigner illegally buying an existing dwelling since 2006 tells us the rules are not being administered very well.

Coming out of the inquiry is likely to be a beefed up and better funded Foreign Investor Review Board and perhaps some bigger and better targeted fines. At the margin, these measures might take some of the oomph out of the markets favoured by foreign buyers.

Housing market still has natural demand

If the RBA, APRA and FIRB are successful at subduing demand from domestic and foreign investors (a big if) we wouldn’t necessarily expect house prices to slump. Demand for new housing is still coming from Australia’s growing population – Australia’s population grew around 400,000 in 2013, or 1.7%, albeit growth has slowed in more recent quarters. The construction industry has struggled to keep pace with this new demand, although with building approvals now running at record levels it’s likely only a matter of time before we get a better balance.

A slower housing market would mean RBA lower for longer

For interest rates, other than a strong housing market there are few upside pressures on interest rates. So if the RBA, APRA and FIRB successfully slow the housing market (a big if) then Australia will be left with slumping mining investment and commodity prices, weak household income growth, and a high $A even after the recent decline. Take away strong house price gains and there are plenty of reasons for the RBA to keep cash at 2½% for a lot longer yet.

Week ahead and $A forecast largely unchanged

Most local eyes will be on the falling $A this week – NAB’s forecast for AUD/USD is unchanged and we still expect 0.88 for end of 2014 (we essentially expect an 0.85-0.90 cent currency for much of Q4, with downside risk). We continue to forecast 0.82 for end of 2015. Some of the cross-rate forecasts have changed however as this week our FX Strategy team made some small tweaks to the EUR, NZD and GBP forecast.

On Thursday the RBA will before a Senate Committee talking on lending risks to investors and presumably macroprudential measures and considerations. Data highlights to be August retail sales on Wednesday which we expect grew a soft 0.1% in the month, coming after better previous gains and amidst weaker consumer confidence. Ahead of the retail sales data, NAB will release the August Online Retail Index on Tuesday. Elsewhere, September RP Data house prices are due Wednesday, and then building approvals and trade data on Thursday. Offshore highlights to be US Non-farm payrolls on Friday, the ECB meeting on Thursday and the key Japanese Tankan business survey on Wednesday.