Boooooom Baby!!!

Relentless housing boom dashes hopes for calm


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Sydney’s auction clearance rate has averaged a high 76 per cent over the last four weeks of winter. Photo: Jessica Shapiro
Christopher Joye

For the rest of the year all eyes should be on housing. It’s the key to inflation, interest rates, and the performance of Australia’s $400 billion mega-banks.
Significantly, Melbourne house price growth has outstripped the rapid double-digit pace of Sydney properties over past three months in what could be the next chapter of the great Aussie housing boom of 2013 and 2014.
Contrary to optimistic forecasts that the boom was over after a temporary seasonal blip, the market has recovered with gusto in the final two months of winter, as we anticipated.
Dwelling values in Sydney and Melbourne, which account for 60 per cent of Australia’s metro population, have rocketed 12.9 per cent and 12.0 per cent, respectively, on an annualised basis over the three months to 19 August, according to RP Data’s latest index data.
Over the past 12 months housing costs in Sydney and Melbourne have jumped by 16.0 per cent and 11.6 per cent, respectively. Nationally, house price inflation over the year to 19 August is back at a super-strong 10.9 per cent rate after it dipped down to a still rapid 9.9 per cent canter in early July.
While it is true that capital growth has stepped back a bit, gains across the five main capital cities in 2014 have annualised at 9.6 per cent, which is more than three times wage inflation.
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Australian dwelling values are 25 per cent above the record reached in March 2008 before steep mortgage rates and the global financial crisis induced a slump. They have also fully recovered the 8 per cent peak-to-trough losses realised over 2011 and 2012 to be 9.5 per cent dearer than the previous high water-mark set in October 2010.
In fact, total house price appreciation in this cyclical upturn, which officially commenced in May 2012 and sums to 19 per cent, is about to exceed the cumulative gains captured in the last boom that gave the Reserve Bank of Australia the willies (in 2009-10).
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Importantly, significant house price increases over the last quarter have forced the RBA to modify its official rhetoric. In the minutes following the RBA’s July board meeting, it crowed that “there had been signs of a tempering in conditions in the established housing market”. This was the goldilocks scenario many commentators said we would get after the deceleration in May and June.
“Members observed that ... housing price inflation had slowed over recent months,” the RBA said in July.
Two days after the July board meeting, the RBA’s governor, Glenn Stevens, who complained in April 2008 that Australian house prices were “very high”, said in a speech “some segments of the housing market do appear to have been calming down lately”.
“It remains to be seen whether this slower pace of growth in dwelling prices is temporary or more persistent,” Stevens observed.
In the same breath he warned that “it would in my opinion be good, for a range of reasons, if it did persist for a while” and said he wanted to see “unremarkable performance on prices” over the “next couple of years”.
The RBA’s take on Australia’s exuberant property prices was discernibly different in the August board minutes released on Tuesday: “Conditions in the established housing market remained strong and while house price inflation across the country in 2014 had not been as rapid as over the second half of 2013, it had remained robust.”
Rather than touting cooling price growth, the RBA now admits it has stayed “strong” and “robust”, which are sharp adjectives for a dour central bank. It likewise softened its previous assessment of a decline in auction clearance rates. But it’s all relative.
Sydney’s auction clearance rate has averaged a high 76 per cent over the last four weeks of winter. The peak registered during the seasonally stronger 2013 spring period was 81 per cent. Melbourne’s winter auction clearance is also only off a touch from the levels it achieved last spring. There is every chance this spring will come close to emulating the extraordinary conditions witnessed a year ago.
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The RBA says we should not get exercised about stonking house price appreciation because Australia’s housing credit growth rate is modest.
In his July speech Stevens said “the growth of credit outstanding for housing is about 6 to 7 per cent per annum, or slightly above trend nominal income growth”. “It’s hard to mount the soap box to complain about that pace,” he averred. Really?
Credit growth is only useful in the context of what it tells us about the “level” of leverage. If we had low leverage and fast credit growth, we’d be keeping an eye on how leverage was rising over time towards dangerous levels.
The issue is that leverage is already at near-record levels.
In contrast to the US and UK, Australian households hardly deleveraged during the GFC. The current household debt-to-income ratio of 150 per cent will soon exceed the 152 per cent level hit in June 2007.
Likewise the ratio of house prices relative to incomes is about to breach the records attained in 2007 and 2010, if it has not done so already.
And while Stevens reckons housing credit growth is only “slightly above trend nominal income growth”, it is running at more than twice current (not ‘trend’) income growth. Wasn’t it Stevens who told us to expect weaker income growth in the future after one-off events boosted it in the past?
A final interesting dynamic is the de facto rate cuts lenders have been bequeathing borrowers out-of-cycle. We first highlighted this news to readers months ago. The RBA has done the same in its August minutes, which revealed that “cumulative movements in interest rates since the start of the year amounted to a noticeable easing in financial conditions”. It seems those calling for RBA rate cuts are already getting them.