Buyers confidence had started to return to the Australian housing market about two months ago. Rising housing auction clearance rates provided the first sign of improvement. House prices have stopped falling and have since started to rise. The revival in home buying activity is being supported by several factors – lower home mortgage interest rates on the back of the two RBA rate cuts; capacity to borrow more after the lowering of the APRA loan affordability interest rates; and imminent tax cuts. These factors together with the fall in house prices since mid-2017 have also made housing more affordable for a much bigger group of potential home buyers, notably first-time home buyers.
The current lift in home buying activity and beginning of a lift in house prices is likely to gather momentum, potentially lasting well into next year and beyond.
While home buying activity is improving, new home building activity is still depressed. The latest May home building approvals was up 0.7% m-o-m but was down 19.6% compared with May 2018. The latest quarterly readings of home building work done was down 2.2% q-o-q in real terms and down 3.0% compared with Q1 2018. The Q2 home building work done numbers will be released in late August which may show that the downturn in home building work done has fallen at least as much as Q1 on both a quarterly and monthly basis.
It will take time for the revival in home buying activity to reduce the excess supply of new homes that resulted from the 2014-2017 housing boom in Sydney and Melbourne. By this time next year, we will see new housing construction starting to improve.
Since mid-2017, housing activity has generally has been mostly exerting a negative influence on Australia’s GDP growth rate. There has been the direct influence from housing – less spending on housing transfers (legal and estate agent fees associated with buying homes) and less spending on building homes. There has also been a significant indirect influence – less retail spending on goods to fit out new homes, lower house prices reducing household wealth has dampened growth in household spending.
Between now and mid-winter, 2020 housing activity is likely to have positive influence over time on GDP growth. In the immediate-term, spending on housing transfer costs is likely to rise and make consistent positive contributions to GDP. Housing construction spending as noted above, will likely continue to make a negative contribution to GDP growth through to mid-2020 before turning positive.
In terms of the indirect effects from increasing home sales, whitegoods retailers should experience a lift in sales through the second half of this year. The lift in home buying activity is being driven by first-time homebuyers. This suggests there would be additional impetus to home fit-out related retail sales.
The recent rise in house prices adds to the beginnings of rising household wealth. Assisted by a sharp rise in the value of financial assets that outgrew the impact of falling house prices, household wealth also began to rise in Q1 2019. In Q2 2019, household wealth rose again by a greater amount than Q1 given another big quarterly rise in the value of financial assets. The positive Q3 outlook in house prices will add more upward momentum to rising household wealth, especially at a time when household disposable income growth is receiving a boost from tax cuts.
The indirect impact on retail spending from rising house prices due to rising household wealth in Q3 is also likely to be reinforced by the boost from tax cuts to household disposable income growth.
The return of buying confidence to the housing market presents a mixed impact on GDP growth through the remainder of 2019 but the likelihood is high that the impact will be consistently positive in 2020. If the housing recovery progresses as indicated above, real GDP growth is likely to be noticeably stronger in 2020 than in 2019, due to stronger household spending. Stronger GDP growth is likely to promote a slow reduction in the unemployment rate, curtailing the need for the RBA to cut the cash rate any further. Unemployment should not drop enough to worry the RBA about an untoward lift in inflation until late 2020 at earliest.
In short, GDP growth led by housing recoveries in 2020 seems to coincide with a record low RBA cash rate of 1.00%. If that combination starts to re-inflate the house price bubble and/or promotes the prospect of inflation lifting above 2.5%, 2021 could be the year when the RBA starts to consider less growth accommodating monetary policy.