Something is stirring
Housing activity in Australia is showing clear signs of recovery and while some analysts forecast that the housing improvement will be unlikely to materially alter Australia’s soft economic growth prospects, there are hints showing a potential housing recovery that is stronger than widely forecast.
The strength and durability of the housing recovery will be a key factor in determining Australia’s economic growth prospects. Spending on housing (new, existing and alterations) in Q2 2019 accounted directly for only 5.3% of total spending on GDP, but the indirect impact of spending on housing on total GDP spending – the so-called multiplier effect is much bigger. Housing spending drives much of the growth in the construction sector employment. House prices affect household wealth and the willingness of households to spend. New home sales help drive demand for household equipment items. The strength of housing activity is a key influence on household consumption, the single biggest spending component of GDP by far at 56.6% of total GDP in Q2 2019.
The housing sector in Australia peaked in mid-2017 and suffered decline until mid-2019 with peak to trough national decline in house prices of close to 10% and much bigger peak to trough declines in home building approvals and housing finance commitments of more than 30%. Several factors contributed to the decline in housing including prudential tightening of loan rules in Australia; tightening of foreign investment rules in China and elsewhere in Asia, limiting previously very strong growth in foreign purchases of Australian homes and a period of oversupply of new homes relative to demand, especially of home units in Melbourne and Sydney.
Weaker housing activity directly weighed on GDP growth over the past two years and the indirect impact working through softer growth in household consumption and growth in construction jobs has become more evident over the past year.
The first tentative signs of a turn in housing came in auction clearance rates that started to lift, albeit on very low volume of sales early in 2019. By mid-2019, auction clearance rates in Sydney and Melbourne were regularly topping 60% on higher sales volumes and with the first hint that selling prices had bottomed and were starting to rise. The re-election in May of the Coalition Government promising immediate tax cuts and more importantly dousing the fear in the housing sector of a Labor Government’s proposed changes to negative gearing and capital gains tax served to reinforce the tentative improvement evident in housing auctions.
Another boost to home buying sentiment came from the RBA’s Back-to-back cash rate cuts in June and July, followed by another recent cut early this month and the strong messages from senior RBA officials that interest rates are likely to be low for a long time. Banks may not have not passed through the full amounts of the cash rate cuts to borrowers, but what has been passed through has been substantial – upwards of 50 basis points since the cash rate cuts started. There is also some evidence that banks are relaxing lending requirements too.
Through Q3 2019 national house prices according to industry sources have lifted nationally around 4%. Auction clearance rates in Sydney and Melbourne have lifted above 70% and on sales volumes at an 18-month high. There is also evidence of a pronounced turn upwards in housing finance commitments.
Lending commitments to households started to rise in June, up 1.8% m-o-m, this was followed by much bigger increases in July, +4.3%, and August, +3.2%. Housing finance commitments have driven the rise in lending to households. In August these commitments have also excluded strongly rising refinancing, the value of owner-occupier commitments rose 1.9% m-o-m while the value of investment housing loans rose by 5.7% m-o-m, the strongest monthly gain since August 2016. Interestingly, within the owner-occupier housing finance category, commitments to first-time home buyers were up 5.2% m-o-m and are up 8% since August last year.
Unlike the tail end of the last housing boom that was pushed up predominantly by housing investor demand which inflated prices and limited the ability to buy of owner-occupiers, especially first-time home buyers, the current lift in housing finance demand is broad-based across investors, owner-occupiers and first-time home buyers.
If the strong current improvement in home borrowing and buying persists it will quickly cut the supply over-hang of new home units and will start to generate stronger monthly home building approvals no later than early 2020 and stronger home building activity by mid-2020. In short, housing activity could be within six months of making a direct positive contribution to GDP growth with increasing indirect positive contribution via stronger jobs growth and household consumption through the second half of 2020.
Increasingly strong signs over recent months that Australia’s housing market is stirring back to life could start to make a positive difference soon to dour official and market forecasts of Australia’s growth. The prospect of growth in household consumption spending improving through 2020 on the back of stronger housing means that Australian annual GDP growth could top 3% y-o-y in the second half of 2020 rather than flounder nearer 2% and that the unemployment rate might decline to 5% or less by the end of 2020 rather than push up to 5.5%. These forecast upgrades, if they occur, would limit the need for more RBA rate cuts.
Housing is the key to whether Australian growth forecasts are upgraded. At this stage, the early signs of improvement in housing are running stronger than almost all forecasts.