The housing boom is over – and the RBA isn’t busting to raise rates | Greg Jericho

The latest residential price data shows a continued slowing of growth which reflects the end of the housing boom. Whereas the prices of apartments and flats alone had been slowing, now the prices of established houses are following suit.

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In the December quarter last year, the average price of residential property grew just 1.0% – and while this was an improvement on the 0.2% fall in the preceding quarter, it is one of the weakest quarters of growth recorded in the past five years:

House prices – quarterly growth

Sydney

Created with Raphaël 2.1.2

5.0%

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

Sep 13

Dec 13

Mar 14

Jun 14

Sep 14

Dec 14

Mar 15

Jun 15

Sep 15

Dec 15

Mar 16

Jun 16

Sep 16

Dec 16

Mar 17

Jun 17

Sep 17

Dec 17

Chart: Greg Jericho Source: ABS 6416.0, Table 1, derived Get the data Created with Datawrapper

The annual growth figures show the picture more clearly – in every capital city except for Perth annual growth in December was slower than it was in September. And the figures in Perth are not exactly heartening, given in December housing prices had fallen just 1.7% over the previous 12 months, compared with a fall of 2.4% in the 12 months to September:

House prices – annual growth

Sydney

Created with Raphaël 2.1.2

10.0%

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

Sep 13

Dec 13

Mar 14

Jun 14

Sep 14

Dec 14

Mar 15

Jun 15

Sep 15

Dec 15

Mar 16

Jun 16

Sep 16

Dec 16

Mar 17

Jun 17

Sep 17

Dec 17

Chart: Greg Jericho Source: ABS 6416.0, Table 1, derived Get the data Created with Datawrapper

But there was no real shock in the figures – monthly housing finance figures have been pointing this way for some time.

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The latest figures out last week show that in January the level of housing finance was 1.5% below what it was 12 months earlier. That is the first annual fall since August 2016:

Housing finance – annual growth

Excludes refinanicng of owner occupier homes; orange = month the RBA cut the cash rate

Owner occupierInvestmentTotal

Created with Raphaël 2.1.2

-20.0

20.0

40.0%

Nov 11

Jan 12

Mar 12

May 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

May 13

Jul 13

Sep 13

Nov 13

Jan 14

Mar 14

May 14

Jul 14

Sep 14

Nov 14

Jan 15

Mar 15

May 15

Jul 15

Sep 15

Nov 15

Jan 16

Mar 16

May 16

Jul 16

Sep 16

Nov 16

Jan 17

Mar 17

May 17

Jul 17

Sep 17

Nov 17

Jan 18

Chart: Greg Jericho Source: ABS 5609.0, Table 11, derived Get the data Created with Datawrapper

Now as then the fall in housing finance is being driven by a decrease in investor finance but the difference is that, in August 2016, the Reserve Bank cut interest rates from 1.75% to 1.5%.

But right now, there is absolutely no sense of any rate cut coming.

The minutes of the most recent meeting of the Reserve Bank board noted that the fall in investor finance was mostly off the back of “the prudential measures introduced by the Australian Prudential Regulation Authority relating to interest-only lending”. And while the board noted that there would likely be some further slowing of housing credit growth, there was little concern.

With regards to housing prices, the RBA board noted that the slowing of growth was particularly pronounced in Sydney and Melbourne and that “conditions in housing markets elsewhere had been relatively stable”. The board also expressed some concerns about the level of debt held by households, and that was taken as a sign that they were not interested in cutting rates any further as this would inevitably increase debt.

But this mixture of slowing housing price growth, worries about debt levels and the continuing weak household income and wages growth has seen markets become very much less sure about when the RBA will increase interest rates.

At the end of January, perhaps flush with the optimism of a nice break over Christmas, the market was anticipating an increase in rates to 1.75% by November this year and a further increase to 2% by June next year. Now the market anticipates the rise to 1.75% will only occur by then:

Market expectations of the RBA cash rate

ASX 30 day interbank cash rate futures implied yield curve

1.45%1.5%1.55%1.6%1.65%1.7%1.75%1.8%1.85%1.9%1.95%2%Apr ’18Jul ’18Oct ’18Jan ’19Apr ’19Jul ’19On 30 JanOn 21 March

Current

Next rise

Two rises

On 21 March

On 30 Jan

Chart: Greg Jericho Source: ASX Get the data Created with Datawrapper

The continued weak growth of housing finance certainly does nothing to suggest that RBA will need to increase rates to put a check on house prices.

As I have previously noted, there is a very solid link between annual housing finance growth now and house price growth in six months time. This would suggest that over the first half of this year housing price growth should continue to slow:

House prices and housing finance – annual growth

Housing finance figures are forward 6 months, excludes re-financing

-20.0%-10.0%0.0%10.0%20.0%30.0%200820102012201420162018

Housing finance

House prices

Housing finance

House prices

Chart: Greg Jericho Source: ABS 6416.0, 5609.0, derived Get the data Created with Datawrapper

The slowing of growth is occurring across the entire housing market – both for established houses and for “attached dwellings” (such as flats and apartments).

But the slowing has been most pronounced for established houses. In September last year, the average price across all capital cities for such houses was 9.3% above where it was 12 months earlier; in December this had fallen to growth of just 5.6%:

Established houses and attached dwelling prices – annual growth

-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%11.0%12.0%2012201320142015201620172018

Established Houses

Attached Dwellings

Established Houses

Attached Dwellings

Chart: Greg Jericho Source: ABS 6416.0, Tables 2&3, derived Get the data Created with Datawrapper

But of course average national figures give a very distorted picture, because Sydney and Melbourne account for a majority of all housing stock value. And the housing price boom since the RBA began its rate cuts in November 2011 has been very much Sydney and Melbourne based and very much for established houses rather than for apartments or flats:

Growth of established & attached dwelling prices since Dec 2011

Establised

Attached

Created with Raphaël 2.1.2

2.2%

Canberra

20.0%

40.0%

60.0%

80.0%

Sydney

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

Chart: Greg Jericho Source: ABS 6416.0, Tables 2 & 3, derived Get the data Created with Datawrapper

In Melbourne, Brisbane, Adelaide, Canberra and Perth the growth in the prices of established houses has been more than double that of attached dwellings. Mostly – especially in Melbourne, Brisbane and Canberra – this is due to a surge in the construction of such apartments. And while the price growth of established houses might be slowing, it remains very much too late for those hoping for some relief of affordability in Sydney and Melbourne.

Since December 2011, established house prices in Sydney grew by 83%, whereas average full-time earnings in New South Wales over the same period grew just 17.5%. Similarly, this rise in prices of established houses in Melbourne has far outstripped that of earnings.

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But this is less evident in other capital cities and not so at all for attached dwellings – indeed in Brisbane, Adelaide, Perth and Canberra full-time average earnings have increased by more than has the average price of attached dwellings:

Residential prices and full-time earnings growth since Dec 2011

Full-time earnings

Established houses

Attached dwellings

Created with Raphaël 2.1.2

2.2%

Canberra

20.0%

40.0%

60.0%

80.0%

Sydney

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

Chart: Greg Jericho Source: ABS 6416.0, 6302.0, derived Get the data Created with Datawrapper

But with this comes a concern, given that generally house prices and apartments move in line. The big discrepancy in places such as Melbourne and Canberra does suggest a correction should occur:

Index of Melbourne residential prices (Dec 2011 = 100)

809010011012013014015016020082009201020112012201320142015201620172018

Established houses

Attached dwellings

Established houses

Attached dwellings

Chart: Greg Jericho Source: ABS 6416.0, derived Get the data Created with Datawrapper

Over the past five years, while household incomes and wages have barely grown, the housing market has been the mainstay of strength in the Australian economy – especially in Sydney and Melbourne. But that strength was based on investors and progressively lower interest rates. With new rules limiting investors and interest rates seemingly having reached their bottom, that boom now looks to be over.