House price growth set to slow in coming quarters: nab & Deutsche Bank

A friend from nab sent through a couple of interesting pieces on the back of the release of the latest Australian Bureau of Statistics (ABS) house price index.

The ABS data indicated that by capital city, Sydney (+4.9% q/q/+21.4 y/y) and Melbourne (+3.6%/+24.3%) showed the strongest rises in the quarter with other capital city house prices all rising, Brisbane +0.3%/+8.5%, Adelaide +3.2%/+11.6%, Perth +0.4%/+13.0%, Hobart +0.1%/10.8%, Canberra +2.1%/19.6% and Darwin +2.8%/14.6%

The insights from both analysts reinforce the general consensus that seems to exist amongst the analyst community that:

  1. we are entering an orderly slowdown in capital growth rates over the short to medium term and
  2. it is lower to middle tier priced properties that are supporting the market

A time of opportunity for those who are prepared?

The main points from this note from Adam Boyton of Deutsche Bank Fixed Income Research points are:

  • the decline in auction clearance rates across the major capitals indicates that the pace of house price growth looks set to slow significantly in coming quarters. Note the correlation between the two in Figure 2.
  • going forward the nature of the house price adjustment in Australia will continue to work through the system - namely modest long-run nominal house price growth with inflation eroding real house prices in some of the major markets. This long-run structural process has being interspersed with a policy-driven cycle notably evident over the past year (mainly the stimulatory fiscal and monetary policy that supported the housing market during the global downturn and was reflected in the strength in house price growth over the year to Q2-2010).
  • in the absence of forced sellers driven by a very significant increase in the unemployment rate or interest rates, a self re-enforcing downward ‘spiral’ in Australian house prices remains extremely unlikely.
  • a ‘macro’ driver (ie. large external shock from the global economy) would be needed to see a downward spiral is re-enforced not just by the relative (i.e. compared to much of the rest of the world) resilience of the Australian market over the past few years, but also important micro-economic/structural factors.

Note the report is only available to download online till October. I have a pdf copy so if you can't access it let me know and I'll email it.

The key points of the other analysis that made its way into my inbox from David de Garis, Senior Economist, Global Markets Research @ nab are that:

  • house prices in Sydney and Melbourne were supported by mid-to-lower-tier priced properties. In Sydney, it was properties in the $650K-$1.2m range while in Melbourne it was properties below $700K that supported the market.
  • it’s clear that the effervescence in housing prices evident until earlier this year has dissipated, at least for now. This will be a relief for the RBA that is seeking to constrain growth in household leverage and spending to keep inflation in check
  • today’s data broadly confirms what we have already seen/heard as far as house prices are concerned and suggests that the current stance of monetary policy is cooling this interest rate-sensitive sector of the economy.

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