Sideways housing market for the rest of 2011?

Thought I'd summarise a few different views I've read in recent weeks of where the property market is at right now and where it is potentially headed...

The RP Data view:

Two recent posts from Christopher Joye and Tim Lawless sum up the RP Data-Rismark view of the short term direction of property prices.

Christopher Joye in a post called Where to for Australia's housing market? predicts that interest rate movements will be the key driver in house price movements:

  • If rates are not going anywhere this year, "we will get mild nominal house price growth over 2011, which will likely underperform inflation (ie, real declines, as we have seen for the last year)."
  • If rates do rise a few times this year, "nominal dwelling prices will go nowhere or retrench modestly (eg, 0-5% year-on-year), depending on the number of hikes. That's not a bad thing at all. The underlying demand/supply fundamentals are very strong. The dwelling price-to-income ratio and rent-to-price ratios will keep on improving, which is a great thing for future buyers. The labour market is fully employed, and household income growth is robust. The only thing that will change any of this is something the RBA controls: interest rates."
  • The fundamentals "will likely continue to solidify as household formation-driven demand escalates via better-than-expected population growth combined with weak new supply coming online" so when interest rates do eventually fall, "there will be an enormous affordability dividend dropped on the housing market, which will likely trigger strong upward movements in prices (eg, in late 2012-14) as the market signals to builders that they need to get their arses into gear and start constructing more housing. In the interim, the RBA is going to be left to deal with significant rent inflation."

Joye also notes that if worst comes to worst, "and the Chindia story implodes, or the global economy has a repeat of 2007-08, the RBA will slash interest rates, with the chief beneficiary being the housing sector, just as it was during the GFC."

RP Data’s research director, Tim Lawless also predicts that house prices are going nowhere in the short term, “with household incomes growing at 6 per cent per annum, interest rates potentially approaching the peak of the tightening cycle, rents increasing, and house values going nowhere, buyers are seeing an improvement in their position.”

He thinks that key leading indicators point towards "a sedate capital growth environment for the remainder of the year."

This is because "clearance rates are bouncing around the low fifty percent mark each week, the number of homes being advertised for sale is almost 30 per cent higher than at the same time last year, and sellers are being forced to adjust down their price expectations. Before there is any real upwards pressure on home values there will need to be some absorption of effective supply and a return of sustained buyer confidence to the market.

The ANZ view:

The collective RP Data view seems also to be backed up by ANZ in their March 2011 Australian Property Outlook titled Why House Prices Behave When Threatened...Most of the Time. The highlights from this report for me are their views that:

  • "there is little on the political, regulatory and economic horizon to suggest that adequate housing supply (to reduce the shortage) is a realistic possibility within the next 5 years at least."
  • "a supportive economic backdrop and expected continued growth in average household incomes (particularly for Gen X & Y) will provide a structural buffer for prices."
  • "the extended period of "sideways prices drift" expected through 2011 will consolidate foundations for current price levels, reducing further the already low risk of a more substantial decline."
  • "the likely price driver over the medium-term will be the average income levels of Gen X & Ys who are in the prime home purchase (owner occupier & investor) life stage."

The Residex view:

Residex boss, John Edward's recent blog post called into question the March quarter RP Data-Rismark data on house price movements, "in the past few weeks there has been widespread press that Australia wide housing values fell by 2.1 per cent in the March quarter. The truth is they didn’t and the correction was in fact five times less than this. The party who led this view was making this statement because it was convinced that it should report housing growth performance on seasonally adjusted terms."

Contrary to the RP Data figures Residex analysis suggests "that houses fell in value by 0.55 per cent for the quarter while units in fact increased in value by 0.65 per cent."

Edward's goes on to mirror ANZ and RP Data's house price forecasts for the rest of the year, the "Residex predicted outcome for our markets does not present as though it is about to takeoff or collapse."

Furthermore Edward's states that:

  • "affordability issues are going to drive rentals and capital growth in the more unaffordable areas is going to be limited."
  • "best growth will be achieved in the lower cost markets and our analysis suggests, at this time, that Sydney presents opportunity and that Brisbane will also move forward sooner rather than later. Both of these capital cities have a level of stock shortage that will minimise the impact of misleading data, and clearly, given the floods in Queensland, Brisbane is of higher risk than Sydney."

So all three sources seem to be broadly aligned in their view that we can expect minimal or stagnant price growth for the remainder of the year.

The subtext to all this for me is that there is significant pent up demand for housing from segments of the market whose incomes are growing and while the market remains broadly in balance because of a range of factors, it will be monetary policy (interest rates) that will will dictate when we see the next spurt of significant price growth. When it comes it will most likely come from more affordable segments of the market & be driven primarily by buyers with growing income levels...

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