Credit is the key
Westpac’s economics team has a relatively positive view on things, arguing the market will likely put on almost 15 per cent from its June low to the end of 2020.
However, the bank says it all comes down to lending — which is not surprising given the Sydney and Melbourne corrections were in lock-step with a 15 per cent fall in new loans over the second half of last year.
Credit has remained tight for most of this year, but June and July saw an 8 per cent spurt in home loans.
Investor loans rose 5 per cent in July alone, but still remain 20 per cent down over the year.Easier to get a home loan
Rate cuts and looser home loan requirements mean people may be able to borrow 10pc more, writes Warren Hogan.
“Banks are likely addressing their issues in the aftermath of the Royal Commission and adopting a more commercial approach to lending,” Westpac said.
“A turnaround in lending will be necessary to sustain the current boost to prices and the likely increase in activity that will follow.”
A flood of new high-rise apartments heading for the market is not the sort of thing to fire up prices, but Westpac argues the impact is unlikely to spread across all residential property.
“Although we expect upward pressure on existing dwelling prices the oversupply and building quality concerns are likely to weigh on the prices of new apartment developments as they come to market creating a two tier market,” the bank noted.
Trough of rebound?
Morgan Stanley’s Mr Read says housing credit remaining a significant weakness is one thing, but the construction side of the housing cycle continuing to roll over is another — and is has an even more important impact on the real economy.
Rising house prices increasing household net worth and therefore spending, and increased property turnover drives spending in homeware and hardware stores, are positives. Falling construction activity is a big negative.
“As it continues to decline, this will affect household jobs growth and therefore income and spending,” Mr Read said.
“Economic growth in Australia remains very low at 1.4 per cent [over the year] and we expect only a gradual recovery from here.
“This is a challenging environment for housing demand, particular because we expect the decline in construction activity to affect the labour market and increase unemployment.”This housing downturn is different
Australia has had housing downturns before, but they usually happen when interest rates are high or rising, not at record lows.
The Morgan Stanley view is the market is still in a trough and not a rebound.
Another interest rate cut, or two, might help at the margins, but that’s about it according to Mr Read.
“It is difficult to envisage a rebound … without an improvement in credit supply, which needs both a increase in loan approvals and an easing in lending standards. We don’t expect either of these to change substantially.”
Trade worries hit markets again
A promising end to the week on Wall Street was cut short by a team of Chinese trade negotiators changing its travel plans on Friday, deciding to skip a visit to the US boondocks of Montana and Nebraska to meet farmers.
Apparently that was enough to (a) annoy President Donald Trump and (b) see the S&P500 reverse early gains. By the end the day it was down 0.5 per cent and down about the same for the week.
Our market didn’t seem overly alarmed by the farmer snub and is priced for a fairly flat opening, having gained around 1 per cent for the week.
Markets on Friday’s close:
- ASX SPI 200 futures flat at 6,719; ASX 200 (Friday’s close) +0.2pc at 6,731
- AUD: 67.7 US cents; 61.4 euro cents; 54.2 British pence; 72.7 Japanese yen; $NZ1.08
- US: Dow Jones -0.6pc at 26,935; S&P500 -0.5pc at 2,992; NASDAQ -0.8pc at 8,118
- Europe: FTSE -0.2pc at 7,345; DAX +0.1pc at 12,468; EuroStoxx50 +0.5pc at 3,571
- Commodities: Brent oil -0.2pc at $US64.28/barrel; Gold +1.2pc at $US1,517/ounce; Iron ore $US93.00/tonne
Oil was the dominant global market shaper, but by then end of the week it was shaping up as a flash in the pan, so to speak.
Following Monday’s 20 per cent spike in the wake of the weekend attack on the Abqaiq oil processing facility, which temporarily halved Saudi production and cut global supplies by 5 per cent, the market regained its composure.
The Saudis said by working around the clock full output will be restored by the end of the month.
The global Brent benchmark ended the week gaining 7 per cent, while the impact on US crude was even weaker.
However, prices are unlikely to come down a lot more as traders appear to be alert to the idea that the oil producing gulf states look a risky bet at the moment (as they have for a while) and are now adding a “fear” premium to prices.
RBA rate cut odds shorten
Locally, unemployment grinding higher was a significant driver in sentiment.
The betting for an October Reserve Bank rate cut flipped from a long odds to a pretty short priced favourite overnight.EMBED: RBA rate indicator
That saw the Australian dollar slip below $US0.68 again.
While a weaker Australian dollar is no doubt a welcome development for the RBA, it may only be temporary if a cut isn’t delivered.
The general easing by central banks across the planet, led by the US and Europe (a shout out to the contrarian Norway where rates went up last week) is also putting the RBA under pressure.
As Governor Philip Lowe noted last month, he and his Martin Place sidekicks, are monitoring global peers very closely.
“If we were to maintain our interest rate in the face of a decline in the global rate, our exchange rate would appreciate, likely moving us away from our goals for inflation and unemployment.
“So we have to move too and this has been a consideration in our recent thinking on interest rates,” Dr Lowe noted.
It is a theme Dr Lowe may well expand on in his “Economic Update” speech to the Armidale Business Chamber on Tuesday evening.
It will be the highlight in otherwise data-light week.
The tentative shoots of the housing sector’s recovery have continued to emerge.
Another solid Saturday of auction results has fired up optimism that what has been, historically speaking, a fairly minor correction, may be over.
Prelim Domain auction clearances
Syd 75%= final ~69%,last wk 73%
Mel 79%= final ~76%,last wk 73%
Listing & sales vols r clearly lifting with Spring & stronger demand, but tight credit,unit supply & soft econ r likely to constrain prices after initial bounce v past cycles#ausecon
In Sydney preliminary clearances look like hitting 75 per cent. Melbourne was closer to 80 per cent.
If that is the worst of it, things haven’t been too bad.
Sure, Sydney house prices fell 15 per cent from their peak to what appears the market’s bottom around May or June.
Melbourne top to bottom looks like being a bit more than 10 per cent, which was about average across capital cities.
Perth with a 20 per cent slump (so far) and Darwin down 30 per cent have been the painfully significant outliers.
The August house price bounce was particularly vigorous, up 1 per cent nationally.
Current clearance rates running at around 70 per cent point to further gains, although there is the caveat — a record low number of homes up for sale is dragging down the supply bit of the supply/demand dynamic.
Normally, clearance rates tend to fall due to the seasonal rises in volumes.
Certainly, more buyers out there. But are the banks handling the increased loan applications? I am hearing the banks are struggling, with the result being many loan approvals are only just making settlement day, and sometimes going over at no fault of the buyer.27:54 PM – Sep 21, 2019Twitter Ads info and privacySee Louis Christopher’s other Tweets
Head of property consultants SQM Research Louis Christopher says while clearance rates remain strong, they are still down a bit on last year.
“Normally, clearance rates tend to fall due to the seasonal rises in volumes,” Mr Christopher tweeted at the close of business.
“Certainly, more buyers out there. But are the banks handling the increased loan applications?
“I am hearing the banks are struggling, with the result being many loan approvals are only just making settlement day, and sometimes going over at no fault of the buyer.”
But will a springtime rebound be enough to sustain a broader economic recovery? There certainly hopeful signs, but a lot will need to go right.EMBED: House prices peak to trough
Low auction volumes supporting prices
Beneath the headlines of house prices stabilising, and even edging up, are many of the same old problems; tight credit, high household debt and a big backlog of soon-to-be-completed apartments that is about to be dumped on a still wobbly market.
If something puts a solid base under a housing recovery, and therefore a broader economic recovery, it probably needs to be more money in the punters’ pockets.
Ideally it would be through higher wages, lower taxes or even lower borrowing costs rather than heavier doses of debt.Australia’s house of cards
Australia’s housing downturn appears to be over … for now. But huge household debts leave the nation vulnerable to a shock.
The rise in Sydney and Melbourne prices reflects an improvement in demand from home-buyers, but as Morgan Stanley’s Chris Read says, it has been “amplified” by slim-pickings under the hammer.
Mr Read argues while sales volumes are likely to increase, structural headwinds such as lower investor activity mean any pick-up is likely to be gradual.
“Below the surface challenges remain, linked to volume, mix, credit and demand,” he says.
“Near-term prices may stay supported, but we still expect sustained recovery to be linked to fiscal policy, not re-leverage.
“Stronger price and clearance signals are likely to persist in the near term, although the transmission to the broader housing market and economy will be lower than in the past.”
The big question is whether the recovery is strong enough to be sustained and not thwarted again by higher prices and more properties coming on to the market.