The Atmosphere’s Heating up in Melbourne’s Housing Market

Clearance Rates

Melbourne recorded a 76 per cent clearance rate over the weekend, and although this may go down when the mid-week numbers are collected, it’s still the strongest result to date. 

The Impact of the Election on Interest Rates

There’s an ongoing discussion between our politicians as to whether low interest rates indicate good or bad economic management. Joe Hockey warned – correctly – that a further cut indicates a slowing, if not, “struggling,” economy, while Kevin Rudd shored up his corner with the backhanded comment that this merely implies the opposition think high interest rates must be a “good thing”.

The last time the Reserve Bank moved interest rates so close to an election was back in August 2007, just prior to John Howard’s demise from office. Of course at that point, the cash rate was lifted +0.25 per cent to 6.75 per cent. Governor Glenn Stevens remarked that, “the world economy is still expected to grow at an above-average pace…” before noting the need to contain medium-term inflation.

Interest Rates during Labor’s Leadership

Source: The Official CTBTO Photostream via Flickr

After Kevin Rudd entered office, house prices were at a peak, and two further increases in both February and March took the cash rate to 7.25 per cent. Following this, the GFC prompted a swift six consecutive rate cut cycle as we felt the worldly repercussions of a highly interconnected financial system regulated by fear and greed, teetering on the brink of economic collapse.

The swift reversal which sent us right back into a rate hike cycle occurred in line with the Rudd stimulus packages, including the first home owner boost which applied to contracts entered into between October 14 2008 and December 31 2009. Consequently, swathes of easy credit entered the housing market, creating a short-term price multiplier effect across all ranges, arresting the downward decline in household debt growth.

Interest Rates Moving Forward

The party could only last so long, and in response to the high Aussie dollar, subdued credit growth, declining asset prices and continued underperformance in the construction sector, the current rate easing cycle, which commenced on November 2 2011, has been going on for 18 months.

The resulting eight cuts, which have left us with the lowest cash rate in at least 50 years, have been successful in taking some of the air out the Aussie dollar, though newly revised forecasts from government indicate a worrying trend in rising unemployment. Cautionary words have emerged from the RBA. Governor Glenn Stevens noted:

“One’s assessment of prospects for consumption will be driven mainly by one’s assessment of the outlook for income, but will also be affected by expectations about asset values and in particular one’s view on whether housing prices are overvalued…”

Job Advertisements and Business Confidence

Job ads fell by 1.1 per cent in July – the fifth consecutive monthly decline – and a cumulative 19 per cent over the past 12 months. Business confidence is waning and conditions are at a 4-year low, while household income dynamics worsening. Considering we have a tightly contested federal election on our doorstep, there is little prospect of improvement in the near-term. 

With the above in mind, it seems a sensible move to pull the one economic lever the RBA have to hand, and provide relief to “interest-sensitive spending and asset values.”

However, since the global economic crisis, the world’s banks have been focused on lowering rates in order to boost growth. The textbook model indicates the atmosphere will motivate an increase in lending for such items as homes, goods and services, though as we know, monetary policy is at best a blunt instrument. While governments can allocate where to spend our tax dollars and pressure the banks to pay forward the rate cuts gifted, they have limited influence on where cheap credit is spent (or for which asset it is lent) and on the areas where it’s needed most – which in terms of housing, would principally be construction.

On the other hand, as we know, the construction industry is not responding as desired, and instead, the gains are being felt in the established housing market. 

Housing Data

Housing finance approvals rose solidly in June ahead of expectation, with ABS figures showing a seasonally adjusted 2.7 per cent increase in owner-occupied finance commitments which are now tracking 7 per cent above the five-year moving average. The series is up +14.2 per cent on the same time last year.

Loan sizes also increased 0.7 per cent for the month and 0.9 per cent for the year (a marked improvement from the beginning of the year), while the value of investor finance commitments went up 18 per cent over the year.

ABS housing data shows that national prices have exceeded their 2010 peak, primarily led by Darwin, Perth and Sydney. The other states are still playing a game of catch up in median terms. And as I explained last week, for those of us who work on the ground assisting purchasers, describing the atmosphere as challenging would be an understatement.

While Sydney is out in front of all states – principally due to a sharp drop in the number of listings for sale – Melbourne is exhibiting a near equal proportion of pent up demand. If you break the data down it’s clear that the larger share of activity is investor-led. Since March 2009, the average first home buyer mortgage has grown by only 1.8 per cent, whereas the average mortgage for the market as a whole has grown by 9.6 per cent.

The Weeks Ahead

Despite a tight macro environment, there’s little to suggest there is any change on the horizon near term. We’ve certainly passed the bottom of the market, although how long the current rally will last is hard to predict.

Assuming rates are kept low for the foreseeable future, it’s fair to conclude there could be more stretch to the bow in terms of price appreciation. For those who are planning on making a purchase, I would strongly caution the need to get qualified advice to prevent the risk of overpaying in a tight competitive environment.

For the time being, high demand for a reducing pool of second-hand dwellings is pushing the established housing market into a seller’s domain.