Westpac’s Bill Evans Sombre on Property Market

Consumer confidence has flagged this month
Photo: eGuide Travel

Westpac Chief Economist Bill Evans expressed a sombre view of the economy and the housing market in his latest economic update.

Consumer confidence flagged in January and recent local and global data was less than inspiring.

The latest labour market data to come out of both the US and Australia contained significantly lower than expected employment figures.

Westpac consumer sentiment fell 1.7 per cent in January, due to a common belief that the unemployment rate will continue to rise this year.

According to Bill Evans, this is a key indicator as to what we can expect from the economy in 2014. 

Unemployment Concerns

Those polled in the Westpac Consumer Sentiment Survey were concerned about the rising unemployment rate, which means we can expect a cautious consumer this year; one more focused on saving than spending.

Mr Evans also expects this change in sentiment to translate to a more subdued property market, replacing the exuberance we saw last year.

Views on whether now is a good time to buy a dwelling were fairly flat for the month, but down on last year’s figures by about 10 per cent.

“The latest labour market data… contained significantly lower than expected employment figures.”

It can be interpreted from this that people would like to buy a house, but affordability constraints resulting from house price rises will likely cause consumers to be more cautious in 2014.

CPI jumped by 0.8 per cent, surprising many economists. Mr Evans attributes the spike to the fall in the Aussie dollar, which has helped to increase the price of electrical goods, petrol prices and overseas holidays.

A Weakening Economy

While most economists are expecting interest rates to rise this year, Westpac is in the minority, predicting a further fall by the mid-to-end of this year as a result of weakening employment numbers and a weakening economy.

According to the latest RP Data, the capital city rental yields fell from 4.3 to 4.0 per cent in 2013 as median house prices increased around the nation. 

Based on the RP Data–Rismark Home Value Index, combined values increased by 9.8 per cent in 2013. However, when adjusted for inflation, the growth was a lower 6.9 per cent.

When median house values are adjusted for inflation values, they are still 4.6 per cent lower than their peak in 2010.

Cameron Kusher from RP Data had the following to say about the Index’s findings:

Based on the RP Data-Rismark Home Value Index, combined capital city home values increased by 9.8 per cent in 2013. However, when you adjust for inflation, the growth was a lower 6.9 per cent. 

Although home values rose over the year across all capital cities, when the impact of inflation is considered, home values actually fell in Hobart (-0.6 per cent) and the rate of growth across all other cities was also lower.

Over time the impact of inflation on housing markets should also be considered.  The raw capital growth figures show that combined capital city home values at the end of 2013 were 3.5 per cent higher than at their previous peak. 

When these figures are adjusted for inflation, values are still -4.6 per cent lower than their previous peak at the end of the September quarter in 2010.

Source: RP Data

Across each individual capital city market, inflation adjusted home values remain below their previous peak. 

This includes Sydney and Perth, where unadjusted figures show values are 10.9 per cent and 3.6 per cent higher than their previous peak respectively.  When adjusted for inflation, values across these two cities are currently -0.1 per cent lower than their previous peak and Perth values are -8.9 per cent lower.

If we look at the time of the previous market peak in inflation adjusted terms across each city, it goes some way to explaining why there has been such a pick-up in demand for housing and subsequently an increase in home values. 

Sydney’s market peaked in the first quarter of 2004 and across other capital cities the market peaks were: Melbourne (Q3 2010), Brisbane (Q1 2008), Adelaide (Q2 2010), Perth (Q3 2007), Hobart (Q4 2007), Darwin (Q3 2010) and Canberra (Q2 2010).

With the relative costs of other goods rising at a faster pace than home values over recent years, it is no surprise with mortgage rates at historic low levels that buyer demand and home values have now been rising. 

From here, if inflation continues to climb, that may result in the need to lift interest rates, which would likely dampen investor activity and slow levels of capital growth. 

The important thing to keep in mind however is that when you consider inflation, dwelling values remain lower than their previous peaks in every city.

If you are thinking of buying selling or investing and would like a FREE 5 minute chat
with Street News Director Peter Sarmas, please contact him on 0418 740 606
or via email at [email protected]