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An uptick in auction clearance rates, increased activity within the real estate market and rising housing values have prompted tentative declaration that the property market rebound is in full swing. UBS economists predict a 5-10% growth in house prices, revising their previous forecast of a 3-5% growth following a 9% rise in home loans over the two months to July.
Auction rates have also been high, with the number of houses listed also rising. Corelogic data indicates that in Melbourne, auction clearance rates wavered between 74 to 75% throughout the four weeks of September. Melbourne auction volumes also rose from 768 in the first week of September to 1020 by the end of the month.
Furthermore, Melbourne home values have seen a 3.2% increase over the months of August and September; Corelogic’s Tim Lawless attributes improving conditions in Melbourne to low mortgage rates, improved access to credit, high population growth, rising auction clearance rates and a rise in buyer activity, among other factors.
In the rental market, the Real Estate Insititute of Australia (REIA) recorded a lift in affordability during the second quarter of the year. The proportion of income required to meet rent is now down to 23.8%, declining by 1.2% over the quarter. This puts rental affordability at its best level in 11 years.
Despite these strong indicators of a property market rebound, however, the wider Australian economy suffers from stagnant unemployment rates, low wage growth and GDP growth rate at its lowest in a decade (0.5% over the June quarter; 1.4% over the year). The RBA has made its concern over these issues clear as it slashed the cash rate by yet another 25 basis points in its October meeting, as many analysts predicted throughout September.
Building approvals continue to their downward trend despite rising home values. Monthly residential building activities statistics from AI Group and HIA reveal that the apartment sector is currently the weakest, declining for the 17th consecutive month. Other headwinds include low investor activity and dwindling faith in Australia’s construction industry.
Low confidence in the wider property sector is also a problem, with confidence falling 10 points over the September quarter and now sitting at 118; the average across eight years of quarterly surveys is 126.
Corelogic is also concerned about low property turnover in the current market, with homeowners holding onto homes much longer than 10-15 years ago. They believe that this is largely due to the rising cost of purchasing and selling property, as well as affordability constraints. Experts worry that this may threaten recovering auction clearance rates, should buyer demand fail to match the auction volume.
Lawless notes that the current state of rising home values and low housing turnover is somewhat uncommon; he expects, however, to see the seasonal rise in listing numbers gather pace and for sales activity to increase. Nevertheless, the property market remains on a tenuous balance, with household debt levels reaching a record high relative to incomes over the June quarter, which suggests that ‘the sector is vulnerable to a shock or change in household circumstances’.
Cash rate now a record 0.75%: RBA
At the beginning of October, the RBA cut the cash rate to 0.75%. Treasurer Josh Frydenberg is urging banks and lenders to pass on the cut in full, but due to profit margin concerns, Australia’s largest banks are reluctant to do so. Commonwealth Bank and NAB have decided to only pass on the interest rate cut partially; for CBA, the full cut will only be applied to ‘property investors with interest-only home loans’.
The RBA is urging for more active action from the government, such as boosting infrastructure spending, to support the cash rate cuts, with shadow treasurer Jim Chalmers criticising the government of ‘leaving all of the heavy lifting to the Reserve Bank’.
RBA governor Philip Lowe has indicated that the rates will stay low for ‘an extended period’ until unemployment, inflation and economic growth have seen improvement. For now, the RBA will continue to monitor the situation. However, it does not seem to have ruled out another cash rate cut entirely, which has prompted speculation that the cash rate will fall by another 25 basis points eventually, if not as soon as November.
Regardless of whether there is another cash rate cut in the books, however, property experts broadly agree that the RBA is keeping a careful watch on house price growth and may tighten on home lending in order to limit it to the desired pace.
In summary:
The conditions within the property market are mixed, with sentiment being one of cautious optimism. Despite improvement across the sector in home values, auction clearance rates and affordability, the market remains bogged down by low buyer confidence, stagnancy in the wider Australian economy and declining building approvals. The RBA lowering the cash rate may boost Australian real estate prices further, but the RBA will likely take steps to ensure house price growth does not gather pace too quickly. (ET)