by Rory Robertson
Today’s updates on RP Data-Rismark home prices and RBA credit both worked in the direction of making Terry McCrann right on a rate hike next Tuesday (see attached RBA Watch)
Australian house prices (not including units) rose by another very strong 1.6% in March, to be up 4.5% over Q1 and by 12.6% over the past year (chart 1).
House-price growth has been particularly rapid in Sydney, Melbourne and Darwin over the first three months of the year, running at annualised rates in excess of 20% (charts 6 and 7).
The main reasons for the impressive strength of Australian versus US house prices (chart 1) are by now well known, including our faster population growth (driven by a massive lift in Australian immigration), our weak supply response (Australia’s home-building trend has remained stuck near 150k new homes per annum, come hell or high water) and our much-more-disciplined mortgage markets.
Moreover, our unemployment rate has fallen by more than 4pp relative to the US unemployment rate in recent years (chart 2), and the RBA was able to drop mortgage rates dramatically after Lehman’s collapse collapsed global growth (chart 3).
Between August 2008 and June 2009, the typical Australian (floating) mortgage rate had fallen by 2-3/4pp relative to the typical US (fixed) mortgage rate. As you know, that was massively supportive of Australian home prices.
Looking at the chart (3) - with Australia’s typical mortgage rate at 6.5% versus 9% at the 2008 peak - it’s clear that there’s plenty of room for mortgage rates to rise significantly over the next few years.
Indeed, if stronger local and global growth - and the re-run of Australia’s biggest-ever mining boom - continue to drag our unemployment rate back below 5%, prompting a re-run of the sort of economic overheating that so disturbed the RBA in 2007-08, then mortgage rates could threaten to revisit their previous peaks near 9%.
On the outlook for house prices, I have no strong view except that those with extreme views will continue to be wrong. There clearly are both positives - rapid population growth alongside decent GDP and jobs growth, colliding with the flat long-term trend in homebuilding - and negatives, the latter dominated by ongoing RBA rate hikes driving mortgage rates higher.
Today’s RBA credit data show housing credit still growing at a solid 8.7% annualised rate (3mma, chart 4). That’s slow relative to several 20%-plus booms in earlier times (chart 5), but obviously it’s been sufficient to fuel rapid house-price growth over the past year.
Importantly, housing credit to investors now is growing as fast as credit to owner-occupiers, notwithstanding Governor Stevens' recent fatherly advice on breakfast TV – “It's a mistake to assume a riskless, easy, and guaranteed way to prosperity is just to leverage to property".
The other big news in today’s credit data is the fact that the shrinkage of intermediary lending to business has ended (chart 4 again).
