The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, January 25, 2012

Are Aussie house prices on the rise again?

For most of this year Australians have had to read asinine media articles reporting purported experts predicting catastrophically-large 20%, 40% and, last week, 60% falls in domestic house prices.

The fact that these individuals have no experience successfully forecasting housing market conditions seems to be utterly inconsequential to the journalists desperately seeking to peddle doom-and-gloom.

The best information we have today suggests that Aussie house prices will have tapered by around 3.5% over the course of 2011. That’s right: less than one-tenth the decline sensationally predicted by the closely-covered doomsayers (no prizes for guessing who I am referring to here).

Wiser readers will realise that this is history repeating itself: the same individuals expressed the same opinions during the global financial crisis only to see Aussie house prices surge over 2009 and 2010.

And now we have mounting evidence that the housing market is staging a slow recovery, as I’ve projected in these pages for some time. The key catalyst appears to have been the RBA’s decision to swing 180 degrees from expecting to hike interest rates to cutting them in November and again in December. A low core inflation result from the ABS today would significantly increase the prospect of a third delicious rate cut for home owners at the RBA’s February board meeting.

The first tangible signs of the recovery derived from RP Data-Rismark’s November house price index release, which reported a marginal 0.1% increase in seasonally-adjusted dwelling prices. This was the first rise in capital city home values since December 2010. Importantly, even stronger capital growth was found across Australia’s ‘regional’ (ie, non-capital city) markets.

A key question that will be resolved next week is whether this November data was a once-off or indicative of a more sustainable theme. More specifically, will the preliminary November month result revise up or down, and what will the index tell us about the highly seasonal month of December?

Today a second leading house price index provider, Australian Property Monitors (APM), has echoed these findings, reporting that nationwide house prices actually ground-out a tiny gain over the December quarter (ie, the three months inclusive of October, November and December).

The main take-away here is not that home values are inflating again: it is, on the contrary, that they are not falling, or falling at an accelerating rate, as Steve Keen has predicted.

In today's release, APM comments, “Median house prices have risen nationally for the first time since September 2010, indicating early tentative signs of recovery in the housing market…The rise in the national median house prices reflects activity in the Sydney and Melbourne housing markets over the December quarter.”

APM’s chief economist, Dr Andrew Wilson, adds, “This result is significant as it shows an end to a recent trend of falling prices over the past year, with the realistic potential for a sustained turn-around in some markets.”

The coincidence between the APM and RP Data-Rismark house price index paths is especially encouraging because they use markedly different methodologies. APM’s index is based on a ‘stratified median’ technique pioneered by Dr Anthony Richards (and colleagues) at the RBA. RP Data-Rismark uses a more sophisticated hedonic regression approach. Over the long-term, the two indices tend to move very closely together.

The recovery in housing activity, which seems to be occurring more rapidly than perhaps even I forecast, is entirely understandable.

Australians have benefited from a tremendous improvement in housing affordability. Capital city house prices have not increased since May 2010. In fact, they have tapered by a cumulative 4.5% (one bad day for the sharemarket!). At the same time, disposable incomes per household have risen by around 14%. On a longer-term basis, Rismark’s analysis suggests that disposable  incomes per household have outpaced capital city dwelling prices by more than 15% since the end of 2003.

The final nail in the affordability argument is, of course, mortgage rates. The RBA’s munificence has bequeathed borrowers with home loan rates that are now well-below their 15 averages. Ubank is offering variable rates of 6.14% and fixed rates of just 5.93%.

If the RBA cuts again in February, and further thereafter, as some analysts believe they will, expect to see the return of rapid house price appreciation. As I've said before, housing (and bank-intermediated credit growth) will be the chief beneficiary of any interest rate relief.