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."

Monday, May 16, 2011

Where to for Australia's housing market?

A lot of fuss is being made about house prices doing nothing. For the record, this is the outcome we have correctly predicted since early 2010. Year-on-year, Aussie dwelling prices have not budged (off -0.6%). In the first quarter of this year, they have not moved at all either in raw or actual value terms (-0.4%). Seasonally-adjusted, the first quarter has been weaker, down about 2%. But the seasonally-adjusted data is simply a relativity, adjusted to reflect conditions that normally prevail at this time. Actual house prices are not down 2%.

Having said that. I would not be in the least bit concerned if they were. If the doomsayers on the domestic economy are right, rates are not going anywhere (I obviously don't agree with them). In this case, we will get mild nominal house price growth over 2011, which will likely underperform inflation (ie, real declines, as we have seen for the last year).

If rates do rise a few times this year (as I expect), nominal dwelling prices will go nowhere or retrench modestly (eg, 0-5% year-on-year), depending on the number of hikes. That's not a bad thing at all. The underlying demand/supply fundamentals are very strong. The dwelling price-to-income ratio and rent-to-price ratios will keep on improving, which is a great thing for future buyers. The labour market is fully employed, and household income growth is robust. The only thing that will change any of this is something the RBA controls: interest rates.

No growth in asset prices, or some small declines, is a handy reminder that no asset-class is a one-way bet, as Glenn Stevens presciently pointed out at the start of last year. To be sure, anyone defaulting on a home loan with a, say, 7.6% mortgage rate (ie, another 50bps on top of the current 7.1% discounted rate), should not have a home loan in the first place.

The fundamentals will likely continue to solidify as household formation-driven demand escalates via better-than-expected population growth combined with weak new supply coming online. This would be our base-case.

When interest rates do eventually fall, as they will, there will be an enormous affordability dividend dropped on the housing market, which will likely trigger strong upward movements in prices (eg, in late 2012-14) as the market signals to builders that they need to get their arses into gear and start constructing more housing. In the interim, the RBA is going to be left to deal with significant rent inflation (chart via Citi).

And if worst comes to worst, and the Chindia story implodes, or the global economy has a repeat of 2007-08, the RBA will slash interest rates, with the chief beneficiary being the housing sector, just as it was during the GFC. Nothing happening here people.