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."

Tuesday, December 27, 2011

All-important November house price index results: housing woe or wonder?

The closely-watched RP Data-Rismark house price index results for the month of November will be released on Friday, and should afford some powerful insights into the market's positioning following the first RBA rate cut.

November is an important month since it is normally the last of the year in which we get healthy sales volumes until the selling season begins again in February (with the exception, perhaps, of beachside properties). December and January can be more difficult to interpret given the paucity of transactions.

Some economists and commentators believe that the housing market is set to endure more pain in 2012. I don't subscribe to that view, and have argued for over a year that the housing market will be a good hedge against adversity in the event the RBA slashes cuts, which it has felt compelled to do.

I've also said for a while now that there are partial indications that the housing market is beginning to stabilise, and with the benefit of two fully-passed-through RBA rate cuts in November and December, which, I would point out no economists forecast at the start of 2011, should bounce back with surprising elasticity during the first quarter of 2012.

Notwithstanding some analyst confusion interpreting the ABS housing finance flows, the fact is that the most valuable ABS series, the seasonally-adjusted number of new home loans approved for the purchase of existing dwellings, has been rising strongly since March this year (see chart).

I've also highlighted AFG's housing finance numbers for November, which were the best it has recorded since March 2009 (AFG is Australia's largest mortgage broker). Both the AFG and ABS data intimate to a revitalisation of first time buyer activity at the cheaper end of the market, which typically presages similar movements across higher priced properties.

Borrowers can now avail themselves of historically low mortgage rates given the RBA's December decision to shift monetary policy into stimulatory mode. Ubank, for example, is offering variable rates of just 6.14%, while their 1-year fixed-rate home loan is 5.93%.

At the same time, inflation-adjusted interest rates for bank transaction accounts and standard savings accounts are either negative, or only marginally positive. So I also expect consumer spending to continue to surprise analysts on the upside, as it has done consistently in the GDP data for the first three quarters of this year (the GDP accounts provide a substantially more comprehensive gauge of goods and services consumption spending than the more limited retail sales numbers).

And if you have concerns about the Australian housing market's 'valuation fundamentals' (ie, you are worried about Steve Keen-like 'bubble trouble'), I would encourage you to reflect on the chart below.

It shows actual Australian dwelling prices over time compared to the median price in 1985 indexed up by only (1) disposable income growth on a per household basis (using ABS National Accounts and HIA data) and (2) adjustments to borrowing capacity enabled via changes in nominal mortgage rates. In respect of the latter, we quantify how the average borrower's purchasing power has changed as a function of changes in mortgage rates assuming that their mortgage repayments-to-disposable income ratio and loan-to-property-value ratio remain constant over the period.

(We actually got the idea for this analysis from a method originally pioneered by Paul Braddick, who is head of property and financial stability research at ANZ Bank.)

The chart demonstrates that one can explain about 92% of the total increase in Australian house prices between 1985 and 2011 simply by reference to household income growth and the long-term decline in mortgage rates as inflation stabilised during the mid 1990s (Braddick arrived at similar findings). Put differently, there is no evidence that Australian housing costs have materially outpaced household purchasing power over the last 26 years. Although if you relied on the hysteria and hyperbole regularly published on this subject in national newspapers, you would be bound to think otherwise!