Australia | Dec 10 2008
By Andrew Nelson
In a continuation of today’s positive run of economic news -after the surprise jump in consumer confidence this morning- the latest domestic data show housing finance also increased in October. The gauge increased by 1.3%, slightly ahead of expectations and marking the first rise in housing finance since January.
ANZ Bank economist Dr Alex Joiner sees the result as evidence that homebuyers are responding positively, if cautiously, to the first round of the RBA’s large rate cuts, as well as to the Federal Government’s boost to the First Home Owners Grant (FOHG). He notes established dwelling approvals rose by 1.6% and new home sales were up 3.5%. The latter result, notes Joiner, is most likely due to the additional bonus to the FHOG for purchasing a new dwelling.
Westpac agrees, saying the result will help to support house prices and hopefully trigger a recovery in new dwelling construction. Supporting this view, Westpac notes the dwelling index in the Westpac-MI Consumer Sentiment survey is now at the highest level since 2002.
It wasn’t all good news however, with the proportion of first homebuyers seeking approvals in October easing slightly to 19.5%, although the number of buyers was actually higher. The proportion of approvals that were fixed fell to 3%, but this is solely due to the fact that potential buyers are acutely aware that further interest rate cuts were on the way.
Remember, these data are two months old and it is likely that the further 175bp of cuts taken in November and December will go even further in fixing some of the poor sentiment that continues to pervade the property market. Dr Joiner predicts that the number of approvals will now begin to bottom out. He notes traditionally, cuts in interest rates tend to be a forerunner of a sharp turnaround in finance approvals.
TD Securities Senior Strategist Joshua Williamson is much more cautious in his view, saying that while the small increase in October’s housing finance numbers will be welcomed by some builders and tradespeople, it is unlikely to herald the beginnings of a recovery in the new housing market. He notes building approvals remained negative in the month and the easing in mortgage interest rates and thawing in low affordability could take longer than usual to result in a trend increase in new finance approvals.
That said, both ANZ and Westpac believe the RBA’s move to pull rates down by 3.0% to 4.25% over September to November will continue to breathe life back into the Australian housing market. Going forward, ANZ expects the RBA will cut official rates to 3.5%. This will see housing affordability continue to improve dramatically, while the boost to the first homeowners grant should continue to support housing finance and the housing market in general over coming months.
But don’t get too excited, because the turnaround in approvals that Joiner expects will be limited by continuing economic uncertainty. Westpac notes that rising unemployment and tighter lending standards in response to the credit crisis will act to limit the pace of recovery. The bank says it will be closely watching the interest rate sensitive housing sector as a gauge of the effectiveness the drastic easing policy.
The major release this week will be tomorrow’s Labour Force release. According to TD Securities, the result should show a 20,000 fall in employment and reinforce the need for further rate cuts from the RBA.