Australia | Aug 10 2009
By Greg Peel
While the Reserve Bank of Australia was very quick to cut its cash rate, and cut it substantially, in light of the GFC, it has recently become a concern that easy monetary and fiscal policy could fuel a housing bubble in Australia. While house prices are down some 30% from their peak in the US, and worse in some areas of Europe and the UK, Australia’s house prices have returned to boom levels after only the merest of blips.
One has to dissect the Aussie numbers to get a clearer picture, nevertheless. The average house price in Australia has risen recently but the major population centres have remained steady to down while satellite cities such as Darwin have seen explosive increases. Darwin became a popular place to buy a house when east coast and Perth prices boomed, given cheaper prices, but not only has equilibrium now been reached, the effect of large natural resource infrastructure development in the NT and subsequent expected housing demand, has seen the mean Darwin house price exceed that of Sydney. That is really quite ridiculous.
Nothing against Darwin, but clearly the impact of job losses in the financial sector have had an impact on Sydney prices, and job losses in the resource sector in WA have affected Perth prices, but Darwin is seen as the new boom town given the extent of gas sector and related infrastructure development in the region. In Sydney, the cheaper but more convenient inner-city areas have shown resistance to price falls while the “mortgage belt” west and south-west has not been so lucky and the high-end suburban addresses – once home to a lot of bankers – have seen quite a crash.
Thus on a comparative basis, the RBA may not have reason to fear a housing bubble across the whole nation. But the fact remains that Australia experienced a housing bubble from the late nineties even more pronounced than that of the US, and yet house prices have not fallen in any consistent way. Either house prices are just really cheap now in Miami, London and Barcelona for example, or Australian house prices are dangerously overvalued. The RBA cut its cash rate dramatically to prevent severe economic recession, not to fuel another speculative bubble.
It was such speculative bubbles that got the world into this mess in the first place.
Obviously the Australian house price rebound has been fuelled not just by the lowest cash rate in 50 years, but also by fiscal stimulus in the form of government grants to first home buyers. There is even talk from the prime minister of perhaps a new second home buyers grant, but one assumes the RBA would rather there wasn’t one. Even the government admits grants do little more than to push house prices up by the amount of the grant, but the government’s intention is to reinvigorate the moribund housing industry and prevent further job losses. What remains to be seen now is what happens to house prices and housing demand when the existing grants have run their course.
New housing finance commitments by owner-occupiers rose by 1.1% in June on a seasonally adjusted basis. New commitments are up 43% in 10 months, with the subset of commitments on new houses up 60%, Westpac reports. While the surge continues, there may now be signs of slowing. Consensus among economist forecasts was for a 1.8% rise, with Westpac in particular expecting as much as a 2.5% rise.
Economists do expect a slowing of growth once everyone who wanted a grant has obtained one. Notably, investor finance commitments (as opposed to owner-occupier, and thus not grant-worthy) fell 1.8% in June to affect a total rise in all new commitments of only 0.3%. As house prices rise, investors are backing away.
Breaking the numbers down further shows the big jump in June was in finance for new dwelling construction, up 2.8%, while finance for already constructed new homes fell 0.2%. Finance for existing homes (not including renovation loans) was up 1.3%. Existing home purchases do not attract as much of a grant.
One of the effects of the grant scheme was to suddenly make houses in certain areas more affordable to own on a mortgage than to rent. Rents surged across Australia as house prices initially fell given investor-buyers shut up shop and job losses and the economic downturn forced owners to sell and hit the rental market. But investor-buyers came back again on high rent yields, at least until prices moved up again. So the question now is: will we see a big retreat in rents now ownership has become the more attractive prospect? If this is the case, then investor-buying should accelerate to the downside while owner-buying begins to wane once the grants expire.
In other words, we may yet have a bursting of the housing bubble.
The balancing factor, nevertheless, is Australia’s growing population, both organically and via immigration, against the backdrop of a general lack of housing. Housing is only lacking in the already overcrowded city centres mind you, while tumbleweeds roll down the main streets of once bustling regional centres. Australia is not lacking in space. If the government had any sense (in my humble opinion) it would provide incentives for industry to relocate to regional centres and use its infrastructure stimulus to ensure robust transport connections and build new houses. Immigrants (assuming rising unemployment does not force a slowdown in immigration acceptances) could also be given incentives not to immediately try to set up in Sydney and Melbourne in particular.
It is notable that in the US, major industry is widely distributed across the country in many diverse regional centres and not simply crowded into New York, Chicago, Los Angeles and other major centres.
Returning to the June numbers, the ANZ economists agree that the RBA can relax a bit and Australians need not necessarily worry about immediate interest rate hikes. ANZ notes the rate of growth of housing finance commitments eased to 1.4% in the June quarter from 4.2% in the March quarter.
When rates do inevitably rise, suggests ANZ, pressure will be taken off the potential housing bubble and the market should stabilise. July was the first time first home buying eased off as a percentage of all home buying in eight months – to 27.1% from 28.5% in May. The average loan size applied for also fell by $11,600 to $270,000, implying first home buyer demand has begun to wane.
It would appear the rush is over.