Why house prices will hardly grow in the second half of 2010: Christopher Joye

Credit: Christopher Joye

With so much conjecture about house price bubbles doing the rounds, which, frankly, appears to be a universal constant in our public dialogue these days, the June quarter release of data from RP Data-Rismark, APM and the ABS will offer a fascinating insight into what is actually happening in the market.

This topic has been made all the more interesting by questions asked by ASIC about why investment banks have not developed products to help mums and dads hedge house price risk (I made a similar point at some length in a 2003 report). In a speech this week, ASIC’s respected chief economist, Alex Erskine, commented:

“[L]ittle has been done to reduce information asymmetries disadvantaging buyers or to enable households to hedge their house price risks... Robert Shiller has been one of the few academics who have expounded the virtues of extending some of the innovations in finance to housing, with proposals for housing price derivatives to allow households to hedge their risks...A better housing market would involve a transparent on-exchange securities market overseen by market conduct regulators … and facilitated by risk management and hedging instruments.”

I should disclose here that RP Data, Rismark and the Australian Securities Exchange are working on a new listed market to liberate exactly the kinds of opportunities that ASIC’s chief economist outlines above. Today there are also emerging over-the-counter options to short (or hedge) Australia’s housing market. This is likely to be a very popular trade with overseas hedge funds, which tend to be bearish on Australia's housing market based on the recent US and UK episodes.**

Since October last year we have been projecting a sustained cooling in conditions back to single-digit growth rates. In the 12 months to the end of March 2010, Australian dwelling prices rose by a frisky 1% per month, or 12% in annualised terms. It took perhaps a little longer than we expected for the normalisation in headline mortgage rates from their low of 5.75% during the GFC back to 7.4% in May to bite into housing demand.

But the evidence is increasingly clear that our 'priors' were right. In RP Data-Rismark’s monthly data (APM and the ABS only report quarterly) we have witnessed the first signs of a significant deceleration in capital growth, which the RBA has also pointed to. On a seasonally adjusted basis, RP Data-Rismark recorded dwelling price growth across Australia’s capital cities of just 0.4% and 0.5% in Aril and May, respectively. That is, residential property price gains had halved from their 2009 pace.*

In the non-capital city regions, which account for about 40% of all homes, dwelling price growth was never particularly strong. In 2009, RP Data-Rismark’s Rest of State index registered an increase of just 7.4% after falling 3.9% in 2008. This year, Australia’s non-capital markets have experienced effectively no growth with cumulative capital gains of only 0.7%.

The question now is what happened to house prices in the June quarter. Since we already know the results of two-thirds of the data for the second quarter (ie, April and May), which generated total growth of just 1%, it is a fair bet that the second quarter results are going to be substantially less than the first quarter outcome of 3.4% (on a seasonally adjusted basis).

Any further softening should also be more accentuated in our monthly measures, which are not subject to the pooling biases that result in higher weights to the early months in APM and the ABS's quarterly models (ie, in the event that April and May have higher growth than June).

In thinking about current housing market dynamics, we have three leading indicators that we can reflect on: new listings; housing finance approvals; and auction clearance rates.

We know that new home loan flows have been relatively weak, and we certainly don’t have anything remotely like a credit-fuelled boom on our hands, as the RBA has argued.

The new listings story is an interesting one. Listings represent effective housing supply—that is, the stock of homes available for purchase in the market. In 2010 we’ve documented a large increase in vendors coming to market after surprisingly low levels of listings in 2009.

Last year it was almost as if vendors disregarded the underlying housing market recovery and were spooked to the sidelines by a combination of the contrails of the GFC and perhaps the never-ending Steve Keen media tsunami.

But this year the supply side has surged back into business, which can naturally place downward pressure on overall price growth.

The final piece of the puzzle is the well-known deterioration in auction clearance rates. In Sydney and Melbourne, which are the two major auction markets, clearance rates have declined from the circa 80% levels (associated with double digit capital growth) back to more subdued 60 per cent levels, which is where they have been bobbing along for several months now.

As the chart below shows, the weaker sales market has in turn meant that relistings of unsold homes have risen in the past few months.

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