Australian capital city house prices up 0.1% in July, but do not expect a return to boom time conditions: Shane Oliver

EXPERT OBSERVER

Australian capital city dwelling prices rose 0.1% in July according to CoreLogic. After a 10.2% decline over 22 months (which was worse than the decline seen in the GFC), this is their first rise since September 2017. Dwelling prices are still down 7.3% from a year ago.

Sydney dwelling prices rose 0.2% which their second gain in a row and Melbourne prices also rose 0.2% which is also their second gain in a row.

Prices also rose in Brisbane (+0.2%), Hobart (+0.3%) and Darwin (+0.4%) but fell in Adelaide (-0.3%), Perth (-0.5%) and Canberra (-0.3%). Perth prices are now down 20.2% from their 2014 high.

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Source: CoreLogic, AMP Capital

The boost from the election result which removed the threats to negative gearing and the capital gains tax discount, RBA rate cuts, and positive headlines around the relaxation of the 7% mortgage rate serviceability test and tax cuts have helped provide a bounce in home buyer demand.

This is clearly evident in a rebound in auction clearance rates where July saw the best monthly average clearance rates in Sydney since May 2017 and in Melbourne it was the best since October 2017. See the next two charts.

While this has come on very low volumes its usually the case that improved clearance rates lead a pick up in volumes and this is likely to be seen in the months ahead.

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Source: Domain, CoreLogic, AMP Capital

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Source: Domain, CoreLogic, AMP Capital

However, while home prices may have bottomed its doubtful that annual price gains are on their way to 10% or so as implied by the past relationship between clearances and prices and the current level of clearances. See the charts above.

The situation today is very different to 2011 when the RBA first started to cut rates in this interest rate cutting cycle which in turn helped unleash booming conditions in the NSW and Victorian economies and rapid debt growth made easy by somewhat lax bank lending standards against a backdrop of undersupplied property markets all of which fuelled rapid growth in Sydney and Melbourne property prices.

By contrast today, household debt to income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged pushing Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak.

So we don’t see a return to boom time conditions and expect constrained low single digit price gains through 2020.

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Source: CoreLogic, AMP Capital

Rising unemployment will be the key to watch. We expect unemployment to drift up to around 5.5% by year end, but a sharper rise could result in forced property sales and another leg down in property prices. This is not our base case but is the key risk in terms of the property outlook.

Much higher unemployment is something the RBA is keen to avoid – in fact it wants unemployment to fall to 4.5% or below – so our view remains for further cash rate reductions in November and February next year taking the cash rate to 0.5%.

SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.