Housing recovery to begin in first quarter of 2012, but data headlines won’t tell us until later: Christopher Joye
With the ability to now get three-year fixed-rate home loans for 5.99%, and 6.39% variable-rate loans, there is understandably excitement brewing about the prospect of a recovery in the Aussie housing market. If the financial markets are right, and the RBA cuts rates another six to seven times by the middle of next year, we will get a very healthy rebound indeed. But in terms of actual near-term data flows, don't expect too much, too soon.
The house price data that is heading our way is still dated before the RBA’s all-important November rate cut. The next tranche of information covers the month of October, and it will not be until the end of December (January) that we get the first, preliminary view of prices in November (December).
While I expect housing activity to revitalise by the first quarter of 2012, this will not flow through to the price data until the end of March or April.
We do, however, have partial, leading indicator data to work with in the interim. We will get monthly “seasonally adjusted” housing finance approvals from the ABS, which lead actual house prices by a quarter or so, and have been trending in the right direction thus far.
The near-term auction clearance rate data will be of limited value since it is not seasonally adjusted and tends to taper off around this time of the year.
I’d venture that the first credible indications of where the market stands will not be available until the February and March auction clearance rate results, which will coincide with the typically more liquid New Year sales season.
On the balance of probabilities, the next three months’ worth of house price data will likely give us “more of the same”. We know from our listings, auction clearance rate, time-on-market and vendor discounting series that October – i.e., the month prior to the RBA’s cut – remained tepid. Clearance rates were low, vendor discounting wide, and there was a sizeable stock of homes on the market available for sale.
While prices were not plummeting, they were not advancing either. The market was frozen in a weak stasis waiting for some interest rate relief.
My current base case is, as a consequence, modest flat-to-negative house price results for the remainder of the year. Here there is a slight complication interpreting the seasonally adjusted data, which may have residual biases from the devastating January/February floods.
In raw terms, national dwelling prices in the month of January were off only around 0.1%. Yet on a seasonally adjusted basis, they recorded a very large 1% fall. When we inspect the raw house price series, we can see a noticeable trend of slowly improving month-on-month conditions since the first quarter of 2011 (specially, slower price depreciation). On a seasonally adjusted basis, however, this disappears. It’s hard to say which series is providing the most accurate insights in light of the natural disasters in January and February.
If you want to answer the question: what are actual house prices doing, rely on the raw index data. If, on the other hand, you want to strip out monthly seasonal influences assuming 2011 is just like any other year, check out the seasonally adjusted benchmark.
Another key question for the housing market will be whether the RBA grants it more interest rate relief in December. According to the financial markets, this is a 100% certainty. That is, another rate cut in two weeks’ time is a bankable outcome.
In fact, financial markets think there is a chance the RBA may pop off two rate cuts in December. I am not so sure, and will firm up my views once we have better information prior to the actual board meeting on the 6th of December. I suspect the RBA will be of a similar mind given that every day is a moving feast right now.
There is no doubt that financial markets are completely besotted by what is happening in Europe. While the Eurozone only accounts for a small share of global economic growth, the transmission of a European crisis can have much more far-reaching consequences.
This is a function of three things.
First, Australian debt and equity markets still place a much higher weight on economic developments in the US and Europe than would be implied from either their direct contributions to Australian economic growth, or global growth.
It is a habit that is proving very hard to shake, much to the frustration of the RBA. And it is borne out strikingly in financial market correlations: while the direct economic linkages between Australia and the North Atlantic economies are modest (around 70% of our exports go to Asia), our equity and debt investments are correlated very closely with daily movements in their US and European counterparts.
Second, and partly an artifact of the first point, the wholesale funding that our banking system sources from overseas is currently being choked by the North Atlantic problems.
If banks cannot get access to funding, they stop lending, and growth will be an immediate casualty. Fortunately, we have been through this episode before, and there are now well-established measures to protect domestic bank funding, including government guarantees of bank deposits and liabilities, and new liquidity facilities offered via the RBA.
So, there is no reason to expect any big change in the Australian banking system’s access to funding in the near-to-medium term as long as the state remains the lender of last resort, which it will.
The final transmission mechanism is consumer and business sentiment. It would seem that in today’s much more closely interwoven world, where financial news is telegraphed via the Internet instantly across computer screens, shocks in one part of the planet are transferred much more quickly to once far removed locations. Domestic business confidence and investment decisions appear to be more responsive to foreign events than ever before. While it is less obvious how Australian consumers will react, we can be sure that they are more sensitive to global developments than they have been in the past.
The essential polarization between the underlying, and positive, economic growth pulse in Australia, and the snowballing turmoil in the Eurozone, was highlighted by yesterday’s construction work done data. In the third quarter this key component of GDP confounded pessimists, rising by an incredible 12.5% (the largest result on record) in comparison with market expectations of a 2.0% increase. This has the potential to increase the third quarter real GDP print by an amazing 1.7 percentage points, which would be a stunning result if the final numbers get anywhere near it.
Since 2007-08 I have argued that Australian cash and fixed-income should be the preferred destinations for your savings. Nothing since has changed to shift my view.
Christopher Joye is a leading financial economist and a director of Rismark International and Yellow Brick Road Funds Management. The above article is not investment advice.