Australian housing market stabilising, with 5% capital growth expected to 2014: ANZ

The Australian housing market is showing signs of stabilisation after a period of softness and barring a global economic calamity, house prices should rise by around 4% to 5% per annum over the next two and a half years, according to ANZ. 

The report also expects a pick-up in currently weak levels of sales activity in 2013 due to low interest rates and the possibility of further rate cuts, encouraging first-home buyers back into the market.

“In the absence of a sharp global economic downturn and escalating domestic unemployment, improving housing affordability, solid household financial positions and strong housing market fundamentals should support modest house price growth into 2013,” says ANZ in its July Australian Property Housing Chartbook compiled by economists David Cannington, Paul Braddick and Ivan Colhoun. 

“While previous structural and policy drivers have now been capitalised into house price growth, we expect prices to increase at a moderate 4% to 5% in annual terms by the end of 2014,” they say. 

The report notes the slowdown in sales activity, with home sales levels running at around 100,000 per month, well below the pre-GFC peak of 140,000 per month and tracking below the 120,000 per month recorded in 2009. 

“While auction clearance rates and days on market have shown some improvement more recently, they also remain well below recent peak levels, suggesting continued divergence between the expectations of home buyers and vendors,” says ANZ. 

“With ongoing softness in house prices and escalating uncertainty around the prospects for the global economy, the outlook for housing market sales continues to look weak over the second half of the year. 

“However, recent interest rate cuts and the potential for further rate cuts should drive improvements in housing affordability, eventually rousing market sales activity from the current lows, especially for first home buyers,” says ANZ. 

The report notes that with the exception of the smaller markets of Darwin and Canberra, house prices have weakened across all other capital cities in the year to June 2012. 

However, ANZ notes the extreme volatility in house prices in 2012 to date, particularly at the high end of the market. 

“House price falls from peak to May 2012 for the most expensive 20% of suburbs have been more than double price falls for remaining 80% of suburbs. This has most likely reflected the negative impact on house prices of increased volatility in equity markets and weak consumer sentiment,” says ANZ. 

An aggregation of housing data from the ABS, RP Data-Rismark and Residex shows that from their peak, house prices for the most expensive houses (the top 20%) have fallen 7.8% while those in the middle 60% have fallen 4.4% and the cheapest hoses (the lowest 20%) have fallen 4.5%.

Despite weakening in recent months, the report notes that the Sydney dwelling prices (both houses and units) market has outperformed the other capital cities since the peak of the current price cycle in late 2010.

ANZ attributes this strength to “the increasing pressure of stronger population growth on weak housing construction and a degree of resilience after an extended period of prior price underperformance in houses and especially units”. 

Sydney’s housing market has been assisted by having the biggest housing deficiency of all the other states – a shortage of four houses for every one built.

Despite experiencing the largest falls over the past year, ANZ says Melbourne housing remains the least affordable across Australian capital cities. 

ANZ says that strong growth in WA household income and weak house price growth has aided Perth’s housing affordability, with the city now ranked sixth least affordable across Australian capital cities compared with equal first least affordable before the GFC.

The report also notes an improvement in housing affordability driven by softening house prices, rising household incomes and lower mortgage rates, which ANZ says has been reflected in improved consumer expectations of the best time to buy a house and lower mortgage delinquency rates through 2012. 

“Previous episodes of improving housing affordability (in the early and mid-’90s) were largely driven by significant reductions in interest rates (and steady growth in household incomes). 

“With interest rates at relatively low levels and expectations of moderate growth in household income, improvements in housing affordability through 2012-13 are expected to be driven more by household income gains and weaker house prices than in the past,” says ANZ.