“Some room” for house prices to increase as low interest rates support “consumer revival”: HSBC’s Paul Bloxham

HSBC Australia chief economist Paul Bloxham says there is “some room for [house] prices to increase” in his latest note on the performance of the Australian economy.

“After a period of falling housing prices in the 18 months to May 2012, there is also some room for prices to increase, although excessive price growth would be a worry, given housing prices are already quite high,” writes Bloxham in his latest Downunder Digest.

The digest notes the pick-up in retail sales in January and February and that consumer sentiment is around two-year highs.

Bloxham expects that “below neutral monetary policy should support a consumer revival” freeing up cash for the majority of borrowers who have variable rate mortgages.

“Low rates have boosted consumer cash flows, as around 90% of mortgages are on floating rates and RBA cuts have largely flowed through to effective rates.

“Low rates are also encouraging portfolio shifts from deposits to equities and housing, which is also boosting household wealth. Rising household wealth encourages consumption and less saving,” Bloxham says.

Bloxham expects a recovery in retail sales to be supported by an upturn in housing construction, “which already appears to be underway”.

“As more houses are built, we expect demand for consumer durables to rise to fill these houses.

“While on-line sales have been a key source of competition for domestic retailers in recent years, durable goods are still largely purchased through traditional shop front retailers. We expect an upturn in sales of durable goods to support the local retail sector.

"Hence, our view remains that ‘Australian retailers are to see a better 2013’," Bloxham says.

The rosier outlook for retailers is driven by low rates and less impact from the Australian dollar.

“In addition to the effect of low rates, we also expect that the Australian dollar is no longer putting as much downward pressure on local retail sales as it had been in 2010 and 2011,” says Bloxham.

“Back then, the strong Australian dollar appreciation had encouraged very strong growth in overseas departures of Australian residents, as more people chose to go on international holidays.

"This meant more dollars leaking offshore, as there was less domestic travel and more spending abroad.

“But growth in overseas departures has slowed. While it is still a drag on local spending, the drag is easing. In this way, the Australian dollar effect on growth is starting to wear off.”