Reserve Bank Governor Philip Lowe’s “housing market 101” crystal balled the housing market, even as he labelled Aussies the most “intense” property sector watchers in the world.
In his Housing Market and the Economy speech, delivered in Sydney, Mr Lowe said “Australians watch housing markets intensely, perhaps more so than citizens of any other country”.
He said the large run-up in prices and subsequent decline were caused by a combination of factors, but there was something weird this time around.
This as the five years to late 2017 saw nationwide housing prices jump “almost 50 per cent” and since then falling “by 9 per cent” – that is, back to mid 2016 levels.
“The current adjustment is unusual,” Dr Lowe said. “Unlike the other four episodes in which housing prices have declined in recent decades, this one was not preceded by rising mortgage rates. Nor has it been associated with a rise in the national unemployment rate.”
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“Instead, in New South Wales, where the recent decline in housing prices has been the largest, the unemployment rate has continued to trend down. It is now at levels last seen in the early 1970s. The unemployment rate has also trended lower in Victoria.”
“So, the origins of the current correction in prices do not lie in interest rates and unemployment. Rather, they largely lie in the inflexibility of the supply side of the housing market in response to large shifts in population growth.”
And that, according to him, is where much of the blame goes, with supply taking “the better part of a decade” to react to population growth and nonresident demand.
Domestic investors also added to the cycle. he said, especially in New South Wales.
“At the peak of the boom, approvals to investors in New South Wales accounted for half of approvals nationwide, compared with an average of just 30 per cent over the five years to 2010.”
But “amplified” price increases designed to boost investor profits came at a price.
“There is an internal dynamic to housing price cycles, and this one is no exception. By 2017, the ratio of the median home price to income had reached very high levels in Sydney and Melbourne.”
“Finding the deposit to purchase a home had become beyond the reach of many people, especially first home buyers if they did not have others to help them.”
“At the same time, the combination of high prices and weak growth in rents meant that rental yields were quite low. So, naturally, momentum shifted.”
“Given the big run-up in prices and the large increase in supply, a correction at some point was not surprising, although the precise timing is nearly impossible to predict.”
He agreed that low interest rates played a part in making credit available cheaper than ever to borrowers — and that tighter lending standards were now having an impact.
But Dr Lowe refused to blame tighter lending standards for the shrinking buyer pool, saying “the main story … is one of reduced demand for credit, rather than reduced supply”.
He agreed though that some lenders have gone too far the other way now — and if they couldn’t find the right mix it would have economic impact.
“As lenders recalibrated their risk controls last year, the balance may have moved too far in some cases. This meant that credit conditions tightened more than was probably required.”
“Now, as lenders continue to seek the right balance, we need to remember that it is important that banks are prepared to take credit risk. And it’s important that they have the capacity to manage that risk well. If they can’t do this, then the economy will suffer.”
The bright side for Mr Lowe was that the housing market adjustment was “manageable for the overall economy”.
“It is unlikely to derail our economic expansion,” he said. “It will also have some positive side-effects by making housing more affordable for many people.”
And what of interest rates? Dr Lowe was coy, except to in a roundabout way say that the best course of action right now was inaction.
“We have the flexibility to adjust monetary policy in either direction as required. There are plausible scenarios under which the next move in interest rates is up. There are also plausible scenarios under which it is down.”
“At the moment, the probabilities appear reasonably evenly balanced. Given these various cross currents, the Board’s judgement remains that the most appropriate course is to maintain the cash rate at its current level.”