The Australian Housing Sector - March 2014

The Australian Housing Sector

We all waited for consumer sentiment to improve last year as housing markets should have been performing well in early 2013, but that didn't eventuate. Low Interest Rates historically create property growth through increased affordability and demand; the market showed some activity as gradually sentiment improved and property markets started to show strong growth moving into the last quarter of 2013.

However, RESIDEX recent data indicates that Sydney, the lead indicator market, is starting to look soft as though it has already peaked (see Graph 1).The current employment situation will be impacting on sentiment with the degree of concern around job security being very high, especially in the Mining and Manufacturing Sectors.

RESIDEX also pointed out that the Westpac-Melbourne Institute Index of Unemployment Expectations rose by 5.5% to be 13.6% above its November level. At 164.4, the Index is at an extreme high, only eclipsed by readings during 2008-09 and the recessions in the early 1990s and early 1980s. Higher readings indicate more consumers expect unemployment to rise in the year ahead. The surge in the Index reflects a severe loss of confidence around job security that can be expected to impact upon consumers' financial decisions.

The Westpac Melbourne Institute Index of Consumer Sentiment declined by 0.7% in March from 100.2 in February to 99.5 in March, indicating that consumers are again becoming cautious. Westpac Senior Economist, Matthew Hassan stated that, 「The Index has now fallen 10.9% from its November peak of 110.3 and is at its lowest level since May last year」.

So, what does this all mean for 2014 for our property markets? Historically, Sydney has been the lead indicator for other markets around Australia. Graph 1 presents Sydney's growth pattern over the short term.

Graph 1

SOURCE: RESIDEX

There are a number of interesting points evident in the graph:

‧        The market seems to have peaked and is now presenting as if it is going to revert to a period of much lower growth.

‧        The data indicates that the high points in growth are reducing with each growth period.

RESIDEX believes both points correct. Graph 2 presents Sydney's growth pattern since 1980. The downward growth trend over the longer term is clearly evident.

Graph 2

SOURCE: RESIDEX

The reason for this pattern is growth in any asset value will at some point reach a level that is unaffordable for the masses, particularly where there is some type of limit on supply. When this happens competition for the asset diminishes, and hence the extra amount that one party is prepared to pay to secure the asset above another also decreases.

The silver lining in this situation is that while house price growth in Sydney will probably slow for the remainder of the year, other states and capital cities still have some growth to achieve before reaching their peak value for this growth cycle.

We had held concerns about the Tasmanian market but it seems that Tasmania is about to be open for business again with a pro-business Liberal Government about to be swept to power.

In South Australia, the position is less clear. Should the Liberal Government come to power then we will have a Liberal Government in all states and it will be very interesting to see what actions the Federal Government takes to improve productivity.

Table 1: The February results for Australia's major markets.

SOURCE: RESIDEX