Aussies Believe Home Prices Will Grow by Just 1% This Year

Growth in Real Estate with Magnifying Glass

A National Australia Bank residential property survey shows market sentiment dipped in the three months to December. Everyday Aussies now think home prices will grow by only 1% in 2016, down on long term averages.

The biggest falls in sentiment took place across New South Wales and Queensland. The only state which saw sentiment rise above its long term average was Victoria. That’s not a great surprise, considering the positive market news coming out of Melbourne recently. We’ve seen dwelling prices in Melbourne outpace the rest of the nation over the last couple of months.

It’s worth pointing out though that there’s a distinction here between sentiment and actual home prices. Sentiment refers to the general outlook matched up against long term averages. Yet the expectations for future home prices paint a different, and somewhat more positive, picture.

Queensland, for one, is expected to post the largest gains this year, with price growth of 1.9%. 2017 is shaping up as an even better year, with projected growth of 2.7%. Remember, that’s despite sentiment falling in Queensland. Those figures compare well even to Victoria. Prices in Victoria are expected to increase by just 0.7% and 1% in comparison.

Elsewhere, NSW is projected to see no price growth. Whereas both SA and WA are expected to undergo moderate price declines.

Building approvals add to pressure on home prices

NAB have concluded that weaker fundamentals have already weighed on home prices. The bank believes the biggest price gains are behind us. That’s not to say there’ll be no growth, just less of it.

NAB identified slowing demand from local investors as a key reason for this slowdown. It also points the finger at weaker demand from foreign buyers as another factor. The ABC reports:

NAB said the percentage of established properties being sold to local investors fell from a survey high of 25.2% in the third quarter of 2014 to a record low of 19.2% last quarter.

The decline corresponds with tighter rules from the Australian Prudential Regulation Authority that have limited the growth in lending to property investors.

The other big slowdown came from foreign buyers, who accounted for 14.4% of all new property sales in the fourth quarter, down from 15.7% the previous quarter, and 8.6% of established property sales.’

While true, NAB overlooked one of the most important factors dragging on the market: building approvals.

The growth in approvals has been surprising, if not unexpected. Building approvals have been up and down for much of the past 12 months. One month they rise by 10%, the next they fall by the same amount. It’s very volatile, and it’s hard to pin down any trend in approvals.

In December, approvals spiked again, underpinning the strength and resilience of the housing market. The Financial Times reports:

The death of the Australian housing market seems to have been exaggerated, as building approvals growth in December surprise to the upside. Approvals to build new homes rose 9.2% month-on-month in December, recovering from a revised 12.4% tumbled (previously -12.7%) in November, which was the steepest drop in almost three and a half years. The rate was more than double the 4.2% expected by economists.

That saw the annual rate post a decline of 2.5%, an improvement on the revised -7.6% (previously 8.4%) in the 12 months to November. Economists forecast a 7.2% fall.

Approvals can be a little bit volatile. In 2015, approvals posted month on month declines in five months, while it has only been November and December that approvals declined on a year-on-year basis.

Therein lies concerns the housing market was due to slow. However today’s data suggest that slowdown didn’t happen quite as quickly as expected in the final month of the year.

Of course, what building approvals point to, or suggest, isn’t always clear cut. There are grey areas involved here as well.

One way to look at the figures is to conclude that demand for housing remains strong. That could suggest the housing market is in a good place. Equally, you could say that higher approvals may lead to an oversupply of homes in the market. One that would have a negative effect on home prices.

We could then spin this around again, and say that cheaper homes benefit households. After all, there’d be more people that would find the market slightly more affordable, right?

On the other hand, we could also make the claim that falling house prices are bad for the economy. They make homeowners feel poorer, and that can lead to weaker household spending. We’re making a few leaps here, but that could lay the groundwork for a housing led recession. All that might be a stretch, but you get the point. These figures can be spun in many different ways. They can be used to portray the property market, and the economy, in a positive light. But you can just easily make a case the other way around too.

Either way, what’s beyond any doubt is that higher building approvals will put more pressure on house prices. What you think about that probably depends on whether you already own a home.

Mat Spasic,

Junior Analyst, The Daily Reckoning

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