The latest figures from the RP Data/Rismark house price index released yesterday will allow the Reserve Bank, economists and property-market watchers to breathe a sigh of relief – just when concerns about a housing bubble were mounting, the market has started to cool.
Nationally, house prices increased just 0.2% in April, well down from the 1%-a-month growth rate we saw earlier in the year and prices actually fell in Brisbane, Perth and Darwin.
But is this a sign that the market has peaked and is now heading on a downward path? Or is this just the breather that property prices needed after rising by as much as 20% in the last year?
Time to take a look at the property market in a special SmartCompany Q&A.
The housing market seems to have turned very quickly. It doesn’t seem that long ago that we were talking about a market that was starting to look out of control.
The wheel has turned fast. It was on March 29 that RBA Governor Glenn Stevens took the unusual step of appearing on the breakfast television show Sunrise to warn about the risks of borrowing too much to buy property, telling viewers “it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged up into property”.
Fast forward just two months, and the housing market has cooled nicely. National prices rose just 0.2% in April, compared to growth of 1.3% in March. While a longer-term view of prices shows they are still running quite strongly – national house prices are up 4.6% since the start of the year and 11.9% over the last 12 months – the cooling seen in the last few months is just what the Governor ordered.
So what’s taken the heat out of the market?
A few things, starting with three consecutive interest rate rises and the possibility that rates will keep moving upwards over the rest of the year.
While rates remain at historically low levels, these jumps are clearly enough to make any buyer consider the amount of debt they are about to take on to buy a property. It’s also worth noting that in Westpac’s consumer sentiment index, the measurement of consumers’ willingness to buy a house or apartment dropped sharply in May, which is a good sign of a bit of nervousness.
A second factor is the flood of new properties coming onto the market. While real estate agents were bleating about a lack of stock in early 2010, it seems a large number of sellers with dollar signs in their eyes have tried to cash in, leading to a jump in the number of properties up for auction.
Thirdly, all the talk about house prices getting out of control – from the media, property experts and Glenn Stevens – has probably helped calm the market. As property analysts Chris Joye said yesterday, “the RBA will no doubt also chalk this one up to a victory for their recent ‘jawboning’.”
Where does it look like prices are heading in the short-term?
While the latest price figures only cover April, it would appear that conditions slowed even more noticeably in May and are likely to slow into June, with reports suggesting a record number of homes up for auction in Melbourne on the Queen’s Birthday weekend of June 12-14. Further to this, home lending figures suggest vendors are taking a much more cautious stance – something that looks unlikely to change in the next few months at least.
All this points to house prices remaining flat or even falling slightly over the next few months as the cooling continues.
Okay, I can take a bit of cooling. But what about the longer-term outlook?
As always, that’s the $64 million question. Clearly, the 20% rises we saw in some markets last year won’t be repeated, and that’s probably a good thing too. As CommSec’s chief economist Craig James argues, the “perfect storm of positive influences for the housing market has now ended. Interest rates are rising, the government has withdrawn some special grants and the supply of new homes is rising. And more importantly, as the Reserve Bank has been at pains to point out, housing finance has fallen to nine-year lows.”
CommSec expects the market to “consolidate” over the next few months, but will still manage to record price growth of 5-8% over 2010.
Rismark’s Chris Joye is a little less bullish, arguing house prices will track income growth, which is expected to be below 5% in this year.
But ICAP economist Adam Carr is a bit more optimistic. He says what has given buyers pause isn’t the level to which interest rates have risen, but rather the pace with which they’ve risen. Once rates stabilise, he expects house lending to rise and prices to follow suit.
The caveat here might be interest rates. If they were to jump sharply as the RBA tries to combat inflation, that is likely to weigh quite heavily on the market.
Well, at least all that bubble talk will fade for the moment.
That’s right, and we should point out that this is another sign of Australia’s charmed economic run. Every time we even look like facing an issue (like a housing bubble) conditions seem to change and the concerns subside. We really have had a great run.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
