Is the housing market losing steam? A SmartCompany Q&A

While commentators have spent much of this year worried about the possibility Australia has a housing bubble, data released yesterday by the Australian Bureau of Statistics suggests these fears are starting to subside – indeed, many are questioning whether the housing market is now running out of steam.

According to the ABS, home loans for the construction of new houses fell for the 10th straight month in August. CommSec’s chief economist Craig James says it is the longest losing streak since 1975, and leave construction loans near decade lows.

Add to this recent weakness in house prices, a drop in loans to investors and a weakness in new home starts, and a very different picture of the housing market emerges.

But has the housing market really turned? And if so, is that really a bad thing?

Time for a SmartCompany Q&A.

Talk me through yesterday’s housing finance data.

The total value of home loan approvals fell 3% in August, after being fairly stable for the previous six months. That suggests the threat of rising interests rates that the RBA has been trying to build (in a sort of pre-emptive strike) is having an impact, with purchasers starting to re-do their home loan sums and reconsider how much they can afford to borrow and spend.

However, the devil is in the detail to a certain extend. The value of home loans for owner-occupiers (that is, people who plan to live in their homes) fell 0.7% during the month, while the value of home loans for investors dropped sharply, down by 3.9% in the month.

First home buyers also continue to back away from the market; they made up 15.5% of all loans in August, down from 15.9% in July.

As Craig James says: “Whichever way you look at it, the latest housing finance data clearly highlights just how soft conditions are in the housing sector. Housing finance is only creeping up from 9-year lows and in annual terms commitments are down almost 23% on a year ago.”

Hmm, the heat really has come out, hasn’t it?

Particularly when you look at loans for the construction of new homes. Those loans fell another 1% during the month, and are now sharply down over the last 12 months. In Queensland and South Australia, the number of new loans has fallen by over 30% in the last 12 months, while loans in NSW, Northern Territory, Western Australia and Tasmania are down by about 20%. Victoria has performed relatively well.

While the weakness in investor and owner-occupier loans does underline a softer market, the falls in loans for construction will of course have an impact on the wider economy – it’s less work for builders, tradespeople and everyone else involved in the building of a new home.

And it’s not great for those worried about a housing shortage, is it?

No. The sort of accepted industry standard is that Australia is building 25,000 fewer homes than it needs every year. Given this data, we are unlikely to catch up soon.

So what’s taking the heat out of the market?

There seems to be a few factors at play, but the short answer is: Sentiment.

For starters, home buyers have clearly taken heed of predictions rates will rise in the next 12 months; former RBA staffer and new HSBC Australia chief economist is tipping rates will increase by 125 basis points by the end of 2011, which would take the official cash rate to 5.75% and mortgage rates up towards 9%.

While that would really only take rates back to pre-GFC levels, clearly many buyers are re-assessing their position.

What about softer prices? Are they having an effect?

Clearly the recent easing in prices is having an effect on investors. With prices falling 1.2% in the last three months, clearly investors do not need to be in a rush to get into the market, and that’s probably why we are seeing them pull back.

However, that is not a bad thing. Fears of a bubble are really based on investors continuing to push up house prices, so the RBA will be pleased to see a little heat out of the investor side of things.

Given what seems to be softer conditions, are we likely to see prices fall further?

Certainly the market is likely to track sideways. CommSec is predicting growth of 5-8% this year, while RP Data is tipping growth will be around 5% this year, and track at similar levels next year too.

However, the outlook really depends on rates. If they jump, we are likely to see more downwards pressure on prices.

Should I be worried?

Not really. Remember, house prices have run very hard in the last few years – annual growth was running at above 20% in some cities earlier this year. The market had to cool and that is what we are seeing.