The last time I reviewed the housing market was in February 2013. We were about five (5) rate cuts into this current cycle of eight (8) and house prices had started growing again. Back in February, the growth in housing finance debt was easily narrowed down to housing investors. What’s different now is that it’s no longer just investors driving the growth in housing finance. During 2013 and especially in the latest quarter to October 2013, owner occupier growth has also accelerated. House prices are now growing at 7.6% P/A and housing finance is growing at over 15% P/A.
The aim of this post is to bring together a range of credit and house price data releases from the last few months to get a view on the Australian housing market. I won’t keep you in suspense – based on housing finance data, there is no reason to think that the trend in prices is anything but up in the short-term. Given the historical lags between peaks in housing finance and house prices, it’s also possible that we’ll see house prices grow for much of 2014 across most states.
What’s behind the current growth in housing finance and house prices?
The red arrow in the chart below represents the start of this series of eight (8) interest rate cuts (Nov 2011). The green arrow represents the last housing finance trough (Mar 2011). So yes, housing finance did start to grow prior to the interest rate cuts, likely on the back of speculation of rate cuts to come.
I don’t have any evidence to suggest that there is a causal relationship between interest rate changes and house prices. But there is a reasonably strong correlation between interest rates and house prices (R=-0.75) over the last 30 months (since the interest rate cuts). This is slightly stronger than the correlation over the last 328 months (R=-0.60).
Since that update, house prices have continued to grow, but for the moment are still below recent peaks in the rate of growth;-
A review of current house prices
There are a number of different sources for house prices and all differ in what they measure. Below is a summary of the three (3) major sources of house price data in Australia.
Australian Bureau of Stats (data as at September 2013)
The ABS measures house prices of established detached dwellings – but not units or apartments, so it’s not a complete picture of all dwelling prices.
There are two ways I’d like to look at these house prices, firstly, by looking at the annual growth in prices of established detached dwellings.
Based on the latest September 2013 data, annual growth highlights that only Sydney and Perth house prices are growing above the National average. But markets such as Melbourne, Darwin and Brisbane (to a lesser extent) are not too far behind.
The picture changes somewhat when you look at the price index at September 2013 compared to the price peak in 2010 and adjusted for CPI. In this case, real house prices at a National level are still below December 2010 peaks by -5.3%.
On a state by state basis, in real terms, only Sydney and Darwin house prices have reached new highs (exceeded the highs from 2010);-
Most other markets are still well below their respective peaks of 2010 in real terms. In nominal terms, it’s a similar picture. Only Sydney, Perth and Darwin have exceeded 2010 highs. This has been a strong enough result to take the nominal National average higher than its 2010 peak as well.
No matter which way you cut the data, Sydney, Perth & Darwin have been the best performing markets in terms of house prices.
As I mentioned, the ABS only measures prices of established detached dwellings (not units), so I’ll also reference two other major providers to help fill in the gaps.
RP Data (year to December 2013)
RP Data (www.rpdata.com) tracks both unit and detached dwelling prices in each market. Note this is the latest data for December 2013.
The data from RP mirrors the story of the ABS – Sydney and Perth are growing faster than the National average (14.5% and 10% respectively, year on year to December 2013, all dwellings). Growth in Melbourne dwelling prices are not far behind (+8.5%). In this case though, Darwin dwelling price growth is lagging behind the market with +3.3% growth over the last year, with Unit price growth declining year on year by 3.8%.
According to RP Data, growth in the prices for Units has been catching up with House prices over the last year – the 5 capital city aggregate +10% for Houses and +8.9% for Units.
The latest month on month growth data is lower in all markets except in Hobart. The lower monthly rates of growth may not be surprising for this time of year i.e. less activity over the Christmas/NY period (the real test is whether there is a sustained decline in housing finance data in the new year). According to RP, all dwellings prices grew by 1.3% (National) for the month of Dec (versus month prior). Despite house prices growing at 14.5% year on year in Sydney, the month on month growth slowed to +0.74% in Dec.
Australian Property Monitors (APM) at September Qtr 2013
The data provided by APM is also broadly in line with ABS & RP data.
According to APM, house prices grew by +7.8% year on year. This reflects growth in all markets, but with Sydney, Perth and Darwin all leading the way (11.7%, 8.6% and 8.1% growth respectively). Even Hobart recorded strong growth of +5.7%. While still below the National average, growth in Hobart is well ahead of Adelaide, Brisbane & Canberra house price growth.
The quarterly data points to slow-down in house price growth across all markets. The most surprising is the slow-down in Perth house price growth – from +8.6% year on year to 0% growth (quarter).
Growth in unit prices was mixed. The year on year growth at September 2013 was strong overall +5.5%. Sydney and Darwin led the way (+10% and +8% respectively). Markets such as Melbourne, Brisbane and Adelaide were weaker – Brisbane recorded -4.6% decline year on year. On a quarterly basis, only Sydney and Darwin recorded growth in unit prices – which was enough to generate a positive 1.2% growth at a National level. All other markets experienced a decline in unit prices.
There is a reasonably consistent story on house prices across all three sources of house price data. To recap;
- Sydney has seen the highest rate of growth of dwelling prices of all markets. In real terms, it is only one of two markets to now exceed its 2010 high in house prices
- Perth house prices continue to grow above the National rate, but this has slowed over a more recent time frame
- Darwin annual house price growth at September (APM & ABS) was +8.1% and +6% respectively, but again, in the RP December data house price growth slows to 3.3%
- Melbourne is a bit of a dark horse – prices are growing just below the National average, but are still high in relative terms across all data providers
The slower growth recorded by RP over December could be a reflection of seasonal slow-down
Housing Finance – what it says about the next moves in house prices
The month of October was a big month for housing finance, with growth accelerating in most segments;
Investment housing finance has been the main driver of growth in housing finance, growing at over 20% in annual terms and accelerating in the most recent qtr to +26%. Growth in investment housing finance represents over 58% of the total dollar growth in all dwellings finance for the year to October 2013, or $17.6b in growth. In contrast, total owner occupier housing finance grew by $12.8b (ex refi’s, annual).
Since the start of this latest round of interest rate cuts, investment housing finance has grown from 41% share of all dwellings finance to 45% share.
Owner occupier activity hasn’t grown as fast, but it’s still growing at a high rate. The only exception is growth in owner occupier housing finance for new homes, which slowed over the recent quarter, but remains at a high level (+14%).
The increase in refinancing of established dwellings over the last quarter is notable. Activity has reached new highs for each month since May 2013. This is quite possibly due, in part, to lenders starting to raise their fixed interest rate mortgages. If borrowers think that rates are going up in the future, they may want to start to lock in lower rates. Alternatively, as house prices have grown, borrowers may be inclined to tap into some of that equity. Some may be restructuring to lower repayments (just to cover all options).
All Dwellings Finance (Total of Investment and Owner Occupier Housing Finance)
Growth in All Dwellings Finance (monthly growth v same month prior year) has reached pre-GFC highs of +20%;-
Both investment and owner occupier housing finance is contributing to that growth – each segment in more detail later.
Importantly, All Dwellings Finance (ex refi’s) in dollar value reached an all-time high in the latest month of October 2013 exceeding the previous peak of June 2007.
Investment Housing Finance
Investment housing finance growth continues to accelerate and it too has reached its pre-GFC peak in growth (+28%);-
In October, the value of investment housing finance reached an all-time high of over $10b in one month – which was an 8% increase over the month prior (which was also a new high). From the chart below, it looks like investment housing finance has gone ‘parabolic’.
Owner Occupier Housing Finance
The growth in owner occupier housing finance hasn’t been as strong as investor housing finance, but annual growth is still very high and approaching pre-GFC levels. Growth for the latest month versus same month last year is +16%.
In dollar value terms, the month of October is only 9% below the all-time high reached in September 2009, which was fuelled by a doubling of First Home Buyer grant.
The largest part of owner occupier housing finance is the purchase of established dwellings, which has been the main contributor to the growth of owner occupier activity (accounts for $8.9b of the $12.8b growth owner occupier finance growth).
Owner occupier finance for new homes and construction both contributed to growth (+$3.8b) but growth in finance for new homes is slowing (red line), while construction finance for owner occupiers has lifted in recent periods (blue line):-
The growth in the volume of owner occupier housing finance commitments was starting to slow during August and September, but has continued to bounce back in October. This chart highlights that whilst growth is on par with pre-GFC growth, the total number of owner occupier housing finance commitments is still well below its peak;-
The slower growth of the last 3 months could be viewed as slightly bearish news. If any metric was going to turn first, it would most likely be volume (as prices rise, more people may become priced out of the market, yet total value growth could ‘mask’ any change in underlying demand) – and we saw this dynamic play out in 2006/07. Volume growth is still high and we’ll have to keep watching this metric to see if/when it changes.
State by State Overview – Investors and Owner Occupiers
On a state by state basis, there are a couple of key markets that are leading the growth in housing finance.
As we saw earlier, investment housing finance accounts for the majority of the dollar value growth over the last year. Most of the growth in investment housing finance is coming from one state – NSW.
The growth in owner occupier financing is a little more evenly spread across the larger states, but WA still accounts for the largest share of that growth.
Owner Occupier activity by state
There are a couple of interesting points about the state by state owner occupier finance data. Note that the slight difference in the National growth rate is due to using ‘original’ not seasonally adjusted data – seasonally adjusted data is not avail on state by state basis.
Across most of the bigger states, there has been a marked acceleration in the growth of the value of owner occupier finance over the October quarter (versus same qtr LY) – in NSW, VIC, QLD, even SA and TAS.
WA has generated the largest annual growth in dollar value (+$4b growth or 30% of the annual growth), yet the state only accounts for 15% of total Owner Occupier housing finance ex refi’s Nationally. But it’s one of three states that saw growth slow somewhat in the last quarter, albeit from/to very high levels. I’ve written about some interesting real estate indicators from key WA mining towns in another post. It appears some steam is possibly coming out of the WA mining markets, so it will be interesting to see how this develops in 2014 and what it means for the broader WA market.
The other notable slow-down in owner occupier housing finance was in NT.
Volume (actual number of commitments) is also growing in line with value growth at a National level, but with a few state differences. That said, over the most recent few months, the growth trend in the number of commitments appears to slow in WA, QLD, SA, NT and ACT. Again, there could be seasonal factors at work (clearance rates slowed at the same time).
Owner Occupiers – First Home Buyer’s (FHB) v Non-FHB’s
Owner occupiers can be broken down into two segments – First Home Buyers (FHB) and non- FHB’s. There are quite a few states where FHB activity has declined over the last year – NSW being the most notable.
In NSW, the growth in non-FHB housing finance was almost completely offset by the decline in FHB activity, resulting in much lower overall growth (2% in NSW versus 6% for the National average). The trend in NSW is striking – since early 2013, the growth in non-FHB commitments appears to accelerate, whilst the number of FHB commitments halved over the last year.
There has been much talk about how FHB’s are increasingly priced out of the market, especially in Sydney. The average loan size for FHB’s in NSW has reached all-time highs over the last 6 months and is currently at its third highest point.
In other markets;
- FHB activity in QLD has almost halved over the last year
- In WA, SA and TAS, FHB activity has grown at 22%, 23% and 17% respectively – likely in response to changes in first home owner grant schemes over the last year.
Here is a snap-shot of the various state-based FHB grant schemes;-
*FHOG – First Home Owners Grant
Some state grants schemes have been more successful than others (based on the growth of FHB commitments). Despite the focus on new home first home buyer incentives, its interesting that growth in housing finance for new homes is slowing down (from the summary chart on housing finance) from +28% to +14% growth. This is being driven by slowing growth in NSW, VIC, QLD, ACT and most notably in WA and NT. In WA, owner occupier finance for new homes has gone from +30% annual growth to -10% decline in the latest quarter. Note from the table above that the incentives for the purchase of new homes in WA (for FHB’s) were just increased in September (as well as in ACT).
Investment housing by state
Lending growth for investment housing has accelerated in the latest quarter across most states, with the exception of WA and ACT.
Whilst the WA figures aren’t significantly different between the annual and quarterly growth rate, it is consistent with a similar slow-down in owner occupier finance growth experienced in that state.
In the ACT, investment housing finance reached an all-time high in June 2013 and has drifted off ever since and is now below the 12mth moving average.
Some other notable points on investment housing finance;
- NSW reached an all-time high in the latest month (October 2013)
- Victoria and NT exceeded its all-time high in the latest month as well (previous was May 2010)
- QLD, SA and TAS are still well off from their all-time highs (and well below the National average), but are trending up nonetheless
Where to next? What the relationship between housing finance and house prices tells us…
There is a strong correlation between house prices and all dwellings finance ex refi’s (R=0.963, a correlation of 1.0 is a perfect positive correlation).
Looking further at the relationship between housing finance and house prices highlights that there is a lag between changes in housing finance and house prices. Using ABS house price data and All Dwellings Finance data (ex refi’s) there is on average a nine (9) month lag between a peak in housing finance and any decline/stall in house price growth. Although the average is 9 months, the range is between 6 and 12 months. This average is based on seven (7) periods where All Dwellings Finance and the ABS house price index declined since 1986.
Using this crude forecasting measure and given that All Dwellings Finance is currently on its highs, it’s possible that we will continue to see house price growth throughout most of 2014. I’ll be looking for a peak in housing finance and at least 3-4 months of sustained financing declines before I consider the possibility of house price declines (at a National average level).
That said, not every state is in the same situation. The markets where housing finance is on its highs:
- NSW – both investor and owner occupier housing finance $ value is on its highs (has reached all-time highs)
- VIC – investor housing finance leads the way and owner occupier housing finance is very close to its highs. The total of both reached an all-time high in October 2013
- QLD – both investor and owner occupier housing finance $ value has reached an intermediate high (but are well off the all-time highs – this point doesn’t matter for relative house price growth)
- TAS – the total of investor and owner occupier housing finance has started to recover (mostly driven by owner occupier housing finance), reaching an intermediate high in October 2013 (last seen in Mar 2010)
- NT – investor housing finance is on its highs and this is helping to drive total housing finance near all-time highs
Until there is any evidence of sustained decline from these intermediate or all-time peaks in housing finance, house prices are likely to grow for most of 2014 in these markets.
It’s less clear in SA and WA. All dwellings finance in both of these markets is off its high, but still elevated. Both markets peaked in May 2013 and are now -4% and -8% respectively below that peak as of October 2013. If housing finance continues to decline from the May 2013 peak in these two markets, then house price growth may continue for (approx.) the next 4 months before it either stalls or starts to decline (depending on the size of the change in finance).
In ACT, housing finance is approx. 15% below its peak reached in May 2013. House prices in this market will likely come under pressure in 2014 as long as this trend continues. The latest quarterly data from the ABS has ACT house prices at -1.2%, although the more recent RP Data has Canberra house prices still growing at 3.3% (annual) as at the end of Dec 2013.