Australian house prices may be 4pc down from their peak, but they are still up more than 40pc over the decade. (Maximillian Conacher: public domain)
It’s a busy week for the Reserve Bank. There’s the annual Cup Day board meeting and the release of its latest batch of forecasts in the quarterly Statement on Monetary Policy on Friday.
Busy is a relative term. Nothing much will change.
Interest rates will stay on hold at the record low of 1.5 per cent, as they have at every meeting since August 2016.
The key forecasts for GDP growth, inflation and unemployment over the foreseeable horizon will remain largely untouched. The glass will remain half-full at the RBA’s Martin Place HQ.
While a batch of data released last week may not alter the RBA’s view, it was unsettling nonetheless.
That core inflation missed the RBA’s target is almost a given these days. It’s undershot every quarter for almost three years now.
But perhaps the more subtle worry is falling house prices feeding into retail sales and ultimately consumption.
Friday’s retail sales figures were undeniably poor. Growth is now almost negligible, up just 0.2 per cent in the September quarter.
The hardest-hit sectors were in discretionary spending, particularly household goods.
Clearance rates point to a crash: analyst
This weekend’s property auction results were again pretty bleak for the sellers, but good for the few buyers who turned up.
Sydney’s preliminary clearance rate was 44 per cent compared to 60 per cent a year ago. In Melbourne only around 42 per cent of properties sold, compared to 67 per cent a year ago.
In Brisbane fewer than a third of properties up for auction sold.
Louis Christopher, head of property researcher SQM, said results like that translate into price falls of up to 3 per cent a quarter and put the market on a “crash” trajectory.
“There were nearly as many properties withdrawn in Sydney as reported sold,” he said.
“170 withdrawn versus 222 sold. I’ve never seen a ratio that high.”
Falling house prices hitting consumers
Perhaps it is a coincidence, but the lower end of the property market finally started falling around the time retail sales hit the brakes.
While top end property prices started falling a bit over a year ago, the less volatile bottom quartile of the market held out until the end of June.
So far, the impacts of expensive housing keeling over have been barely noticeable in the broader economy.
GDP was strong and consumer spending OK over the second quarter, despite real income per worker falling.
However, price falls in the property market are far broader now.
The bottom end of the market is down around 2 per cent over the year, compared to the almost 10 per cent fall in the top end.
The affordable end of the market becoming more affordable is terrific news for first home buyers, but it makes existing home owners — already worried about stagnant wages and falling savings — more anxious about their dwindling wealth.
In that environment, consumer spending becomes a bigger worry.
“The price of less expensive housing tends to be less volatile, and price falls much rarer — declines in this segment suggest more persistent weakness in the property market,” Morgan Stanley’s Daniel Blake said.
“Additionally, spending of owners of housing in this segment are likely to be more sensitive to prices, given that lower income households tend to hold less savings buffers.
“This suggests we may begin to see signs of wealth effects from housing in the latter half of the year.”
Has the economy already peaked?
September’s weak retail figures may just be the start of that.
The economic bedrock of the first half of the year — household consumption and residential construction — could start to look rather shaky.
“We think household consumption moves to a sub-2 per cent annual pace next year with housing turning into a drag on activity,” RBC’s Su-Lin Ong observed after the dust settled on last week’s house price and retail data.
Ms Ong said Australian economic growth may have peaked for the time being.
Just how persistent and broad the house price fall will be is open to question.
However, the annualised rate — viewed over a three month period, which flattens out some monthly volatility — seems to show the rate of decline slowing in both the top and more affordable ends of the market up to the end of October.
The slight uptick in the three months to November shouldn’t be construed as an effort to call the bottom of the market, but as the graph shows, things can turn around fairly quickly.
Either end of the market is affected by different forces to a degree.
The top-end has been hit by tighter credit and the regulatory squeeze on interest-only loans and investors.
Bottom-end will, to an extent, be squashed by the vast supply flowing through the residential construction pipeline in the next 12 to 18 months.
That said, strong employment growth is likely to continue to put a floor under the price of more affordable end of the market for some time yet.
So has home affordability improved?
Just how grim is the property price slide? It depends on your perspective.
Those looking to get into the market will be cheering falling prices.
Across the national capitals, the CoreLogic Home Value Index is back to where it was in January 2017. So if you bought a property since then, chances are you are underwater and unhappy.
National dwelling values are 3.5 per cent below where they were a year ago at their peak.
While Sydney and Melbourne have experienced sharper falls than the national average, the declines are still modest and fairly insubstantial compared to gains made by those who’ve been in the market for several years.
Perth is a different world of pain. CoreLogic’s reading of the market there is property is worth less than it was a decade ago. Ouch.
“While home owners don’t like to see the value of their assets falling, to put this into perspective, values are still 45 per cent higher over the past decade and 210 per cent higher over the past 20 years,” CoreLogic’s Cameron Kusher said.
|Market||1 years||10 years||20 years|
“Although values in Sydney and Melbourne are seeing accelerating rates of decline, in the context of the run-up in values over recent years, it has not greatly improved affordability,” Mr Kusher said.
If you couldn’t afford to get in a few years ago, you probably can’t afford to now.
“CoreLogic expects values to continue declining over the coming months, however it is unlikely that these falls will make any significant improvement to affordability, especially in the absence of real income growth.”
In other words, most markets would need many more years of price declines to generate the sort of affordability now seen in Perth and Darwin.
Wall St slips again on trade worries
After a pretty torrid October, global markets kicked off a new month feeling a bit more chipper.
Over the week the ASX was up more than 3 per cent. US gains were a bit more modest, but still a handy 2.4 per cent, while the Asian market was the stand-out.
Japan jumped 5 per cent and China rose nearly 4 per cent as the authorities there again intervened to calm the jitters.
However, global politics’ latest game show “Deal Or No Deal”, featuring US and Chinese Presidents Trump and Xi, was a ratings flop on Wall Street.
On Friday, it overshadowed otherwise positive economic news with another strong month of jobs creation and annual wage growth pushing above 3 per cent for the first time in almost a decade.
The dimming chances of an imminent trade deal saw all indices slip, with the NASDAQ faring the worst thanks to Apple tumbling almost 7 per cent on weak earnings guidance.
Not great news for the ASX, but judging by futures trading, not disastrous either.
Markets on Friday’s close:
- ASX SPI 200 futures -0.1pc at 5,811 ASX 200 (Friday’s close) +0.1pc at 5,811
- AUD: 72.0 US cents, 63.2 euro cents, 55.5 British pence, 81.5 Japanese yen, $NZ1.08
- US: Dow Jones -0.4pc at 25,271 S&P500 -0.6pc at 2,723 NASDAQ -1.0pc at 7,094
- Europe: FTSE -0.3pc at 7,094 DAX +0.4pc at 11,519 EuroStoxx50 +0.3pc at 3,214
- Commodities: Brent oil -0.8pc at $US72.59/barrel, Gold flat at $US1232/ounce, Iron ore $US75.40/tonne
There was a bit more action on commodities markets.
Oil was down 7 per cent over the week. Friday’s trade saw it slip almost 1 per cent to be around 15 per cent lower than a month ago.
While the US followed through with threats to impose sanctions on Iran, there were big carve-outs allowing the likes of India, South Korea, Japan and five other nations to keep buying oil from the pariah nation.
Tehran’s reaction seemed to be along the lines of “whatever”.
Iron ore was in a holding pattern after losing ground in recent weeks and copper gained.
RBA rates and forecasts on hold
Locally this week the RBA is the main game, apart from a horse race.
Unlike the Melbourne Cup, the RBA on Tuesday is a one-horse race — No Change will salute again.
You can place a “multi” on the US Federal Reserve to hold as well on Wednesday, but that won’t pay much either.
Of more significance will be the RBA’s forecasts contained in the quarterly Statement on Monetary Policy.
As ANZ’s economics team points out, “Critically, the forecasts in this SoMP will establish the jumping-off point for the forecasts into 2021”.
ANZ’s house view is the RBA will leave its forecasts on inflation and economic growth relatively untouched and nudge down its trajectory for the unemployment rate.
However, while unemployment is improving, ANZ believes the RBA will be more cautious in its outlook on wages.
Given the RBA’s forecasts have rather over-estimated wages growth for years, caution is understandable. Others might just give up guessing.
Not even close. The RBA has maintained overly optimistic forecasts for wages growth for years (Supplied RBA)
Westpac wraps up bank reporting season
Locally there is a fair bit on the corporate calendar.
Westpac drops its full year results on Monday.
Underlying cash profit — excluding on-offs — should be fairly flat at around $8 billion.
Judging by third quarter numbers, margins will be squashed and costs (excluding the already announced ones relating to customer remediation and the royal commission) are likely to be higher.
There are some big AGM’s on as well; CBA and News Corp (Wednesday) and BHP (Thursday) are the pick of the bunch.
|Westpac FY result||FY cash profit of $8b forecast|
|Job ads||Oct: ANZ series. Employment growth still strong|
|RBA rates meeting||Cash rate on hold at 1.5pc|
|AGMs||CBA, Domino’s Pizza, News Corp|
|Construction index||Oct: AiG series. Activity still expanding|
|James Hardie results||Q2 earnings|
|RBA: Monetary Statement||Quarterly statement on monetary policy watch closely for any changes to key forecasts|
|News Corp interim result||Recent results have featured big write-downs on the value of various media businesses|
|REA interim result||Slowing housing market may impact earnings|
|CH: President Xi speech||Keynote address to a trade expo in Shanghai|
|US: Mid-term elections||History shows, irrespective of the outcome, markets rise afterwards|
|US: FOMC rates meeting||No change to 2.25-2.5pc band|
|CH: Trade balance||Oct: A politically sensitive figure. Another big surplus with the US expected|
|NZ: RBNZ rates meeting||No change, holding at 1.75pc|
|CH: Inflation||Oct: CPI around 2.6pc, producer inflation 3.5pc|
|UK GDP||Q3: May edge up to 1.4pc YoY, but still weak|