The shifting power balance in housing

Household debt at near 200 per cent of disposable income puts Australia in the top quartile of advanced economies. While a further increase is possible, most accept it would be imprudent. 

"Aspects of the market that suit investors are likely to become less prevalent.”

Regulators are likely to remain sensitive to any lending growth perceived to be excessively fast or potentially imprudent. 

Interest rates at 1.5 per cent could theoretically fall further. But given they reached 17 per cent in 1989 and averaged 6.6 per cent in the 1990s any further decline is unlikely to be meaningful in the context of the huge fall over the past 30 years.

This doesn’t mean house prices can’t rise but that would depend on even more fundamental drivers of house prices: economic and population growth, and household formation rates.

Background

Over recent decades, though fundamental, these drivers have receded into the background.

In the ten years to 2007 investor lending growth averaged 20 per cent a year and owner-occupier lending grew at 13.5 per cent.

Current population growth of 1.6 per cent, while strong for an advanced economy, won’t be able to drive comparable gains in prices.

Boiled down we should expect house prices to rise more slowly over the next couple of decades than over the last couple - or just go sideways for a time. Underlying this is an expectation the regulatory overlay will continue to emphasise owner-occupiers relative to investors.

Meanwhile the imbalance between household income growth and debt growth will need to be addressed by slower credit growth. Housing credit can no longer grow well ahead of household income.

In fact, if policymakers want to stabilise the household debt to income ratio at 200 per cent (the current rate is 197 per cent), the rate of growth in credit will need to be half the rate of growth in income. 

To put that in perspective, housing credit is still growing at an annual rate of more than 5 per cent while annual income growth has averaged just 1.2 per cent in the past year.

Prevalent

As such, aspects of the market that suit investors are likely to become less prevalent. 

Consider auctions. Australia’s use of the auction is largely an anomaly from an international perspective but it has suited a period of rising house prices where the power balance has been in favour of the seller. But buyers – especially first time buyers – don’t like them. 

On a national basis auctions accounted for 20 per cent of total sales in August (the latest data), compared with 14 per cent in August 2012. The increase is starker in Sydney and Melbourne – where the use of auctions is much more widespread than elsewhere in the country.

Auctions may not work as well in a credit constrained environment.  They typically run on a four-week cycle with-aggressive marketing to try and build a heightened sense of competition and FOMO (fear of missing out).

However in a world of tighter and more onerous credit conditions it will be harder to get full credit approval before the auction given these short timeframes (and there is some anecdotal evidence marketing periods are being extended to help address this).

Note too when a property is bought under auction there is no ‘cooling-off’ period compared with buying via private treaty where there is a period of usually five days to withdraw from the sale with no legal repercussions.

In a world of easier credit availability buyers at auction might be able to go above their self-imposed limit with reasonable confidence the extra finance will be available. Tighter credit suggests fewer buyers will be willing to take this risk.

Further, the prospect a bank’s valuation comes in below the purchase price rises in a rapidly cooling market and that too can be a risk more won’t take. For the vendor there is the risk not all interested parties are in a position to bid on the day.

We can see some signs of this trend: house prices have been falling for over a year now and auctions appear to be losing favour. In Sydney and Melbourne, auction volumes were more than 10 per cent lower in the second quarter of 2018 compared with a year ago.

Total sales are lower but auctions as a portion of total sales have dropped faster to 45 per cent in Sydney and 58 per cent in Melbourne in August. That compares with 61 per cent and 67 per cent respectively in December 2017. We suspect that trend has continued in recent months. 

If auctions are losing favour, then auction clearance rates may become less useful as a price signal. Nationally, auctions are now under a quarter of total sales.

That’s a challenge for those of us forecasting housing prices but another welcome development for buyers, we would think.

Jo Masters is Former Senior Economist & Richard Yetsenga is Chief Economist at ANZ