Aus house prices lift. Déjà vu again?

Sydney’s auction clearance rate and prices suggest it can sometimes take a few months for house prices to catch up with the move in the auction clearance rate. This was the case in the last big upturn in 2016.

So ANZ Research doesn’t necessarily take the lag in house price growth versus auction clearance rate as evidence there won’t be a dramatic acceleration in prices over coming months.

Yet ANZ Research are expecting this cycle to play out differently than in the past. Specifically, they expect house price growth of around 3-5 per cent in 2020 - even with a further Reserve Bank of Australia (RBA) rate cut factored in - which is well below the level implied by the current clearance rate.

ANZ Research’s ‘this time is different’ view stems from the expectation conditions around credit supply will not support a rapid acceleration in house prices.

While the Australian Prudential Regulator Authority’s (APRA) recent lowering of the interest rate floor eases credit constraints a bit, ongoing changes to the treatment of expenses and the implementation of full ‘comprehensive credit reporting’ from September this year are material offsets to this easing.

ANZ Research thinks the lift in prices so far reflects something of a ‘pop’, as supressed demand hits the market following lower interest rates and more certainty around tax. As the pop subsides and more supply comes onto the market, the economists think price growth will ease somewhat.

But there is considerable uncertainty in how the cycle will evolve. Interest rates have never been this low. This could encourage those with borrowing capacity to look at residential property as an alternative to other investments.

At one end of the risk spectrum, equity markets look fragile - but bank deposit returns are almost negligible. And housing retains significant tax advantages.

A sharp lift in house prices will challenge the RBA and banking regulators. While it may delay a further rate cut, ANZ Research doesn’t think it will rule it out.

ANZ Research thinks regulators will react if a rapid jump in house prices occurs and some combination of lower rates and tighter macro-prudential measures will be implemented.

David Plank is Head of Australian Economics at ANZ