Aus housing: confidence continues to grow

Signs of recovery in the residential property market have been emerging for some months now, with sentiment turning around convincingly in May. Since then, auction clearance rates have picked up sharply, prices have been rising strongly in Sydney and Melbourne for two months and housing finance is starting to pick up.

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The results of the latest ANZ-Property Council of Australia survey show the strong improvement in sentiment has extended into the current quarter.

"Prices will moderate in coming months as more supply comes on stream and credit policies remain relatively constrained.”

Interest rate cuts (both actual and anticipated) and regulatory easing have been the key drivers of this turnaround.

Prices are clearly benefitting from the combination of pent-up demand and low levels of stock, but ANZ Research continues to think the current period of strong monthly price gains will be relatively short lived, and prices will moderate in coming months as more supply comes on stream and credit policies remain relatively constrained.

The turnaround follows the Australia Prudential Regulation Authority’s (APRA) announcement in early May which flagged the easing of the interest rate floor used in serviceability assessments, as well as Reserve Bank of Australia (RBA) rate cuts - both actual and anticipated.

The extent of the recovery in the finance availability index surprised ANZ Research, given ongoing constraints on lending related to responsible lending requirements, but encouragingly points to a rebound in building approvals over the coming quarters.

Alongside expectations of easier access to finance, many survey respondents continue to expect interest rates to go lower. A net 50 per cent of respondents across the country expect rates to be lowered over the next 12 months.

This is consistent with ANZ Research’s view and market expectations. The RBA has cut again in October, and ANZ Research and the market expect further cuts over the coming months.

House price expectations continued to improve in the December quarter and are now back in positive territory for the first time in 18 months.

New South Wales and Victoria, where capital city prices have had the strongest rebound, have seen a solid improvement in price expectations, while the bounce in Queensland and South Australia has also been strong. In Western Australia, price expectations are also now in positive territory.

Of the respondents that operate in the residential sectors of New South Wales and Victoria, a net 29 per cent and 37 per cent, respectively, expect housing prices to rise in the next year (compared with a net 24 per cent and 17 per cent expecting declines in the previous survey).

For the country as a whole, 33 per cent of survey respondents expect housing prices to rise in the coming year — the strongest result since September 2015.

The lift in the outlook for residential prices is consistent with the improvement across a number of housing market indicators. Auction clearance rates have been picking up since the beginning of the year; home prices rose strongly in Sydney and Melbourne in both August and September; housing finance is also turning higher now.

The turnaround in sentiment and subsequent pick-up in house prices has been sharper than ANZ Research expected.

ANZ Research’s view for some time has been that APRA’s relaxation of the interest rate floor would provide a modest easing, but it needs to be viewed in the context of a number of other more permanent tightening measures implemented over recent years.

An element of pent-up demand looks to be driving the recent strength in the housing market, and ANZ Research expects it to moderate towards the end of the year.

Felicity Emmett is a Senior Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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