Aus housing: on the rebound

However, the recent turnaround in housing price growth has been concentrated in Sydney and Melbourne. Auction clearance rates in Sydney and Melbourne bottomed in December 2018 and have been rising since.

In May, auction clearance rates rose sharply and led to housing price growth from June onwards – both Sydney and Melbourne have seen around 3 per cent price growth in the last few months. ANZ Research expects annual price growth in Sydney and Melbourne to peak in mid- 2020 in the low double digits.

In Brisbane and Adelaide, prices look to be stabilising after a period of modest weakness (-3 per cent and -1 per cent from the respective peaks). Perth prices are falling, bringing the cumulative decline to 21 per cent since the top in 2014. Hobart prices now look to be stabilising after a stellar run since early 2016 where prices have risen a cumulative 34 per cent.

The turnaround in the housing market was driven by the combination of lower rates and easier access to credit together with increased certainty around housing taxation. Even though there are more rules around mortgages than there were a few years ago, it’s easier to get a mortgage approved now than it was just a few months ago.

That change in the barrier to mortgages has amplified the effects of lower interest rates (which make mortgages cheaper to service) and led to sharp increases in new housing finance commitments, by both investors and owner occupiers.

ANZ Research had thought the easing of the mortgage serviceability floor would be at least partly offset by other tightening measures such as the updated Household Expenditure Measure (HEM) and the introduction of comprehensive credit reporting. But that has not been the case.

ANZ Research does, though, see credit conditions remaining tighter than they were pre-Royal Commission. And this is likely to constrain the eventual pickup in prices.

Meanwhile, declines in house prices over the past few years have improved a range of affordability measures. The recent sharp turnaround in prices though will ultimately reduce affordability - in Sydney and Melbourne in particular. Average loan sizes for first home buyers are higher than ever.

The national household debt-to-income ratio is also still very high, at almost double the level of household income. While there is little sign of a pick-up in credit growth as yet, the recent lift in housing finance and likely further house price gains could eventually feed into higher household debt.

High household debt leaves householders vulnerable. Mortgages are generally affordable now because interest rates are low (Australia’s rate of mortgage arrears is low compared to other countries) but a negative shock driving unemployment higher would be amplified by the impact of high debt.

Felicity Emmett is Senior Economist and Adelaide Timbrell is Economist at ANZ