Aus housing: confident outlook

Just as tighter credit was the main driver of the weakness in housing through 2018 and the first half of 2019, easier access to credit has been a key catalyst for the recovery in housing. Importantly, the ongoing recovery in debt finance availability points to a welcome turnaround in housing approvals in the first half of 2020.

The credit taps were turned back on in mid-2019, when the Australia Prudential Regulation Authority (APRA) announced an easing of the interest rate floor used in mortgage serviceability assessments.

Alongside expectations of easier access to finance, many survey respondents continue to expect interest rates to go lower. A net 42 per cent of respondents across the country expect rates to be lowered again over the next 12 months, consistent with both ANZ Research’s view and market expectations.

House price expectations continued to improve in the March survey and the index is now close to its 2014 high.

The rebound in price expectations has been sharpest in New South Wales and Victoria where capital city prices have had the strongest recovery. But house price expectations are also high in Queensland, South Australia and the ACT. In Western Australia, price expectations are in positive territory but only just.

Of respondents operating in the residential sectors of New South Wales and Victoria, a net 59 per cent and 57 per cent, respectively, expect housing prices to rise in the next year. Across the country, 52 per cent of respondents expect housing prices to rise in 2020 – the strongest result since June 2014.

The extent of the house price rebound has been surprising, particularly given ANZ Research’s view that access to credit is likely to remain relatively constrained because of the number of permanent tightening measures imposed over recent years.

But the combination of pent-up demand and low volumes of properties for sale has added impetus to the price upswing. As the number of listings continues to recover in the first half of 2020, ANZ Research expects the pace of gains to moderate.

Alongside the overall bounce in sentiment, the construction outlook continues to improve. Nationwide, a net 24 per cent of respondents in the residential sector expect construction activity to rise in the next 12 months (up from 6 per cent in the previous quarter). The outlook is positive across all the states and territories, except South Australia which turned negative in the latest survey. In contrast, the outlook for construction in New South Wales turned positive for the first time in nearly two years.

The further improvement in the construction outlook is particularly encouraging. The latest data from the ABS show housing construction continued to fall solidly in Q3 and building approvals remain low. There are, however, signs of improvement in other leading indicators of construction.

Housing finance for the construction or purchase of a new home continues to recover and lending to developers is also picking up. While building approvals look set to rebound in coming months, the fall to date suggests construction activity will continue to decline through the first half of 2020, before picking up in later in the year. The time-lags associated with building apartments suggest housing supply will move into deficit over 2020 and 2021, putting downward pressure on vacancies and upward pressure on prices.

Felicity Emmett is a Senior Economist at ANZ