Australian housing market showing signs of cooling off. Are there lessons for NZ?
22 September, 2015
I want to talk about the Australian housing market because the Reserve Bank of Australia (RBA) has released a new research paper that shifts the blame for housing bubble away from interest rates.
Yes, last week the RBA released a research paper entitled "long run trends in housing price growth." This report is interesting because some of the conclusions drawn by the RBA are likely to resonate here.
The RBA looked at three decades of data and concluded that the boom in house prices since the mid 2000s, very similar to the dynamic here, was not due to lower interest rates but in fact it was more likely explained by population growth that was not met by a supply of new dwellings; so simply a shortage of housing.
They point to a persistent shortfall in available houses from 2005 onwards. This shortfall was primarily because a population spike was not met with increased construction activity. In fact, Australian dwelling completions initially slowed down despite higher prices.
It's might be no coincidence that this research is from the RBA — but their conclusion is very different from the widely accepted view that the central bank caused the house price bubble through having ultra-low interest rates.
And now the housing market is cooling off in Sydney.
Yes, we are seeing the first signs of slowing despite current low interest rates; this does support the RBA's research.
One metric we watch closely is auction clearance rates, which measure the proportion of houses that sell under the hammer. Four months ago they were running at 90% in Sydney — very few houses were failing to sell on auction day.
The most recent weekend saw a 71% clearance rate which is the lowest springtime clearance rate in three years.
There is also an extraordinary number of new listings coming to market. This coming weekend will see the first so called "super Saturday" with over 1,000 homes going under the hammer over Sydney. With the increased supply they are seeing price declines in some suburbs.
As well as more existing homes on the market there is an increased supply of new homes with some massive developments coming to market. Sydney building approvals so far this year are running 35% higher than the previous year.
This new construction activity coupled with slowing population growth has lead investment bank Goldman Sachs to predict a glut of homes by 2017.
Could a cooling off happen here?
Using the insight from the RBAs research we should look at trends in population growth and house construction to get a sense of where house prices might go here.
So what's been going on in New Zealand and Australia is that we've been getting more people coming in than we've been building houses even though the rate of construction has increased.
Where we diverge though is those population trends. So Australia's population growth started to slow, on the flipside though, New Zealand's going through a real net migration boom. Migration data released yesterday shows a net 60,290 people moved to New Zealand in the year to August — an all time high. August alone had net inflow of 5,396 people, over twice the level of August two years ago; so quite a different dynamic there.
So unfortunately unless we build a whole lot of new houses the pressure keeps on New Zealand house prices. Probably not great news for those of you out there looking to buy your first home and it looks like the RBAs research is right, higher house prices could be with us for a bit longer.