Improving housing activity usually plays a key role in phases of economic recovery. Rising spending on housing tends to promote stronger retail sales – one of the so-called multiplier effects. Rising spending on housing also tends to boost house prices lifting household wealth. Housing activity has been improving in the US almost continuously since mid-2010, the main reason why Laminar has and continues to be optimistic about US economic growth prospects. In Australia, housing activity has been more erratic improving in some parts of the country while deteriorating in other parts. Housing activity in the biggest city, Sydney, was very weak in the wake of the global financial crisis and has only started to show signs of starting to revive since mid-2012, but those signs have strengthened considerably in the early months of 2013, providing the main reason why we are optimistic about Australian growth prospects in 2013, notwithstanding the negative impact on growth from the deferral of several big resource investment projects.
A number of monthly housing reports were released in the US last week and are also due for release this week. The housing reports released last week were mixed. On the strong side, housing starts rose in March by a greater than expected 7.0% and after 7.3% increase in February. Housing starts topped 1 million on an annualized basis in March for the first time since March 2008. Weekly data on mortgage applications from the Mortgage Bankers’ Association have also turned stronger of late with the composite index up 4.8% for the latest weekly reading after a 4.5% increase the week before. On the soft side, however, the April National Association of Homebuilders’ index fell unexpectedly to 42 from 44 hinting at a pause in the home building recovery.
This week US March existing and new home sales are due and are both expected to register small increases on what have been quite elevated levels in January and February. Importantly, US house prices continue to improve too. The February Federal Housing Finance Agency price index is out this week and is expected to rise around 0.7% m-o-m (market consensus forecast) building on gains of 0.6% in January and 0.5% in December.
Mostly strong housing activity readings in the January to March period are likely to contribute to a much stronger US Q1 GDP report, out this Friday. The consensus forecast is that annualized growth in US GDP will jump from 0.4% in Q4 2012 to 3.1% in Q1 2013, which if it plays out will be the strongest quarterly US GDP reading since mid-2006.
The Australian housing recovery still has a way to go before it starts making a major contribution to growth. February housing finance commitments, released last week, lifted by 2.0% m-o-m and the February home building approvals report, released earlier in April rose by 3.1% m-o-m. More evidence will be needed to confirm the beginnings of a stronger turn in housing activity, but the more current weekend home auction clearance data continues to improve (it was over 75% in Sydney at the weekend) and on high volume of sales (up in Sydney by 50% on the same time last year).
On the basis of strong current and prospective home sales we expect a significant increase in housing finance commitments in both March and April. Strongly rising housing finance commitments will in turn promote much stronger increases in monthly private sector credit readings, probably commencing with the May reading. We also expect home building approvals to trend higher through the remainder of 2013, although month-to-month readings could still be quite volatile. Given our outlook for strengthening housing activity we doubt whether the RBA will lower the cash rate any further even if the Q1 CPI report out this week shows benign mid-2% headline and underlying annual inflation, as we expect.