Australia’s housing downturn between 2017 and early 2019 was most pronounced in Australia’s two biggest cities Melbourne and Sydney and resulted in median house prices falling more than 10% from their cycle peaks in both cities with falls of more than 20% in some suburbs. During the same period home building approvals and home building activity fell sharply and weighed directly on economic growth and indirectly by adding to factors promoting weak growth in household consumption spending.
Since mid-2019 the housing activity tide has started to turn. By early 2019 sharply falling house prices had caused home sellers to become very cautious. Listings in Melbourne and Sydney were unusually low. It took only a flicker of interest among home buyers for demand in the Sydney and Melbourne housing markets to outstrip limited supply. RBA interest rate cuts mid-2019 combined with some easing of housing credit restrictions by lenders pushed up home buying interest while new home listings remained low.
Housing demand in Sydney and Melbourne grew much faster than the lift in listings through the second half of 2019 causing the most rapid rise in house prices in 30 years. If Sydney house prices continue to rise at their recent fast pace, they are expected to match their previous all-time peak by Q2 this year.
The fast rise in house prices has caused some analysts to caution that the thin market provides most of the reason for the rise and there are risks the market could stall. Late in 2019 there was some hint in housing industry data that the month-to-month increases in house prices was flattening out and that marked acceleration in new listings early this year might flatten the house price recovery completely. The early indications from real estate agents for January, however, are that home buyers are returning after the holiday season with renewed vigour. It may take a few more weeks to determine whether this is the case, but there is some evidence in other housing indicators that the housing recovery may be broadening, not narrowing as feared by some.
The lifeblood of housing demand is housing finance. The latest housing finance commitment numbers for November 2019 showed the value of new housing commitments for owner-occupiers up 1.6% m-o-m and 10.0% y-o-y. Owner-occupier housing finance commitments have risen in each of the past 6 months after falling in four of the six months previously to May 2019.
Investor home loan commitments have not recovered as well as owner-occupier loans still weighed by the tightening in lending requirements imposed in recent years although some of the restrictions are starting to ease. Nevertheless, the value of investor housing finance commitments rose 2.2% m-o-m in November and has risen in five of the last six months. In annual terms in November the value of investor home loans was down 3.2% y-o-y weighed by the falls each month in the six months to May 2019.
As those monthly falls (several close to 4% m-o-m) fall from the base of the annual calculation over the next few months it is likely that the annual change in the value of investor housing loan commitments will rise sharply. The base calculation is also likely to lift annual growth in the value of owner-occupier housing loan commitments from 10% y-o-y currently to well above 15% over the next few months.
Much stronger growth in housing finance commitments over the past six months points to strong home buying activity over the next few months at least. It also seems that home builders after cutting back activity through 2018 and much of 2019 are starting to expand again. The sharp decline in home building approvals running worse than 30% y-o-y falls at times in 2018 decelerated and started to base out in 2019. In November 2019 home building approvals lifted 11.8% m-o-m and were down only 3.8% y-o-y. Approvals for single private homes were actually up 5.5% y-o-y in November.
It will take time for improving home building approvals to feed through to dwelling commencements and rising work done in housing construction. The latest information on housing commencements is for Q3 2019 and showed falls of 11.7% q-o-q, 27.2% y-o-y. The value of work done in the home building sector was better, down only 0.5% q-o-q. Commencements and work done are always the last numbers to improve often lagging by more than a year the first signs of improvement in house prices.
It is likely that when Q4 2019 housing commencements and work done numbers are released in late February that they will look a lot less bleak than Q3. Providing home building approvals continue to lift it is reasonable to expect that housing commencements and work done will turn positive around Q2 2020. By the second half of 2020 housing activity could be positively contributing directly to Australian economic growth. There is a fair chance that home buying activity and its upward pressure on house prices is already positively contributing indirectly via better household consumption spending to growth.
Most housing indicators are looking stronger late-2019 and that strength looks set to continue early in 2020 and broaden to home building activity later in the year. Housing is a key leading indicator of Australian economic growth and at this stage housing is saying prepare for upside growth surprises in 2020.