Buying confidence started to return to the Australian housing market about two months ago. Rising housing auction clearance rates provided the first sign of improvement and about a month ago house prices stopped falling and appear to be starting to rise again. The revival in home buying activity is being supported by several factors – lower home mortgage interest rates on the back of the two RBA rate cuts; capacity to borrow more after the lowering of the APRA loan affordability interest rates; and imminent tax cuts. These factors together with the fall in house prices since mid-2017 have also made housing more affordable for a much bigger group of potential home buyers, notably first-time home buyers.
It is now safe to say that the current lift in home buying activity and beginning of a lift in house prices is likely to gather momentum and will last well into next year and probably longer.
While home buying activity is improving, new home building activity is still depressed. The latest May home building approvals was up 0.7% m-o-m but was down 19.6% compared with May 2018. The latest quarterly reading of home building work done was down 2.2% q-o-q in real terms and down 3.0% compared with Q1 2018. The Q2 home building work done numbers will be released in late August and will probably show that the downturn in home building work done is down at least as much again on a quarterly and annual basis as it was in Q1.
It will take time for the revival in home buying activity to reduce the excess supply of new homes that resulted from the 2014-2017 housing boom in Sydney and Melbourne. By this time next year, we see new housing construction starting to improve.
Since mid-2017 housing activity generally has been mostly exerting a negative influence on Australia’s GDP growth rate. There has been the direct influence from housing – less spending on housing transfers (legal and estate agent fees associated with buying homes) and less spending on building homes. There has also been a significant indirect influence – less retail spending on goods to fit out new homes and lower house prices reducing household wealth in turn dampening growth in household spending.
Between now and mid-winter 2020 housing activity is likely to exert a mixed tending increasingly net positive influence over time on GDP growth. In the immediate-term spending on housing transfer costs is likely to rise and make consistently positive contribution to GDP. Housing construction spending as noted above will continue to make a negative contribution to GDP growth probably through to mid-2020 before turning positive.
In terms of the indirect effects from increasing home sales whitegoods retailers should experience a lift in sales through the second half of this year. The fact that the lift in home buying activity is being driven by first-time homebuyers implies additional impetus to home fit-out related retail sales.
The end of falling house prices and a return to rising house prices – even if only modestly rising house prices – adds to the beginnings of rising household wealth. Household wealth stopped falling and started rising in Q1 2019 assisted by a sharp rise in the value of financial assets more than offsetting the impact of falling house prices. In Q2 2019 household wealth almost certainly rose again and by more than in Q1 given another big quarterly rise in the value of financial assets and a smaller decline in house prices than occurred in Q1. House prices turning positive in Q3 will add more upward momentum to rising household wealth and at a time when household disposable income growth is receiving a boost from tax cuts.
The indirect impact from rising house prices working through rising household wealth in Q3 to lift retail spending is likely to be strongly reinforced by the boost from tax cuts to household disposable income growth.
The return of buying confidence to the housing market presents a mixed impact on GDP growth through the remainder of 2019 but the likelihood is high that the impact will be consistently positive in 2020. If the housing recovery progresses as indicated above, real GDP growth is likely to be noticeably stronger in 2020 than in 2019 led higher by stronger household spending. Stronger GDP growth is likely to promote slow reduction in the unemployment rate curtailing the need for the RBA to cut the cash rate any further but not pushing unemployment down enough to worry the RBA about an untoward lift in inflation until late 2020 at earliest.
In short, the housing led recovery in GDP growth in 2020 looks like coinciding with a record low 1.00% RBA cash rate. If that combination starts to re-inflate the house price bubble and/or promotes the prospect of inflation lifting above 2.5%, 2021 could be the year when the RBA starts to consider less growth accommodating monetary policy.