House prices: short-term fall, long-term rise

By Besa Deda
Chief economist, St.George Bank

The Australian economy has so far avoided catching the 'recession' bug so many other major economies have caught.

Economic conditions in Australia have weakened but not yet enough to satisfy the technical definition of a recession. One of the reasons the Aussie economy has experienced a downturn that has been softer than many other developed economies is the resilience of its residential housing market.

A recovery is well underway in residential house lending. Life was breathed into residential lending by significant cuts to interest rates and the government’s first-home buyers’ boost.

Both the value and number of loans to owner-occupiers has risen for eight straight months. The annual rates of growth stand at a 7-year high of 36.3 percent and a 9-year high of 23.5 percent, respectively.

Encouragingly, the recovery in lending is beginning to broaden. The recovery was initially driven by first-home buyers and by households taking out a loan as an owner-occupier.

But in recent months, investor interest has lifted and upgrader demand has perked up. It is important the recovery broadens out for the recovery in housing to be sustained.

We expect housing lending to continue to gain strength. It should in time lead to a recovery in residential construction, most likely in 2009/10, and eventually also lead to a lift in house prices.

There are a number of key reasons why we are optimistic on house prices. These include low mortgage rates, the first-home buyers’ grant, relatively low vacancy rates and the sharp improvement in housing affordability.

But there are also the important demographic fundamentals that should facilitate a lift in house prices over the medium term. These demographics include strong population growth. Population growth has accelerated to be at its highest level in 40 years.

It is running at this pace at a time when there’s a national shortage of housing and when increasing housing construction is being restrained by difficulty in accessing funding and uncertainty about the economic and financial outlook. This shortage is set to get bigger over the next few years.

This imbalance between demand and supply means prices should stabilise later this year and early next year, before price pressures emerge and gradually intensify over the next few years.

In the short term, further falls in house prices are still likely. Most recent house price measures are still showing declines. These are most pronounced at the top end of the market.

At the lower end of the market, mild price growth is already starting to show through; this trend isn’t surprising given the dominance of first-home buyers. First-home buyers now account for a record 29.5 percent of all housing loan transactions.

Perhaps a sign of the times to come, consumers are also more hopeful about the outlook for housing. This month’s survey of consumer sentiment revealed that a net 34.5 percent of consumers now expect house prices to rise over the next 12 months. That’s a big shift from a net 0.6 percent of respondents expecting falls in May.

The predictions above are not without risks on the radar.

The prospect of higher unemployment still looms large and poses the biggest risk to housing. However, we believe that the deteriorating employment picture may dampen the housing recovery but not reverse it.

Offering some reassurance is the job market that has held up considerably better so far in this slowdown than in the last Australian recession, despite having a backdrop of the worst global recession since WWII.

Besa Deda is chief economist at St.George Bank.

Disclaimer: The above information is general only and does not take into account your objectives, financial situation or needs. For personal advice, talk to a St.George financial planner on 1300 367 240. St.George Bank Limited ABN 92 055 513 070 AFS Licence No. 240997.