My message, if it wasn’t clear, is that if you have been holding off purchasing a home because of the risk of capital losses, then these risks are probably lower now than at any time in the past decade. Maybe prices will be a couple of percent lower at the end of next year, but I have a hard time wrapping my mind around downward price movement more severe than a couple more years of the slow melt, or around 3% in nominal terms. The chances of price gains is also now much higher.
I described in the past how each Australian city has its own cycle, and that aggregate data is may need to be assessed against local indicators. Sydney will probably be the first to start the next price cycle.
Now don't take this as a thumbs up from me for housing price growth. High asset prices are not a particularly desirable feature of an economy. However my strongly held view is that asset prices should not form part of the debate over housing affordability. It is like having a debate over the affordability if steel by looking at the price of BHP shares. No, the asset price will be subject to the whims of financial markets, and the affordability of steel can only be observed by looking at the price of steel. In housing markets, land prices are asset price, and rental prices are the actual market price for housing.
Whether we also desire for social reasons broad access to the housing asset market, then we may consider severe changes to policy in this arena.
Further, I am merely observing the features of previous cycles. This is a slightly better approach than just extrapolating recent trends, but there is no particularly strong theoretical reason why the next cycle should be identical to the last. Though I do expect common features.
So what sort of indicators are crucial in observing the bottom of the cycle?
What we are looking for in this indicator is a slight uptick. We have bobbed along the bottom for three years now. Can this go on, or are we due for a correction? Will those reluctant landlords cash in once prices have stabilised? Once turnover starts to noticeably increase, perhaps break through 5% toward 6%, I will have more confidence that it is a relatively advantageous time to buy.
Turning point of mortgage payments to income ratio
We should see bottoming out of mortgage payments to household incomes at the bottom of the cycle. With further interest rate cuts expected this year, this indicator should fall quickly below 8% in the next two years.
Turning point in housing credit
Housing credit growth has been on the decline since the end of the national boom in 2003. However the short periods of increasing rates of growth also produced price gains. It’s now been ten years since the peak, and a modest turn around looks imminent, especially considering the pattern of the second derivative of housing credit which is surging towards positive territory.
It may seem like an odd indicator, but falling rents (in terms of rent to income ratios) is a signature of increasing prices. The last 5 years have seen rents tighten in relation to income. This might be over for now and if we see this indicator start to fall I will have even more confidence about where we are in the cycle.
Of course, I noted earlier that the next housing price cycle will be far less severe than the last. This is not a prediction of a huge nominal gains, but of relative returns from entering housing in 2014-2015 compared to the last 6 years. For those interested in getting into the market it is time to start paying close attention to the market in your area.