Friday, May 3, 2013

More housing market signals

My recent post about timing the Australian property cycle concluded that, all things considered, the period over the next 2-3 years will probably the best time to buy since the late 1990s.

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.

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?

Dwelling turnover
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.

Falling rents
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.


  1. "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."

    That's really it in a nutshell isn't it? Policy no longer reflects the notion of broad access to home ownership being representative of social progress, such things having been largely resigned to the dustbin of outdated socialist thinking. Housing is now an "asset" first and foremost. The fact that it is also a basic necessity for life itself and that the breadth of access to ownership of the roof over ones head is indicative of the level of equality within a society is a consideration that has pretty much fallen by the wayside. How much extra money one can make buying and selling houses is more important than who can't afford one to live in.

    It's hard to see any real driver for change at present. Our policy makers have a vested interest in the large number of voters who benefit from the current situation. It's probably not unreasonable to assume that a majority of them own investment property themselves, creating a double vested interest.

  2. I'm not so sure that broad access to home ownership is a necessary part of social progress.

    It was a very useful tool in much of the anglo world in the 1950s-1970s to ensure that income/wealth inequality was kept in check. But look at Germany and Austria for instance (46 and 52% home ownership respectively). It hasn't been a drag on social progress at all. In Australia the rate has been basically flat at 70% for 50 years.

    The point here is that if we aren't going to treat homeownership as a social goal, which I believe we have not for the past 30 years, we need to treat secure affordable rental housing as a social goal - better access to long term tenancies, limits on rental increments etc. The very policies one sees today in Germany and other European countries. Which coincidentally will curb home prices as well.

    But Australia simply will not head this way any time soon. I simply can't see much changing. As you say, there are too many vested interests. So my view is to play the game as it is, rather than spend a lifetime banging your head against the wall trying to encourage positive change.

    This is why I keep referring to housing (well the land component really) simply as an asset to assess in terms of returns, costs, capital gains and so forth. Investors are the market for housing, home owners simply follow the trends.

    So in my view there are some signals that investors and households are recovering from their last debt binge and will soon be ready for another.

    1. I thought you might bring up countries like Germany, with their lower rates of home ownership. But as you say, rental markets in such places are regulated - with a mind to the very social aims I mentioned - to the extent that tenants are more secure in their rented properties, probably enough so that actual ownership is not such a pressing goal. I wonder how they would feel looking at the situation I have been witnessing here in Gladstone, with rental hikes driving lower income earners out?

      So any comparison with the Germanic countries must be made with the caveat - as to your credit, you have done - that broad access to home ownership is a less pressing social issue when tenants have more rights than they do in other places. I wasn't aware that the German situation was typical though. And even with their stronger raft of tenant protection policies, half the population still seeks ownership.

      I do agree with you regarding playing the game as it is. Problem is as I see it, increasing numbers are going to find that playing the game is simply not an option. You know Cameron, living in Gladstone among people who have done well out of ousting the more vulnerable has given me the particular insight that when we shrug our shoulders and casually remark "oh well, that's just life", what we really mean is "that's just long as it is happening to someone else".

      I appreciate that you do not particularly approve of the situation. It just appears that I am a little less accepting than you are.

  3. It will take the buying public some time to trust that low interest rates are here to stay, and that is being made more complex by the upcoming election and the wall of political spin that we will all be assaulted by. It really does confuse people when they get different messages from different parties on the same issue. It could all get further confused if the new Abbot led government chooses some austerity options to please the Barnaby factor amongs their voters.

    Your 2014/15 call gives us time to get past the election and to adjust to a lower dollar - if it actually does fall.

    Lef-tee I don't think that housing will fall across the board until governments take less out of the pie. At the moment they take so much that developers can't be sure of selling at a profit, and until they can make a decent profit more players won't come into the market to develop land. The policy obstacles are a problem, but dubious profitability is a worse problem, hence they bank until times are better.

    I doubt that governments will adjust their take, but perhaps it will be adjusted slowly through inflation and wage rises.