23 August 2013

Bullish Housing Market

The Swiss based global Investment Bank UBS is out with a new note getting bullish on housing:

  • Dwelling commencements to rise to 154k in 2013, and 160k in 2014

    In this detailed note they reiterate their forecast for dwelling commencements to pick-up moderately to 154k in 2013 (was 152k), and 160k in 2014. This view is supported by the RBA slashing rates to a record low, driving: 1) a rebound in prices to 5% y/y; 2) approvals up to a ~160k trend; 3) boom-like auction clearance rates; 4) lending surging by 20%; 5) housing affordability improving sharply to near a decade-best; 6) rental yields becoming relatively very attractive; 7) ‘time to buy a dwelling’ sentiment near the highest level since 2009; 8) households’ surveyed attitudes to debt becoming less cautious; 9) strong population growth (1.8% or 394k y/y); and 10) 1st home buyer incentives more favouring new housing.

  • House price growth forecast upgraded to 10% y/y in 2013, and 5% in 2014

    UBS is also upgrading their forecast for house prices to lift 10% y/y in 2013 (was 7%, with upside risk), but look for moderation to 5% y/y in 2014 (was 3%), given a likely ongoing subdued labour market. A ‘boom’ could also induce the RBA to hike, which would quickly hit affordability given a still near-record high household debt-income ratio. That said, housing credit growth should recover modestly to 5% y/y ahead, albeit well below the double-digit trend pre-GFC (so we don’t see a re-leveraging cycle).

  • Different cycle – more medium-density, less houses and renovations

    But, this cycle will likely differ from history with only a moderate overall upswing – and a higher medium-density (61k in 2013, 65k in 2014) share (particularly high-rise), but only a modest rise of houses 91k in 2013, (93k in 2014). This already led the real average value per commencement to drop to a 3-year low. By State, they look for further retracement in Victoria, but strength in NSW, while QLD is slowly recovering from a depressed level, and WA is surprisingly resilient. 1st home buyers are edging up from weakness, supported by changes to incentives favouring new homes, but are likely to recover only gradually given high prices. Meanwhile, alterations & additions are depressed at the lowest share of GDP since 1975, but could improve moderately ahead as unemployment stabilises. Overall, we look for real dwelling investment to bounce by 4-5% y/y in both 2013 and 2014, but note this contributes only ¼% pt y/y to GDP, and hence is clearly not enough to ‘rebalance’ growth amid the drag from weakening mining investment.

  • Risk that more rate cuts over-stimulate housing, but lower AUD preferred

    The RBA responded to a weak economy by cutting rates to a record low. Looking forward, we expect the RBA to hold at 2.5%, as it prefers the AUD to fall further (UBS 0.85USD by mid-14) to support growth. However, if the economy remains weak, but the AUD fails to fall, the RBA would likely cut again, which would risk fuelling a ‘housing bubble’. This view reflects that the boost from rate cuts historically dominates the hit to sentiment & income from higher unemployment – causing house prices to accelerate. Hence, under that scenario, housing may face targeted (but not publicly announced) macro-prudential tightening measures.

  • Steve Keen admits he was wrong about housing prices

    In a separate note on 19th August Australian Property Forum, Professor Steve Keen the “perma bear” on Australian housing, admitted in writing he got it wrong. In the article Keen states...” it’s also clear that Australian house prices aren’t undertaking the long slow burn down that I expected... “

    In November 2008, University of Western Sydney associate professor of economics and finance Steve Keen made a high-profile bet with then Macquarie Group interest rate strategist Rory Robertson (now Westpac). The bet was that house prices would tank by 40 per cent. The loser of the bet would have to make the more than 200km trek from Canberra to the top of Mount Kosciuszko wearing a T-shirt that says "I was hopelessly wrong on house prices! Ask me how."

    ...”Clearly I was wrong here... there’s now no way that I’m going to win the Keen-Rory Robertson bet...”

    Keen states that credit growth turned negative in both the USA and Japan after their crises – but not in Australia. Credit growth slumped from plus 25 per cent of GDP in Japan at the height of its bubble to minus 15 per cent a decade later, and it spent a full decade in negative territory. America plunged from plus 15 per cent in 2008 to minus 5 per cent in 2010, and it spent two years in negative territory. In contrast, Australia’s credit growth peaked at almost 25 per cent of GDP in 2008 – substantially higher than the USA’s at the time – and then fell to plus 2 per cent in 2010, but it then bounced, rising to a peak at plus 10 per cent in June 2012, which are not directly related to usual arguments for housing price stability such as supply constraints or population growth.

Best regards,
Craig Robertson
Executive Head of Sales - Credit

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