Soft landing in sight for Aus housing

The housing credit impulse appears to be turning up, consistent with the signal from the auction clearance rate. The impulse in housing credit has been a reliable leading indicator of turns in the direction of house prices.

"Improvement in the auction clearance rate suggests the bulk of house-price weakening is already behind us.”

There is rightly a lot of focus on current and future developments in the housing market. Among other things housing plays a central role in household net worth which, in turn, is an important determinant of the household saving rate.

This means the outlook for house prices is an important component of the outlook for household consumption, particularly in a low wage growth environment.

Recovery mode

In our view house prices are likely to be in recovery mode by the second half calendar 2018 given still-low interest rates and the outlook for household income growth.

Additional weakness in house prices from this point would require new catalysts. There are some potential ones, such as the prospects of additional credit tightening by the banks or out of cycle mortgage rate increases driven by higher bank funding costs.

We are watching both. But for now the leading indicators of house prices point to stabilisation and then recovery.

If, instead, things develop in a more-bearish fashion there will be implications for our outlooks on household consumption and the Reserve Bank of Australia.

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In terms of the other risks to the housing market we often see referenced in market commentary, there doesn’t seem to be a move higher in lending cancellations - though we do caution these data are only for owner-occupied finance commitments.

In terms of risks to household balance sheets the number of resales at a loss is not especially elevated at this point either.

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Availability

Another concern being raised is a further tightening of credit standards by the banks might reduce the availability of housing finance, with a subsequent impact on house prices.

There is certainly a clear link between the housing credit impulse (effectively the change in the change in credit) and house prices, as shown below. At present, however, the latest data suggest the housing credit impulse is in the process of turning up. 

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This is consistent with the signal from the lift in the auction clearance rate. We also note the recent trend has been for a lowering of interest rates on fixed rate investor loans and an easing of lending criteria rather than a tightening.

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Considering that landscape we are looking for a mild pick up in house-price growth over the coming year.

David Plank is head of Australian economics & Joanne Masters is a Senior Economist at ANZ