Credit where due with property confidence

In particular, the marked improvement in credit availability was especially encouraging given ANZ Research’s view that restricted credit has been the key factor behind the downturn.

Confidence improved broadly across the country, with New South Wales, Victoria, Queensland, Western Australia and South Australia all posting gains, suggesting to ANZ Research the worst of the house price falls are probably behind us.

However, ANZ Research believes that credit availability will continue to be restrained, and the bounce in prices and construction will be more muted than the rebound in residential indicators suggests.  

"Confidence improved broadly across the country… suggesting the worst of the house price falls are probably behind us.”

Sentiment also bounced in the commercial property space and is well above confidence in the residential sector. The outlook for the office, industrial, aged care and accommodation segments all improved.

Stability

Since April, ANZ Research has been flagging emerging signs of stability in the residential property market. In particular, they noted the pace of house price declines was slowing and auction clearance rates were beginning to rise.

Over the past month, lower interest rates, the proposed change to the interest rate floor by the regulator and the removal of uncertainty around the impact of possible tax policy changes have boosted sentiment toward housing.

This boost is reflected in the rise in the auction clearance rate in Sydney and Melbourne to the highest level in more than a year.

The latest ANZ-PCA survey captures this shift with broad material improvement. Of particular note is the marked improvement in credit availability. This measure has proved to be a reliable indicator of shifts in housing activity in the past and, if it remains so, suggests better times ahead.

It seems safe to say the worst of the house price declines are well and truly behind us.

This doesn’t mean ANZ Research is expecting a shift back to dramatic increases in house prices - which would not be seen as desirable, given the still stretched levels of affordability in Sydney and Melbourne.

Nor does ANZ Research think it is likely in the prevailing environment of more stringent credit policies.

Optimism

Confidence across the property sector has bounced solidly following four straight quarters of declines. Although halting a period of significant weakness, our view is the recovery in housing is likely to be relatively subdued.

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Crucially however, firms are now reporting they expect finance to become more readily available. This is critical in the current environment, where macro-prudential policies and tighter bank lending conditions have, in our view, been the main drivers of the slowdown in the housing sector.

In the September quarter survey, firms reported a sharp improvement in their expectations of the availability of finance over the next 12 months. This is close to the high seen in June 2014.

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Finance

ANZ Research expect this turnaround is a response to both the APRA announcement in early May flagging the easing of the interest rate floor used in serviceability assessments as well as cuts in the overnight cash rate by the Reserve Bank of Australia.

Whether these expectations of easier access to credit will be met remains to be seen but they are an important factor in the broader lift in sentiment.

Many respondents are now also counting on lower interest rates. A net 51 per cent of respondents across the country expect interest rates to be lowered over the next 12 months. This is consistent with ANZ Research’s  view and market expectations, with at least one more cut priced in after the cuts in June and July which totalled 50 basis points.

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With this sharply improved backdrop, the bounce in the outlook for house prices and construction is not surprising. New South Wales and Victoria, where pessimism was greatest, are the states where the bounce has been largest.

While price expectations remain negative in these two largest states, they have improved sharply from the lows seen in the June quarter.

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The lift in the outlook for residential prices is consistent with the improvement across a number of housing market indicators. Auction clearance rates have been picking up since the beginning of the year. Home prices, after nearly two years of declines, managed to eke out a small rise in Sydney and Melbourne in June. And housing finance is showing tentative signs of stabilisation. 

Curb your enthusiasm

While easier credit and lower interest rates have clearly buoyed sentiment in the housing sector, ANZ Research is cautious of being overly optimistic about any rebound. Their view for some time has been that restricted credit supply has been the most important driver of the downturn.

So while APRA’s relaxation of the interest rate floor will provide a modest easing, it is small compared with the range of other more permanent tightening measures implemented over recent years.

This suggests the turn in the housing cycle is likely to be relatively subdued.

The improved outlook for construction is consistent with tentative signs of stabilisation in building approvals. But with construction much more heavily tilted towards high-rise apartments than has been the case historically, the lags between approval and construction are longer; so a quick turnaround in work done looks unlikely.

ANZ Research expects that activity is likely to continue to decline in coming quarters, given the fall in building approvals to date and would not expect a pick-up before mid-2020. 

David Plank is Head of Australian Economics and Felicity is Senior Economist at ANZ