Greg Jericho| 19 January 2017| The Guardian
The release of the latest housing finance data this week show that investors are back in the market in a big way, and suggests that after a slowing of housing price growth in the past 12 months, prices are likely to pick up in the first half of this year.
The story of the housing boom – especially in Sydney – over the past five years has been one of investors. Consider that in November 2011 when the RBA cut the cash rate from 4.75% to 4.50%, the value of housing finance commitments for owner-occupiers was $2.7bn more than that for investors. By the middle of 2014, the value of investor finance commitments outweighed that of owner-occupiers:
But in the middle of 2015, after the introduction of limits on the growth of investor finance by the Australian Prudential Regulatory Authority, investor finance nosedived.
It fell in eight months from March 2015 from accounting for 53.4% of all housing finance commitments to just 44.3% in November that year:
Such a dramatic fall is a tad suspicious – a cynical person might suspect some investors were being re-classed as owner occupiers in order to comply with the rules – but regardless, total finance commitments fell off during this period.
By April last year, total finance commitments were 8% lower than they had been a year earlier, with the 6.9% rise in finance for owner-occupiers not being able to compensate for the 20.3% fall in investor finance:
But now investor finance has roared back – up 17.1% in the past year, driving total housing finance growth up 5.1%. And this at a time when the finance for owner-occupiers has been falling.
The housing finance data is good for giving us a heads up on where the market is heading. There is a pretty solid correlation with the growth of finance commitment and that of housing prices six months later:
When housing finance began to fall in the middle of 2015, this was reflected in a slowing in the growth of housing prices at the end of that year. The pick-up in finance growth in August-September last year, suggests we should start seeing an increase in the growth of housing prices in the first six months of this year.
One reason the drive in investor finance sees an increase in house prices is that, for the most part, investors are obtaining finance to buy existing houses or dwellings, rather than build new ones.
Only 7.5% of investor housing finance is for construction, compared to 14% of owner occupiers.
That’s not to say there hasn’t been a lot of construction going on. In fact since the RBA began its series of rate cuts in November 2011, investor finance for dwelling construction has grown by more than finance for established homes:
And the latest building activity data out yesterday revealed a record number of dwelling being complete or under construction:
Largely this has come off the back of huge increase in the construction of apartments in Sydney, Melbourne and to a lesser extent, Brisbane.
The massive surge of apartment building in those cities has led the RBA among other to worry about a glut. While there remains a record 33,298 non-house dwellings that have been approved for construction but which has yet to commence, it is likely many of those will remain pipe dreams rather become actual buildings.
In the past six months there has been a significant drop in the commencement of apartment construction:
The big mystery of course in the housing price puzzle is interest rates – a puzzle that has become rather more difficult to unravel with the election of Donald Trump.
Trump’s victory immediately sent expectations for inflation, and thus interest rates, higher. Back at the start of November, the market wasn’t expecting interest rates here to change for the next 18 months; now the belief is that there will be a rate rise by the middle of next year – and certainly no rate cut:
Much of this is based on the premise that Trump will deliver stimulus to the US economy that actually generates growth and an increase in prices. But whether he does, and whether his policies (whatever they end up being) actually deliver growth and increased inflation, let alone have an impact on Australian prices and rates remind very much to be seen.