Australian Housing Update – let me down, let me down gently [ChartPack]

The housing boom is over but don’t lose any sleep.

Sure the property market has moved into the next phase of the cycle, and yes we’re in for a slowdown.

But there’s still plenty of life left in our markets.

To help set context for the year ahead, today I’ sharing a recent ANZ Housing Update Research  which contains more charts than you can poke a stick at.

Here’s the what the ANZ Bank had to say:

House price growth has continued to slow down, and tighter regulation is having the desired impact.

• Housing price growth has slowed through the second half of 2017. Nationwide, prices are now just 5.5% higher than a year ago – much slower than the 11% y/y recorded through the middle of the year.
• The cooling market has been driven by regulatory changes. APRA’s tightening on investor borrowing and interest-only loans has resulted in higher interest rates for those borrowers, and lowered demand for housing.
• Weaker auction results point toward further slowing as we move into 2018. Our forecast that the RBA will increase interest rates next year will also work to lower price growth. But if the RBA doesn’t tighten then prices will likely slow less than we forecast. Importantly, there is still nothing to suggest to us that prices are going to enter widespread declines.
• Stamp duty discounts in New South Wales and Victoria are driving large numbers of first home buyers into the market. This is likely to provide some support to demand, and therefore prices.
• The deposit burden for FHBs continues to rise, and more people require assistance getting the deposit together. But once they are in the market, low interest rates mean that repayments are affordable, and the interest bill has been falling.
• We believe foreign investors have not been the main driver of price growth in recent years, as they account for only a small share of total housing turnover. However, foreigners do make up a significant component of the new housing market, meaning they have more impact in the construction space.

Price growth slowed through the second half of 2017 in response to tighter regulation

Source: ABS, CoreLogic RP Data, ANZ Research

We think 2018 will see a further slowdown in price growth, in line with softer auction results and the expectation of higher interest rates

Source: Bloomberg, CoreLogic RP Data, RBA, ANZ Research

Stamp duty savings are helping some FHBs, but many still require assistance

Source: ABS, RBA, ANZ Research

Average FHB loan sizes are still manageable, and interest costs have been falling

Source: ABS, RBA, ANZ Research

Foreign buyers have not been the main driver of price growth, but do impact the construction sector

Source: FIRB, ANZ Research

Conditions are in place for better rental yields

Source: ABS, REIA, Residex, ANZ Research

Residential construction has performed somewhat better than expected – slowdown still to come

• The expected slowdown in the residential construction cycle over 2017 and 2018 looks set to be more muted than we forecast at the start of this year. We continue to expect the level of construction activity to ease from current elevated levels, but the slowdown is forecast to be relatively mild. 
  
• Building approvals have stabilised and started to trend higher. In trend terms, annual growth in building approvals troughed at -13.3% y/y in May 2017.
  At the time, we expected further falls of 5-10%. In fact, since May, building approvals have risen 6.7% in trend terms.
• Moreover, housing finance commitments for the construction of new dwellings suggest further improvement. The downturn in building approvals in this cycle has been modest by historical standards, in our view reflecting the fact that the slowdown was not triggered by higher interest rates.
• Given building approvals, the solid pipeline of activity, and improved sentiment, we expect dwelling investment was flat over the second half of 2017, and forecast a mild 3.5% y/y decline over 2018.
• Building approvals have picked up across both houses and apartments. Interestingly, though, the pick-up in apartment approvals has been led by townhouses, while approvals for high-rise developments has slowed. This is particularly evident in Victoria.

The outlook for residential construction has stabilised and building approvals are trending higher

Source: ABS, RBA, ANZ Research

Forward indicators and the strong project pipeline suggest the pull back in residential construction will be milder than feared

Source: ABS, Ai Group, ANZ-Property Council

Approvals for large unit developments have slowed but the picture is more positive for low rise, lower density developments

Source: ABS, ANZ Research

There are a number of risks, but the long-term outlook is solid

• We remain on watch for signs of rising settlement risk, particularly in Queensland where the significant increase in supply of apartments is set to peak in 2018. 
• Encouragingly, settlement failures remain around historic norms to date and macro-prudential measures have had an impact. The RBA’s assessment of the risk points to some delays, but not increased failure, in settlements.
• ANZ’s latest results are consistent with the view that risks remain, but there is nothing too concerning at this stage. Mortgage arrears and delinquencies in Western Australia have been rising, but we would categorise that as a mining story, rather than a housing story. Either way, the impact has been isolated so far, and arrears in New South Wales and Victoria are in line with long term averages.
• Homeowners have continued to take on more mortgage debt. While repayments have been manageable in this low interest rate environment, households will be sensitive to interest rate increases. We estimate a 2% rise in interest rates would see mortgage affordability blow out to the worst levels on record.
• But it’s hard to envisage 2% of rate hikes coming through with inflation and wages growth so soft. We believe households will be able to absorb the 50bp of rate rises we have forecast in 2018, as many people have solid mortgage buffers. Over 70% of people are ahead of their mortgage repayments, and nearly 50% are more than three months ahead.
• Analysing the housing balance provides the best guide to longer term trends in the housing market. On face value, the housing market looks to be in balance but this hides the latent demand from first home buyers who have been priced out of the market in recent years.

We remain watchful for signs of rising settlement risk given the amount of supply coming on stream, particularly in Brisbane

Source: ABS, ANZ-Property Council, RBA, ANZ Research

The RBA is watching settlement risk closely, but noted in the latest Financial Stability Review:

Source: APRA; Banks’ annual and interim reports; Bloomberg; FSA; RBA; S&P Global Market Intelligence, ABS

ANZ’s annual results are consistent with the view that risks remain, but there is nothing too concerning at this stage

Source: ANZ, ANZ Research

Financial stability is a concern: highly leveraged households are sensitive to future interest rate rises but have a mortgage buffer

Source: ABS, CoreLogic RP Data, RBA, ANZ Research

The housing balance is the best long term guide to trends the housing market

At face value, the housing market looks broadly in balance.

But this masks the fact that housing affordability issues have seen a slowdown in the formation of new homes (ie a lower headship ratio).

If we hold the headship ratio at its long run average, the housing market is still in deficit.

We believe there is a significant level of latent demand for housing, which will underpin prices and require construction to remain elevated.

Source: ABS, CoreLogic RP Data, ANZ Research

Source: ANZ Research