Thursday, 15 December 2011

Housing market: what 2012 holds in store

Housing market: what 2012 holds in store

Chris Zappone
December 13, 2011

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Auction results: Jen's house fails to sell

Jennifer Hawkins' home fails to sell in Sydney while Melbourne sees stronger sales.
Video will begin in 1 seconds.
If 2011 was bad for the Australian housing market, next year could be worse with real estate bears such as Steve Keen predicting an accelerating slide in prices.
The University of Western Sydney professor expects home prices will fall between 5 and 10 per cent nationally in 2012, as households opt to pay off loans rather than pile on more debt in the hope of realising a capital gain.
“The main force that will drive prices down is precisely the same force that drove them up: the acceleration of mortgage debt,” said Professor Steve Keen. “That is now decidedly negative in Australia.”
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New housing starts are down. House prices might be on course for a second year of falls. Photo: Rob Homer
To be sure, Professor Keen has made big calls before, including betting that house prices would sink 40 per cent from peak to trough - for which he famously walked up Mt Kosciuszko in 2010 after losing.
This time, though, the numbers are starting to align with some of the more gloomy outlooks for the Australian housing market.
Capital city home prices, for instance, have already fallen 4 per cent in the year to October, according to research group RP Data, although interest rates in both November and December may reverse some of that retreat by the time the full-year figures are in.
Back-to-back decline?
Without a major late-year bounce, though, Australian home prices are still on course to challenge or exceed their 2.6 per cent drop in 2008 during the depths of the global financial crisis, according to RP Data.
Last weekend's clearance rates in Sydney and Melbourne were both low - with Sydney's sinking below 50 per cent to its weakest in more than a year - indicating there's little immediate momentum shift coming from the Reserve Bank's twin interest rate cuts this month and last.
Assuming 2011 returns a drop in home prices, a further slide in 2012 would mark the first back-to-back annual falls since 1990-91 when Australia was grappling with the severe recession, according to Fairfax-owned Australian Property Monitors.
“If there is no recovery next year, this is where we will start to look for government action like we saw in 2008-09,” said APM senior economist Andrew Wilson, referring to efforts to stimulate housing demand including for first-home buyers.
The national auction clearance rate in 2011 stands at about 48.3 per cent, the weakest in three years, RP-Data said, with the national median price of a home at $448,500 in October.
Stimulus, shortage
Dr Wilson, though, is optimistic that the housing sector will revive enough in 2012 to preclude the need for fresh stimulus policies from governments.
For one thing, financial markets are expecting at least another one percentage point to be lopped off interest rates by the Reserve Bank in 2012. If passed on by the commercial banks, those cuts alone would be worth about $200 a month on a standard mortgage of $300,000 over 25 years.
And some economists, such as St George Bank economist Besa Deda note that housing starts - including during the September quarter in data out today - are failing to keep up with population growth around the country.
"Dwelling starts are nowhere near keeping pace with the rate of population growth so that's exacerbating the housing shortage which we see as growing to about 140,000 (homes) next year," Ms Deda said.
Diminishing impact
While the RBA is tipped to slash interest rates in 2012, the boost for the property market may not match the clout it carried during the 2008-09 GFC when its cash rate dived from 7.25 per cent to 3 per cent in a matter of months.
One reason is that households seem more content to save more or pay back loans rather than take on more debt even if it is cheaper.
“The cumulative reduction in interest rates will be less pronounced,” said Westpac economist Matthew Hassan. “It's clear we're not going to see the same massive policy incentive coming from interest rate and fiscal quarters.”
Louis Christopher, managing director of SQM Research, an industry research group, says house prices will only stabilise next year if the sovereign debt crisis in Europe is contained.
“If credit markets don't freeze up, we could have a recovery in housing next year,” said Mr Christopher. “If we see a restriction in the access to credit it's going to be really bad for housing.”
Australian banks are exposed to any rising borrowing costs associated with tighter credit on international markets because they source about a third of their funds from outside Australia.
And while some economists see a housing shortage in Australia, the high cost of entering the market means there can be a glut of supply at the same time.
According to SQM, there were about 388,800 properties listed nationally for sale in November, up 16.7 per cent from a year ago.
“It is enough stock to continue to put downward pressure on house prices,” said Mr Christopher.
The combination of big increases in house prices since the 1990-91 recession and the gathering gloom about the state of the global economy is one reason why observers such as London-based The Economist and US-based GMO investment fund chief Jeremy Grantham routinely rate Australian homes as among the world's most over-priced.
And so while Professor Keen may have made his long march up Australia's highest hill, he still views his losing bet with then Macquarie interest rate strategist Rory Robertson as a live one. In fact, he contends the prediction of 40 per cent price drop was meant to run until 2025, a view that might eventually look optimistic.
czappone@fairfax.com.au
twitter This reporter is on Twitter: @chrizap
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Comments

100 comments

Time for another round of interest rate cuts (and enforced on the banks). We're at 4.5% so there's plenty of fat to cut there. For most of 2009 the RBA set rates at 3%. Keep Australia strong and growing for the common good.
Michael | Adelaide - December 13, 2011, 10:46AM

It doens't matter which direction house prices move - Anne, guy, MVF, etc will all still be angry, miserable and covering their keyboards with rage induced flecks of spittle.
bag of tricks - December 13, 2011, 10:53AM

Oh please not another housing article!!!!!
First the all the "investors are doomed" people will comment. Followed by all the investors commenting, people who havent "gotten into the market" have missed out comments.
Can we please move on!!!!!
Scott | Perth - December 13, 2011, 10:54AM

But, but my one bedder is going to the moon. I analysed the market and I found that almost everyone wants to move to a 50sqm concrete box for half a million dollars. This year alone it has gone up 25%!! Get in before it's too late!
MVF | Free Liu Xiaobo - December 13, 2011, 10:54AM

Steve Keen = Fail
LukeK - December 13, 2011, 10:54AM

Dear old Steve Keen. He's predicted twenty-eight of the last one housing downturns. Even a stopped clock tells the right time twice a day. How many other 'experts' would get so much air time with such a poor reputation?
Mallard | Sydney - December 13, 2011, 10:55AM

House prices should not be propped up with stimulus policies that only hurt first-home buyers. As a first-home buyer, I am looking forward to lower house prices.
Charles Ponzi - December 13, 2011, 10:55AM

so here's a question for all the so-called economists from the banks, real estate industry and other self-declared 'experts', what happens if this happens in 2012;
1. Europe tanks. I mean really tanks. Greece defaults, Italy defaults, Spain defaults and one or two big (and I mean big) banks actually fail.
2. The USA bumps along with unemployment at between 8 and 10% and political stalemate continues right up until the election and then Obama wins and it continues well into his 2nd term.
Do you all realise that these are the two things that are very likely to happen in 2012? And that means that China will cool. I mean really slow down. And the credit markets will seize up. I mean seize up. It's GFC all over again. GFC 2.
Now tell us all what you think is going to happen to house prices in 2012.
When I read the stuff you say I really question your expertise in very basic economics. You give the impression that you are guessing and hoping. It's really scary.
cheers
PP | Bondi - December 13, 2011, 10:55AM

If Europe collapses there will be a very big drop in house prices as the financial system locks up. If they by some miracle manage to keep that Titanic afloat for another year, probably prices will drop a little bit just on the basis of the pessimism it is causing.
John | Canberra - December 13, 2011, 10:59AM

I correctly predicted 2 rate cuts way back in May.
Maket wont take a beating in 2012. It will slow down till March and will lift 5% after June once another rate cut takes efffect. A normal market will eventuate in Sydney and Melbourne.
Craig | Melbourne - December 13, 2011, 11:05AM
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