Green Shoots Are Starting to Appear for Property Prices

Property markets in both Sydney and Melbourne are showing the early stages of prices stabilising with the first signs of growth since the market peaked in 2017.

Australia’s property market has been reinvigorated by a host of regulatory and monetary policy moves in recent times that have led to a huge lift in confidence.

The obvious change in the last few months has been the RBA slashing the cash rate to 1.0% from 1.5% over its past two meetings. RBA Governor Lowe also spoke on the most recent cut and stated that there would be ‘more to come if needed.’

Economists are also predicting that there could very well be more rate cuts ahead, with many expecting the cash rate to fall to 0.75% by years end. The two consecutive rate cuts have taken home loan rates to their lowest level since the 1950s when you could buy a home in Melbourne and Sydney for around $7000.

So far the major banks have been quick to pass on the rate cuts to borrowers, led by ANZ who had previously come under scrutiny for not cutting their rates by the full amount. They passed on the full 25 basis points. Westpac passed on 20 basis points while CBA and NAB passed on 19 basis points.

We’ve also seen recently that APRA has started to wind back some of their macroprudential measures that were imposed on lenders. Specifically easing the 7% buffer rate that they were forced to apply to potential borrowers, which had thrown a handbrake on credit across the country.

While investors have been encouraged by the re-election of the Coalition government at the federal election on May 18, who campaigned on a platform of no changes to negative gearing or capital gains tax.

Price Growth is Coming

The good news for homeowners and investors is that it appears the moves by the RBA and APRA are starting to finally impact property prices. Particularly along the east coast that has seen some weakness in the past 18 months.

House prices grew by 0.2% in Melbourne and 0.1% in Sydney over the month of June according to CoreLogic, adding to some of the other key data points that are starting to turn the corner.

Auction clearance rates are also slowly improving and have seen strong results over the last few weeks. In the final week of June, 66.5% of capital city homes sold at auction. This was the third consecutive week where the preliminary auction rate was over 60%.

It is generally considered that buyers and sellers are balanced, when auction clearance rates above 60% on a prolonged basis, which would suggest that we could very well have reached the floor with property price falls.
Again it was Melbourne and Sydney that have been showing the strongest results, with preliminary clearance rates above 70%. While the amount of volume is still light, the fact that clearance rates are back up and stabilising is the first stage in the recovery.

Can the RBA boost employment?

Interestingly, the RBA mandate for the recent interest rate cuts has not really been around house prices at all. Fortunately, housing growth is a byproduct of lower interest rates.

However, at the moment, the RBA has its sights set on boosting employment across the country, in hopes of stimulating inflation back into their target 2-3% band.

As it stands the unemployment rate is 5.2%, well above what the RBA and Governor Lowe would be comfortable with. They would prefer to see something under 5.0% for a start and preferably something below 4.5% longer-term.

The problem is that the RBA are very quickly running out of levers to pull. For the time being the major banks have been under a fair bit of pressure to reduce rates in-line with the RBA’s OCR. The problem is that they will slowly be running into problems with their ever-tightening net interest margins.

So if the RBA does cut one more time in 2019, it is debatable as to whether the banks will pass it on to any large degree. It could very well end up being as low as 5-10 basis points, which wouldn’t tip the scale all that far for many homeowners and investors. Which would also mean the RBA would effectively be out of bullets.

There is also the concern that the US Federal Reserve will look to cut rates at their next policy meeting which will likely cause upward pressure on the Aussie dollar. Something that would clearly not please the RBA.

However, the good news is that the seeds of a property turnaround appear to be starting to slowly sprout. While the recent falls in areas such as Sydney and Melbourne are not ideal, we have to remember just how far property prices have come in the last five years with many areas doubling in value in that time.

For now though, the green shoots are starting to appear which should give investors and homeowners plenty of confidence headed into the second half of 2019.

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