The outlook for the global economy has stabilised but recovery is expected to be gradual. Industrial activity is showing early signs of stabilisation and consumer confidence is improving from very low levels.
Financial markets are also improving with equities market gains since early March consolidating and credit spreads narrowing. The Australian economy has thus far avoided a ‘technical' recession and has been among the best performers globally. While economic growth will remain fragile in 2009, ongoing policy stimulus and support from improving Chinese demand will soften the blow going forward.
While house prices in most other developed economies have tumbled significantly since the global financial crisis, Australian house prices have been resilient, softening only 1.2% in the year to May 2009 (according to Residex). Prices momentum has clearly improved on the back of significant interest rate cuts and government assistance to first-home buyers.
Australia's housing market will be well supported over the medium-term:
- Housing affordability is testing record ‘highs'. Any post-grant market adjustment is likely to be overwhelmed by ongoing and additional stimulus from recent and prospective interest rate cuts, further broadening the recovery from first home buyers to the ‘upgrader' and investor segments.
- Population growth is running at its highest level in four decades, providing an unprecedented call on national dwelling stock. This is being reflected in rental vacancies at historical lows in most capitals.
- The supply-side has been inhibited by high development costs, land availability and developer uncertainty. The now chronic demand/supply imbalance will intensify upward price pressures, providing a key signal to investors and developers alike to engage the market for the first time in a number of years.
- The labour market looms as a cloud over the horizon, but on current expectations, is likely to present as a second-order influence on housing market outcomes.
We expect dwelling prices to edge higher for much of the remainder of 2009 with upside risk presenting from intensification of strong fundamentals, a shift in price expectations and a restoration in market confidence.
The national outlook
The Australian economy has proven to be remarkably resilient to the recessionary conditions currently gripping much of the globe - so has the Australian housing market.
Median house prices, on average, have fallen in the vicinity of 4-5% in the year to March. In contrast to the 20%-plus falls in other countries, this is an outstanding result. Further, in recent months housing data has become more positive. Demand is increasing, reflected by an over 20% turnaround in housing finance approvals since the RBA began cutting rates back in September last year, with confidence returning in spades. The federal and state first home buyer incentives have also assisted the market with a record proportion of new buyers (around 38%, excluding those refinancing loans) looking to enter the market.
Amidst this strong demand, clearance rates have been high and prices, especially where first homebuyers are most active at entry to median levels, have started to edge upwards.
However, there are some caveats. Top-end prices remain relatively soft and we anticipate that this segment of the market will be last to recover. Further, recent gains have not been made across all states, with the mining boom states weaker after being so much stronger through the boom.
Policy stimulus and tight fundamentals, due to record high population growth and weak building levels, continue to exacerbate the shortage of housing - this has supported the market until now and will continue to do so. As such we anticipate modest growth in median prices going forward, capped by ongoing economic uncertainty.
New South Wales
This market was seen as vulnerable entering the downturn in the property cycle, but the Sydney market was weaker earlier than others and has now shown some positive signs in recent months.
Housing finance approvals are up over 30% in the past seven months outperforming all other states. This has supported numbers of sales around the recent three-year average, remaining significantly higher than in the recessions of the 1980s and 1990s. Clearance rates have also risen to regularly fall between 70-80% in the recent months. As such Sydney median prices, that had eased as much as 5-7% through the year to March, have seen solid increases 1-2% per month in April and May.
