Has the Australian housing market hit a wall? A SmartCompany Q&A

The bad news keeps coming for the Australian housing market.

Yesterday, data from the Australian Bureau of Statistics showed the number of new owner-occupier housing loans fell by 1.5% in March, versus expectations of a 2.4% rise.

The 44,968 new loans sold in March was the lowest result since March 2001, leading CommSec economist Craig James to comment that “the housing sector has well and truly come off the boil”.

That will be music to the ears of housing bears, who have predicted a major correction in the Australian housing market for more than three years.

But just how big will this price correction be? How far can we expect prices to fall this year?

Let’s take a look at some of the issues in a SmartCompany Q&A.

Talk of housing bubble has all but disappeared, hasn’t it?

It was just 11 months ago when we looked at the question of why housing bubble fears kept dogging Australia in an earlier SmartCompany Q&A.

Back then, legendary US investor Jeremy Grantham, chief strategists and co-founder of US investment firm GMO was predicting a major correction after claiming house prices were running 7.5 times incomes. That figure was subsequently questioned, but those bubble fears just wouldn’t go away.

Are they gone now?

They certainly appear to be after all the poor property data we’ve been seeing.

Take us through it.

The indicator most people watch is, of course, house prices. Data from RP Data/Rismark and the ABS all said basically the same thing – housing prices fell by around 2% in the March quarter and are largely expected to keep falling in the month of April (the latest data will be out this month).

While that figure was affected somewhat by the natural disasters in Queensland, RP Data’s Tim Lawless warned the trend was unlikely to be reversed across 2011.

“Clearance rates are bouncing around the low 50% mark each week, the number of homes being advertised for sale is almost 30% higher than at the same time last year, and sellers are being forced to adjust down their price expectations.”

“Before there is any real upwards pressure on home values there will need to be some absorption of effective supply and a return of sustained buyer confidence to the market.”

No sign of clearance rates or stock levels improving?

Not at this stage. Clearance rates are reasonably consistent (50% in Sydney and around 60% in Melbourne) but the stock on market keeps rising.

Figures released at the start of the month from Louis Christopher’s SQM Research show the number of listings added to the market grew by 3.9% during April, and by over 68% during the past year.

What other worrying signs are there?

Plenty.

Building approvals rose about 9% in April, but remain down 18.1% over the last year and dropped sharply in January and February.

Home lending remains at decade-lows for owner-occupier housing and while investor loans increased in March, they are 10% lower than a year ago.

Housing affordability also worsened slightly in the December 2010 quarter, according to the latest figures from the Housing Industry Association, which show the average mortgage holder spends 35.3% of household income on mortgage payments.

Are we seeing signs of mortgage stress?

We are. In March, ratings agency Fitch reported a surprise increase in mortgage delinquencies and while the proportion remains small – 30+ day arrears rose 1.37% in the fourth quarter of 2010, up from 1.3% in the third quarter, and 90+ day arrears increased from 0.48% in the third quarter to 0.54% – the recent bank profit reporting season did underline the trend.

ANZ, Westpac and Commonwealth banks all saw an increase in mortgage arrears in the March quarter, with the number of loans in arrears believed to be up by around 10% across the sector.

It’s not a pretty picture is it, considering the state of the economy?

And more particularly the mindset of consumers. Clearly caution has set in among households, which are concentrating on paying down debt and reigning in spending – despite the fact that household incomes are rising at about 6% per annum, according to RP Data.

While there are a number of things weighing on house prices – including natural disasters in some areas and affordability issues – the caution of consumers is central to the “patchwork” nature of the economy (as Wayne Swan likes to say) and the problems in the housing market.

What does it mean for prices?

There are two camps here – the hard-landers and the soft-landers.

What do the hard-landers see?

A property correction like we’ve seen in the United States and Europe, where heavily over-leveraged households are forced to sell their homes and prices plunge by as much as 40% as the market goes through a sharp and sudden correction.

And the soft-landers?

This camp has two sub-camps. Some, such as RP Data, expect prices to remain flat over the rest of the year with the possibility of some small falls, although the firm does expect first home buyers to re-enter the market as prices become more affordable.

Another group in the soft-landing camp, which includes SQM’s Louis Christopher – sees falls of 5% or more during this year, as the stock on the market continues to grow and the caution among households continue.

Which scenario is more likely?

It would seem we need something else to happen to trigger the hard landing scenario – a sudden slowdown in China, a sudden spike in unemployment or sharp increases in interest rates.

The first two events look unlikely in the next 12 months, which would suggest that the soft-landing option of no growth to falls of 5% in some areas looks more likely at this stage.

There’s a “but” there…

Interest rates are the unknown here. Most pundits expect two rate rises in the next six to nine months and it remains to be seen what this will do to households.

Will it lead to an increase in mortgage arrears or will incomes rise enough to give households a buffer?

Will higher rates make it harder for first home buyers to re-enter the market? What impact will higher rates have on property investors?

Will the RBA be cautious about triggering a sharper decline in house prices, or will it be forced to tackle rising inflation whatever the consequences?

The only answer I have now is that it’s going to be an interesting 12 months for Australian housing.

But as we always say, all property owners should be looking at how these big-picture trends are impacting their specific market and individuals circumstances. Conditions are likely to be very different in each city to city and even suburb to suburb.