National House Prices Rise As The RBA Holds, But For How Long?

RBA Commentary for August 2019

The official cash rate sits at 1.00% as:

·         Inflation hovers around 1.6%;

·         The Australian dollar fell to 0.68c US; and

·         Unemployment sits around 5.2%.

CoreLogic announced on August 1, 2019, that national housing prices across Australia had risen, albeit marginally, prompting the Reserve Bank of Australia (RBA) to leave rates on hold.

Despite this move by the RBA, homeowners are welcoming the news of national home price growth as this is the first time in two years that national dwelling prices have shown positive signs. This change, however, also has many owner-occupiers and investors questioning whether or not this is an indication that the market is about to turn for the better.

In light of the announcement by CoreLogic, the Reserve have left the official cash rate on hold for August. But economists are suggesting that if inflation continues to stall,and doesn’t meet RBA targets, then it’s likely that rates will get cut again. Some economists are even speculating that two rate cuts may be possible by November 2019.

Let’s look at the movement in the housing market and economic commentary to see how these related.  

National Housing Prices

Tim Lawless, head of CoreLogic research indicates that national dwelling prices have ‘found a floor’ as housing prices held firm during July. Mr Lawless also said that the stabilisation of home values was ‘becoming more broadly based’ as ‘five out of eight capital cities recorded a subtle rise in values over the month’ and so did several regional areas.

The main drivers of the turnaround are predominately based on changes in the Sydney and Melbourne markets, which rose 0.3% and 0.4% respectively over the last two months. Brisbane also experienced a 0.2% lift over the same duration, which was the first recorded rise for the city since November of last year.

Dwelling Values July 31, 2019
All Dwellings
City or Suburb	Month %	Qtr. %	Year %	Total Return %	Median Values
Sydney	0.2	-0.2	-9.0	-5.7	$775,978
Melbourne	0.2	0.1	-8.2	-5.1	$619,443
Brisbane	0.2	-0.8	-2.4	3.6	$484,998
Adelaide	-0.3	-0.6	-0.8	-5.0	$427,009
Perth	-0.5	-2.2	-8.9	-4.0	$441,275
Hobart	0.3	0.1	2.8	8.0	$451,191
Darwin	0.4	-2.1	-8.7	-2.3	$395,119
Canberra	-0.3	-1.5	1.1	5.6	$586,535
Combined Capitals	0.1	-0.4	-7.3	-3.8	$591,476
Combined Regional	-0.2	-0.8	-3.0	1.7	$374,548
National	0.0	-0.5	-6.4	-2.7	$517,895

Source: CoreLogic

Changes To National Housing Prices Since 2014

Looking back at national housing prices over the past 5-years it’s interesting to note that despite dwelling values appearing to drop substantially since their peak in 2017, home prices are still higher than in 2014. For instance, Sydney home values fell by 9.0% over the last 12-months, and by 14.7% since the market peaked in 2017. But compared to 2014 prices, the market is still 18.4% higher.

Changes in Dwelling Values 2019-2014
All Dwellings
City or Region	Past 12 Months	Since 2017 Peak	Since 2014
Sydney	-9.0	-14.7	18.4
Melbourne	-8.2	-10.8	23.5
Brisbane	-2.4	-2.7	7.2
Adelaide	-0.8	-1.3	10.3
Perth	-8.9	-20.2	-20.0
Hobart	2.8	-0.8	35.9
Darwin	-8.7	-29.8	-29.3
Canberra	1.1	-1.5	22.3
Combined Capitals	-7.3	-10.1	13.2
Combined Regional	-3.0	-3.5	11.0
National	-6.4	-8.3	12.8

Source: CoreLogic

So, what major factors have led to changes in national housing prices?

Why Have National Housing Prices Changed Since June?

Mr Lawless indicated that several factors have contributed to the recent change in the housing market, with the most likely being the latest drops in the official cash rate, the lightening of credit restrictions, reductions in taxation and an increase in consumer confidence. Other prominent factors noted were an increase in housing affordability and a limited supply of homes on the market.

Economists agreed with Mr Lawless. Plus, they added that consumers received the federal election results well, despite many waiting nervously to see if there would be changes made to negative gearing and capital gains. The fact that the election safeguarded these meant that consumer confidence jumped.

Where Is the National Housing Market and Official Cash Rate Heading?

Shane Oliver AMP chief economist suggests that while Sydney and Melbourne housing markets appear to be making a recovery, he doesn’t expect home values to skyrocket any time soon. Mr Oliver indicates that there are now tighter lending standards in place than when the market peaked. Therefore, the market is more contained than it was two to three years ago.

Based on his research, Mr Oliver implied that the next six months will be a time for marginal changes in the housing market where home values may rise or fall, marginally, until they bottom out. Once the market bottoms, then Mr Oliver estimates that modest gains will appear, which he says will occur during 2020. Other economists also agree, with some suggesting the market will gain pace over the next 18-months.  

The RBA, according to economists, is expected to cut rates to 0.50 by the end of 2020. The two main contributing factors to changes in the official cash rate being inflation, which isn’t meeting the RBA’s 2.0% targeted forecast and employment, which is trending higher at 5.2%.

While the RBA governor Philip Lowe feels that the Australian economy is strengthening, he also has stated that he will drop the cash rate further to ‘produce faster growth’. Mr Lowe said at a recent meeting that while the preferred measure of inflation is 3%, the RBA is currently aiming for 2%, as 3% has not been within target since 2015.

The next inflation report released by the Australian Bureau of Statistics (ABS) is due out in October, and the labour force report is due out on August 15.

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