Housing bears are notoriously hopeless in picking housing market bottoms: Louis Christopher

Just a quick update on a few thoughts and stats on the market as we start the new property year off this weekend.  

Firstly, Sydney and Melbourne valuation points have improved with the price declines but both markets remain heavily overvalued on our favoured measurement, which is house prices to nominal GDP. Both markets could do with another year of price drops. If we were to have it (and we think there will be more price declines), then valuations would at least return to closer longer term trends for Sydney. Melbourne still needs to correct some more.

Of course, there is a massive difference between where prices ‘should’ be and where they may actually go. All I do know is when housing prices do eventually bottom in this cycle (very unlikely to be this year), the housing bears will no doubt be forecasting (and demanding!) yet more declines.

Housing bears are notoriously hopeless in picking housing market bottoms and I can assure you now it will be no different in this cycle!

As mentioned, this coming weekend will be the opening of the new auction season for Sydney and Melbourne. We can expect just over 150 auctions in Sydney and around 200 for Melbourne. As each weekend goes by in February, auctions numbers will increase to the point where the market will should reach its full volume on the 2^nd of March with about 850 to 1000 Saturday auctions that day for each city.

 

As per the opening of each season, auction clearance rates will likely rise from the December lows. I am expecting Sydney to rise back into the late 40s or maybe early 50s after unreported results. While Melbourne may reach the high 50s. Be careful of the media reading too much into this. Some may herald this as a recovery in the housing market.  It won’t be.

Just recall this time last year the market opened up with Sydney recording a clearance rates in the high 50s and Melbourne actually touched 70%.

No, this downturn still has some legs to run yet. As mentioned above, Sydney and Melbourne remain heavily overvalued despite the price falls that have happened, there is a election just a few months away where negative gearing is at play, and then the banks are still being very draconian on providing loans to the market.

But I have noticed one thing – there are more bargain hunters in the market. And the first home buyers are somewhat out. This downturn has been going on for over 18 months now. Its not new any more and the longer it goes for, the more sensitive it will be to any stimulus thrown at it. 

APRA have also signalled a reversal of policy. Back prior to Christmas, APRA scrapped its interest only lending limits, which was in our view the final straw for the market when the interest only limits were brought in earlier 2017. 

Speculation is rising that the next move from APRA may well be to lower the 7% buffer threshold to maybe 6% or lower still. This buffer is a minimum servicing requirement that’s of the loan applicant if they could handle an average lending rate of 7%. With average lending rates in the 4s it is now very hard to see a scenario where lending rates lift by some 300 basis points. In the current environment, doing so would probably see revolution on the streets, let alone the deepest housing crash in history.
 
So, what are our forecast again?



Nothing much has changed in our view since the release of our results. We think our base case is very much in play but I do also think the odds have increased just a little more that instead of a possible rate cut later this year, the RBA will lean on APRA as mentioned above. Doing so may well create the same effect as a rate cut which  in turn, just might create a bottom in the current housing downturn, especially if APRA keeps loosening lending restrictions into 2020.

Offsetting this view will be fears by investors over the repeal of negative gearing, assuming Labor wins in May plus the ongoing hard core scrutiny of the banks on loan applicants.  For now, there is no rush for buyers to enter into the market. But keep an eye out for easy pickings. We have quite a few distressed listings in our Distressed Property report now. Some 23,000 of them, of which, many vendors are quite negotiable…