This weekend is a crucial one for the housing market.
The election result has created what appears to be a whole new landscape for property. Negative gearing changes are out and the change to the capital gains tax are not happening. These are likely to have a positive effect on prices, but how big will it be?
The results in property markets this weekend will help answer that question, and point the way for the rest of the year. If there is a pop in prices and in auction clearance rates that will create a wave of positivity among vendors and investors (and a return to despondency for first home buyers).
So will there be a bump in prices and clearance rates? It’s hard to see any other outcome. The house-selling landscape just got a lot nicer. It’s not just the certainty around negative gearing that will help auctions this weekend.
The Reserve Bank is expected to cut interest rates when it meets on June 4. And quite possibly again in July.
Also, home buyers should soon be able to borrow more, as the banking regulator is permitting banks to use a lower yardstick to figure out if borrowers can pay money back. Banks used to have to check people would be able to pay off their loan even if mortgage interest rates went up to 7.25 per cent. That figure is known as the “assessment rate”. Now the Treasurer has approved banks to set a lower assessment rate.
Those changes will give home buyers the ability and confidence to borrow up big. And when multiple buyers show up to an auction, their pockets overflowing with borrowed money, house prices tend to shoot up.
So the demand side of the picture looks stronger than it has for a while. Still, it’s worth being wary. There’s a lot of stock for sale this weekend. A total of 1933 homes are up for auction, double the number for sale last weekend, when the election was being held.
If buyers can absorb that flood of property and make the property landscape look sunny again the stage will be set for a period of property market enthusiasm.
If you look at the share prices of Australia’s big four banks, it is clear many people expect the property market to turn around. The share prices of each is higher than it was before the election. Commonwealth Bank, Australia’s largest bank, is up 6.5 per cent.
THE BIG PICTURE
A strong weekend for property could bring back FOMO (fear of missing out) and have buyers rushing to buy before prices surge back up again. The risk for anyone who hurls themselves headlong into the property market is this could be a short-run sugar hit.
Have the fundamentals of the housing market changed? Some things are certainly still the same:
• New housing supply is still coming online, especially in tall towers in central cities
• Interest-only periods on investor loans are still expiring at high rates, which can cause some of those properties to be put on the market
• Australia has a weak national economy with poor gross domestic product (GDP) growth, high underemployment, and worsening unemployment. (This grim state of affairs is precisely why the RBA is poised to cut rates.)
• We still have record high household debt-to-income ratio, as the next graph shows.
THE REST OF THE YEAR
If this weekend’s results go well, two waves are likely to collide. A wave of buyer enthusiasm sparked by FOMO. And a wave of seller enthusiasm caused by what will look like a property recovery.
The battle of those two waves will determine the shape of the property market for the rest of the year. If the buyers prove most numerous and prices, it will be a great short-term result for property prices. But that recovery will come at a cost. Taking household debt to yet another a new level might just sow the seeds for the next downturn.
Jason Murphy is an economist. He is the author of the new book Incentivology. Continue the conversation @jasemurphy