Australia Home Prices to Rise on Rate Cuts: Mortgages

Australia’s flagging property market is poised to get a boost from record low interest rates and a housing shortage that could boost prices by as much as 10 percent this year.

The Reserve Bank of Australia has cut the cash rate by 1.75 percentage points since November 2011 to match a 50-year low, which has helped reduce standard variable mortgage costs to 6.65 percent in November, the lowest in almost two years, central bank data show. Traders are betting on a 50 percent chance the central bank will drop the rate a quarter point to 2.75 percent by March, interest-rate swap prices compiled by Bloomberg show.

While lower borrowing costs failed to stimulate demand in 2012, additional rate cuts and a constrained supply of homes will draw buyers back to the market, said Janu Chan, a Sydney-based economist at St. George Bank Ltd. A decline in home prices is already showing signs of moderating, with a 0.4 percent decline in 2012 after a 3.6 percent drop in 2011, according to data from Brisbane-based researcher RP Data.

“The two most recent rate cuts, and all the successive ones, should continue to feed through to the economy and have an impact, particularly on housing,” Chan said in a telephone interview. “There’s also the supply side -- there’s been a long period of underbuilding in various areas.”

Chan predicts home prices could rise by 5 percent to 10 percent on average in Australia’s biggest cities, including Sydney, Melbourne and Perth in 2013. Her estimate is higher than those of analysts from Australia & New Zealand Banking Group Ltd. and Commonwealth Bank of Australia, who predict average gains of between 3.5 percent and 5 percent in the cities.

Slowing Growth

The median price for homes and apartments across the eight biggest cities was A$483,000 ($504,397) as of Dec. 31, according to RP Data. Sydney’s was the highest at A$580,246, Melbourne’s median price was A$500,000 and Perth’s was A$479,000.

House price growth started to slow in 2010 after rising every year but one in at least 23 years, according to government data. Prices fell 4.1 percent in 2008, before climbing 14 percent again the following year, the data shows.

New homes under construction fell for the third straight year in the 12 months to June 30, statistics bureau data showed.

Approvals to build homes slipped for a second straight year to 145,515 units in the year to Oct. 31, compared with 160,760 two years earlier, according to government figures.

Building Recovery

Australia’s building industry, which has been shrinking for 30 months, is showing signs of recovery, a private construction performance index showed. The index rose to 37 in November from 35.8 percent in October, revealing a slower pace of contraction, according to the most recent index figures. The S&P/ASX 200 Real Estate Index jumped 25 percent last year, compared with about 15 percent for the benchmark index.

Construction also is picking up, underscoring a turnaround. Residential work done rose 1.5 percent in the September quarter from the lowest level since March 2010 in the previous three months, data from the statistics bureau show. Queensland, New South Wales and South Australia state governments are trying to both stimulate building and boost demand for homes by offering A$15,000 to first-time home buyers purchasing a newly built home, according to state government announcements made in 2012.

Construction Boost

They join the Reserve Bank in trying to stoke industries such as construction as commodity prices ease and the nation’s mining boom looks set to peak this year.

The measures contrast with moves by governments across Asia to contain booming housing markets. Singapore home sales are expected to fall as much as 27 percent, according to Chicago-based broker Jones Lang LaSalle Inc., after six rounds of housing curbs by a government trying to control prices that soared to a record in 2012. Hong Kong’s monetary authority has warned about an overheated property market and a “disconnect between property prices and economic fundamentals” after prices doubled in the past four years.

An increase in home building will help keep a lid on Australian prices and avoid a repeat of the surges following the RBA’s last easing cycle, said Savanth Sebastian, an economist in Sydney at a unit of Commonwealth Bank who forecasts a 5 percent average increase across the country in 2013.

Previous Growth

Despite declines in mortgage rates, “the housing market has still been unable to record growth in values over the year,” RP Data senior research analyst Cameron Kusher said in an e-mailed release this week. “It is clear that the previous strong value growth conditions to which many home owners have become accustomed of recent years are well and truly behind us.”

Kusher forecasts 2013 home price increases between inflation and wage growth. That would equate to price growth between 2 percent and 3.75 percent, based on government and RBA forecasts.

Prices in Australia’s five biggest cities have risen about 0.5 percent this month, led by Sydney, according to RP Data’s daily home price index.

The rate cuts so far have also had limited impact on other parts of the economy. The Australian services industry shrank for the 11th month in December, and manufacturing contracted for the 10th month, data released by the Australian Industry Group this week showed. Consumer sentiment slumped in December by the most in nine months, and business confidence plunged in November to the lowest level since 2009, private surveys last month showed.

Prior Surge

In contrast, when the central bank cut its benchmark rate to 3 percent in April 2009 from 7.25 percent in September 2008, house prices responded. They surged 21 percent in the 15 months to June 2010, according to government data, boosted also by increased handouts of as much as A$21,000 to first-time buyers of both new and existing properties.

Lending and prices also took off after the overnight cash rate was lowered to 4.25 percent in December 2001 from 6.25 percent in February that year. House prices almost doubled in the following decade as households’ debt-to-disposable income ratio jumped to a high of 156.3 percent in September 2006 from 97.7 percent in March 2001, according to central bank data. That ratio was at 148 percent in the September quarter.

“Forward-looking indicators of residential construction, including building approvals, continued to point to a modest recovery in that sector in the period ahead,” the RBA said in minutes of its Dec. 4 meeting. “This was likely to be supported by the pickup in dwelling prices, sales activity and rental yields over recent months.”

Improving Returns

Total gross returns on houses and apartments rose to 4 percent as of Dec. 31 across Australia’s eight biggest cities, compared with minus 1.2 percent six months earlier, figures from RP Data show. At the same time, rental yields remained steady at 4.2 percent for houses and 4.9 percent for apartments, according to RP Data.

Australia had 494 suburbs in November where it was more expensive to rent than to buy a house or apartment, up from 388 in October, RP Data said.

Rising rental yields are drawing more investors to purchase. Investors accounted for A$7.7 billion of home loans as of Oct. 31, a 15 percent jump from two months earlier, while loans to owner occupiers rose 1 percent to A$9.94 billion in the same period, statistics bureau figures show.

Housing finance approvals for owner occupied and investment properties rose 3.8 percent in the 12 months to Oct. 31, after falling 2.8 percent in the same period a year earlier, according to statistics bureau figures.

Market Turning

“Housing finance has seen some steady growth and a lot of other indicators of housing market confidence have started to turn,” David Cannington, Melbourne-based economist at ANZ Bank, said. “We’ll most likely see 100 basis points of interest rate cuts in 2013 and that’ll go a long way toward improving housing affordability.”

Cannington forecasts prices across capital cities will be about 3.5 percent higher than current levels by the end of 2013.

Still, even as mortgage approvals rise, the pace of growth remains sluggish. Annual growth in mortgages to owner occupiers declined to 4.2 percent as of Nov. 30, compared with 9.2 percent three years earlier, according to RBA figures.

Home-loan growth remains at the slowest annual pace since records began in 1977 as concern about the growth of the global economy and declining commodity prices kept potential home buyers on the sidelines.

The RBA’s rate cuts are helping boost affordability and reduce the number of Australian home owners missing payments on their mortgages, Fitch Ratings said in a Dec. 24 report. The proportion of mortgage payments more than 30 days late dropped to 1.36 percent in the three months ended Sept. 30 from 1.54 percent in the previous quarter, it said.

Mortgage Payments

“Fitch expects the Reserve Bank of Australia rate cuts in October and December 2012 to provide relief to borrowers, improving affordability for existing borrowers,” Hai Duong Le, a Sydney-based analyst at Fitch, said in the report. “The agency expects this to be reflected” in mortgage performance in the following two quarters, he said.

About half of Australian borrowers are ahead of schedule on their mortgages, with prepayments equal to more than 10 percent of outstanding home loans, or 1.5 years of repayments, the RBA said in its Financial Stability Review in September.

“It’s still early days but you could say the worst for the housing sector is behind us and it’s a steady crawl upwards now,” said CBA’s Sebastian. “It’s more about creating affordable homes than going out and seeing a price surge. So we expect modest growth, rather than extravagant growth.”

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