Australia's house price correction may already be over

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It may have only started late last year, but it looks like Australia’s house price correction may be already over.

That’s the view of David Plank, head of Australian Economic at ANZ Bank, who says “the worst may be behind us in terms of house price weakness”.

As he explains, while recent data from CoreLogic suggests house prices are falling, dragged lower by declines in Sydney and to a lesser degree Melbourne, that largely reflects seasonal patterns, rather than further price declines.

“At face value, CoreLogic’s December house price data indicates that the pace of monthly declines is accelerating, with the fall in December outpacing the decline in November,” Plank says.

“The problem we have with this is that the headline data published by CoreLogic, the most commonly referenced series, are not seasonally adjusted.”

Plank says the cyclical slowdown in Australia’s housing market that usually occurs over summer — seeing turnover levels fall sharply — often leads to volatile price movements during in CoreLogic’s raw data, raising questions over whether it is reflective of underlying price trends in individual markets.

To gauge whether it is, Plank says the data needs to be seasonally adjusted to eliminate the effect of this traditionally slow period for activity.

This chart from ANZ shows monthly house price movements based off CoreLogic’s data. The red bars are those supplied by CoreLogic while those in blue have been seasonally adjusted by ANZ.

Source: ANZ Bank

“When the data are adjusted for seasonal influences then the interpretation of recent house price developments changes considerably,” says Plank.

“The raw data indicate the decline in house prices is accelerating, but the seasonally adjusted data tell the opposite story.

“The peak monthly decline in house prices was October, with prices effectively flat in November and December.”

Economists at Macquarie Bank agree with Plank, suggesting that using CoreLogic’s daily price data — providing a real-time snapshot of what’s happening on the ground — there’s tentative evidence emerging to suggest prices nationwide are now starting to lift once seasonal adjustments have been applied.

As for Sydney, Australia’s largest and most expensive housing market where prices have fallen the most over the past few months in non-adjusted terms, Plank says the seasonally adjusted price movements suggest price declines are now ebbing.

“The original data suggests that the Sydney house price decline is accelerating… [but] when we seasonally adjust the data the peak monthly decline in house prices was back in October, with November and December showing progressively smaller declines,” he says.

This chart compares monthly price movements in Sydney comparing CoreLogic’s original and seasonally adjusted data.

Source: ANZ Bank

While prices have fallen even with adjustments for seasonality, they have not been as steep — or accelerating — as seen in the original data.

And along with a recent stabilisation in auction clearance rates, Plank says it suggests the largest of Australia’s house price declines may have already been seen.

“Base effects mean the annual pace of house price growth will almost certainly slow over the first few months of 2018, even if prices rise a little each month, but the data does point to the worst being almost behind us,” he says.

“While we are a little cautious about reading too much into the data at a volatile time of the year, we do think the combination of ever smaller falls in house prices and the stabilisation and lift in the auction clearance rate needs to be taken seriously.”

Though, in isolation, Planks says recent trends makes it difficult to think annual house price growth will fall into negative territory this year, he says that other factors will likely prevent a sharp rebound in prices as was seen in 2016.

“A renewed tightening in macro-prudential policy is something to look out for,” Plank says, alluding the possibility that APRA could tighten lending restrictions further given growth in household debt continues to outpace that of household incomes, increasing household leverage.

However, rather than tighter lending restrictions, Plank says price growth will likely be capped by a more traditional source: interest rate hikes.

“In our forecasts, a new catalyst for housing weakness is a lift in the cash rate by the RBA,” he says.

“We think the growing expectation of this and then the reality will push annual house price growth down to almost zero by the middle of the year.”

If the RBA doesn’t lift rates in May, Plank admits that ANZ’s forecasts for house prices will “most likely be too low”.

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