Australia's housing downturn appears to be slowing

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  • Australian home prices fell heavily again in February, although the rate of the decline was slower than in previous months.
  • Australia’s median home price has fallen 6.8% from the peak seen in late 2017.
  • CoreLogic expects that prices will continue to ease in the near-term. The group is also sceptical that a rate cut from the RBA will do much to support market conditions.
  • Financial markets are fully priced for a rate cut by early next year. Whether that remains the case will determined by Australia’s Q4 GDP report that will be released next week.

Australian home prices fell heavily again in February, albeit at slower pace than in recent months.

CoreLogic’s Home Value Index fell another 0.7% during the month in average weighted terms, extending the national downturn that began in late 2017 to 6.8%.

Prices nationwide had fallen 1.1% in December and 1.0% in January.

Australia’s national median home price now sits at levels last seen in September 2016, having fallen in 14 of the last 16 months.

However, at “only” 0.7% in February, it appears that price falls are now slowing. Whether that continues remains the key question, especially for the Reserve Bank of Australia (RBA).

By type of property, house prices fell by a weighted average of 0.8% last month, faster than the 0.6% decline for units.

CoreLogic

Breaking down the national result, prices in Australia’s combined capital cities fell by a larger 0.9% last month, led once again by steep falls in Sydney and Melbourne, along with the mining capitals, Perth and Darwin.

Elsewhere, median prices also fell in Canberra and Brisbane while those in Adelaide were flat. Hobart, at 0.8%, continued to buck the national trend in February, continuing the outpeformance that’s now been seen for more than a year.

By property type, median capital city house prices fell by 0.9%, faster than the 0.7% decline for units.

Over the past three months, capital city median home prices fell by 3.3%, extending the fall over the past year to 7.6%.

In regional areas, prices eased by a smaller 0.3% last month. Average home prices slipped by 0.3% while those for units eased 0.2%.

For the quarter, prices in regional areas fell 0.5%, leaving the decline over the past year at 1.4%.

Combined, Australian home prices fell 6.3% from 12 months ago.

CoreLogic

Despite signs that prices are now falling at a slower pace, Tim Lawless, Head of Research at CoreLogic, says they’re unlikely to bottom in the near-term.

“The February housing market results marked a subtle improvement in the rate of decline, however the housing market downturn is now more widespread geographically and we aren’t seeing any indicators pointing to the market bottoming out just yet,” he said.

In particular, Lawless says recent weakness in housing credit data, including to owner-occupiers and investors, “explains a lot of the broader softening in housing market conditions recently”.

However, he says credit is not the only reason behind the recent weakness, noting increased supply, particularly of units in some capital city markets, along with elevated levels of property listings, reduced foreign investment and growing expectations that prices will continue to fall as other factors that have weighed on prices, offsetting low mortgage rates and strong labour market conditions in New South Wales and Victoria.

As for whether a potential rate cut from the RBA — something that is now fully priced by financial markets to occur by early next year — will help turn around market conditions, Lawless says it’s uncertain if it will make much of a difference.

“Further cuts to the cash rate are looking like a growing possibility, however it’s uncertain how much stimulus lower rates may provide to the housing sector considering the tight servicing criteria and higher funding costs from lenders would likely prevent any cuts from being passed on in full,” Lawless said.

That view is not uncommon, and helps to explain why financial markets are pricing in a small chance that the RBA may cut rates twice before the end of next year, something that would likely deliver more relief to borrowers than a single 25 basis point decrease that may not be applied to variable mortgage rates.

At it’s February monetary policy meeting, the RBA Board noted that: “if [home] prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast”, adding that “factors affecting households’ future consumption decisions remained a key risk for the domestic economic outlook”.

The RBA also acknowledged that “dwelling investment was also expected to decline more sharply than previously expected, consistent with the decline in residential building approvals and the fall in housing prices”.

In a speech delivered in early February, RBA Governor Philip Lowe said there were two possible triggers that could warrant a reduction in Australia’s cash rate: higher unemployment or continued weakness in inflationary pressures.

“In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point,” Lowe said.

“We have the flexibility to do this if needed.”

While the RBA now holds a neutral bias on the outlook for interest rates — acknowledging that the future direction is now “more evenly balanced” — that could quickly change depending on how the Australian economy fared in the December quarter last year.

We’ll find out that answer on Wednesday, March 6, when the Q4 GDP report is released. The early indications suggest it will be another weak quarter, an outcome that would see year-ended growth rate slow even further.

Such a result, especially if sustained, would likely slow hiring across the country, leading the potential for higher unemployment and even weaker inflationary pressures.

For those looking for a more granular view on what happened in home prices across the country last month, this detailed table from CoreLogic has the answers.

CoreLogic

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