The recent strong rise in house prices across Australia might reasonably be expected to be a precursor to a rise in housing construction. This in turn would bring associated economic and multiplier benefits for the rest of the Australian economy.
Steady on. ANZ’s Property Research Team lead by Paul Braddick says in a note today:
Despite an unprecedented pent-up demand of physical housing stock and an expected 15-20% lift in home prices over the next 2½ years, we are forecasting the most modest housing construction cycle in the past 30 years.
That is amazing when you think about the record-low interest rates, and the reported pent-up demand. So without an increase in supply through new construction it possible that even a bullish house price forecast such as this 15-20% from the ANZ undershoots as buyers enter the market and chase each other at auction.
[Update: Braddick told Business Insider later this morning: “I believe our official forecast is looking increasingly conservative in light of the current market momentum in both Sydney and Melbourne.”]
The ANZ note adds:
House prices are rising strongly in Sydney, Perth and Melbourne, buoyed by improved affordability that has released some of the pent-up sales demand created over recent years. Solid growth in investor and upgrader demand has driven stronger sales, auction clearance rates and home prices as buyers increasingly recognise the upside potential for valuations and take advantage of sharply reduced borrowing rates.
An extended period of low interest rates and tightening market fundamentals should fuel further price gains in the year ahead.
However, affordability concerns, rising unemployment and generalised household, home-buyer and lender caution are likely to cap price gains relative to earlier recoveries.
In other words the ANZ expects there to be a limit on price rises because the economy is still relatively weak, more people are going to be out of work in the next year or two, and the trend toward saving not spending — caution — that has been such a feature of the domestic economy since 2009 will act as a natural handbrake on price growth.
But although Australians haven’t lost their heads yet, the frothy auction clearance rates starting to emerge as Spring just kicks off are a sign that the lack of supply and pent up demand with super low rates might just create the preconditions for a surge in prices.
So there is a warning too, embedded in the ANZ paper:
recent years’ experience has disproved the view that housing is a one way bet and we suspect an ongoing air of household debt aversion/caution will restrain the expected initial upturn in renovations.
If the ANZ is right the track that house prices are on is, as Malcolm Edey alluded to last week, not too concerning as you can see in the chart below.
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