The Australian team at Credit Suisse has been turning out some fascinating research this month on sentiment in the Australian property market.
Economists track sentiment closely because shifts in mood can often prove to be good indicators of future demand. There are questions about that, sure — but we’ll get to that later.
Analysts Damian Boey and Hasan Tevfik at Credit Suisse, in two research notes to clients this month titled De-rating Australian housing, have been looking at the relationship between what people across the country think about the housing market, and what happens with prices. And they have drawn out some strong correlations – mood, overall, tends to lead price.
For NSW, they produced this fascinating chart, by far the most dramatic of all the states:
In terms of talking points on this chart, where do you start?
There was the wild rally in the late 90s. Then after a decent run of sustained gains, Sydney property prices started crashing in 2003, and the red line shows people saw value in the market. The GFC happened, dampening sentiment and making the people of NSW roughly as uninterested in buying houses as the rest of Australia.
And then there is the shocker at the end: as people’s outlook on the housing market has dived spectacularly over the past two years, prices have been roaring.
Sentiment and confidence measures can be shaky indicators of what’s actually happening in an economy. For example, in the benchmark NAB survey on business confidence, companies in Australia right now are reporting low confidence while at the same time saying overall business conditions are at their highest in years.
What people will tell you about how they’re feeling about something doesn’t always square with their answers to questions that require harder, factual answers. So a business owner might tell you everything is going to hell in a handbasket, but at the same time, report that his revenue is up this month and he’s planning to put on a few more people.
In the same way, people in Sydney might tell you it’s a terrible time to buy a house. And then go and buy one that weekend.
This is because housing demand is driven by a lot of practical realities. In a strong economy like Sydney’s – the unemployment rate in the metro area is around 3% – there’s always going to be a steady demand as people progress careers, or need a bigger house to accommodate kids, or grandparents. The bustling economy in the state is helping to sustain that.
There has unquestionably been a supply shortage in Sydney but so far there has been more than enough demand to outpace it. On the influences for this, Boey and Tefvik say:
In recent years, the NSW housing market has been fuelled by foreign buyers and investors. Large net interstate migration into NSW has also contributed to the tightness of the market.
In some ways, this is reassuring for people in Sydney. It’s an argument that the explosion in property prices – a ridiculously unsustainable 20% annually in some places at some points – has been driven by the double whammy of a supply shortage couple with an extraordinary surge in demand from elsewhere – interstate migrants naturally following jobs, and foreign investors.
The upshot is, despite what anyone would think after hanging out at a Saturday afternoon barbecue and listening to the conversation about housing, people in Sydney are not totally insane when it comes to property.
That chart shows that people are well aware prices are nuts.
The difficult – and delicate – question is whether people will continue buying as they become fearful about the entry point, even as interest rates remain at their historical lows. Add in to this the question of people wanting to come to Sydney with prices as they are, and you have a very bad outlook for housing demand.
It’s worth noting Credit Suisse has long been of the view that the RBA will have to take interest rates below their current level of 2%. Nationwide, they say that the “the ‘home-buying sentiment’ component of the Australian consumer confidence index has led growth in home sales. Recently, sentiment has deteriorated to below-average levels, consistent with weakness in housing demand.”
But congratulations, Sydneysiders. At least you recognise the risk.