Where To From Here For Home Values?
According to the RP Data-Rismark Home Value Index results for June 2013, combined capital city home values increased by 3.8% over the 2012/13 financial year. The growth in home values has been moderate and the response to the low mortgage rate environment has not been as strong as in the past. This begs the question where to from here?
The June results of the RP Data-Rismark Home Value Index showed a variety of performances across the capital cities and the performances of individual capital city housing markets are likely to continue to diverge based on their own unique circumstances. Activity is being driven by investors (who can be fickle and exit the market quickly) and upgraders whose activity is most likely linked to the recent pick-up in consumer sentiment and in some instances the recent pick-up may not continue based on the direction of the economy from here.
Current housing and broader economic conditions do not appear to indicate the market’s performance return to that prior to the financial crisis, for a number of reasons.
Firstly, household debt to disposable income currently sits at 147.3%. No doubt Australian households have a large amount of debt, most of which (133.2%) is housing debt. The chart below shows that the debt to disposable income ratio has been virtually unchanged since the end of 2005. Clearly households have reached the limits to how much debt they can take on. Whether this limit continues into the future remains to be seen but at the moment it is clear Australians do not want to take on more household debt and around 90% of this debt is related to housing.
Secondly, and which directly relates to the first point, households have increased their level of savings and shown less of a propensity to spend. The national accounts data includes an item for the household saving ratio and looking at this over time (below) provides valuable insight. Over the past 12 months, the household savings ratio has been recorded at 10.5% and over the past five years it has been recorded at an average of 9.8%. The level of household savings currently is at its highest level since late 1987 (25 years ago now) and the recent trend of higher savings has reversed a 30 year trend over which time savings by households continued to deteriorate.
Thirdly, consumers are changing the way they spend and doing it with their own money rather than with credit cards. Over the 12 months to May 2013, the number of credit card accounts increased by just 2.1%, in comparison debit card accounts increased by 6.2%. Total credit card transactions increased by 6.9% over the year but cash advances fell by -2.4%. Total debit card transactions increased by 13.9% over the year. Credit cards had an average outstanding balance of $3,236 and the average credit limit was $9,091. On an historical level both are quite high however, the average outstanding balance was down -3.5% over the year which was the biggest year-on-year fall on record and the average credit limit was -1.0% lower on the year a near record fall.
The previous run-up in home values had been assisted by significant changes to economic conditions such as financial deregulation, significant falls in mortgage rates, a large reduction in unemployment, much lower inflation and strong growth in housing credit.
Mortgage rates are below historic levels currently however the impact of shifting from 17% at the start of the 1990’s to around 7% at the end of the decade is not as significant as a further 1% to 2% reduction.
It’s a similar story for unemployment which shifted from around 11% in 1992 to around 6.5% by the end of the decade. In fact, an anticipated increase in unemployment from the current low levels is one of the major factors contributing to the changes to consumer behaviour.
In 1990, annual inflation was running at 7%, by the end of the decade it had fallen to around 2% and today it sits at 2.5%. The lower level of inflation since the end of the last recession has clearly contributed to the lower mortgage rates which in-turn has assisted the run-up in home values.
Credit growth throughout the early 2000’s was sitting at an annual rate of 16% to 20% as the housing market surged. Ever since 2004, growth in housing credit has been slowing and over the past year credit has grown at a near record low level of 4.5%.
None of these economic measures are likely to shift as significantly as they have in the past and therefore any changes are not as likely to be as conducive to significant growth in home values as they have been in the past. The outlook for home values therefore now appears to the new normal of low, but stable, growth for the medium term.