A housing market recovery is now getting more airtime by the economic and real estate commentariat. Invariably, signs of life are almost exclusively referenced by movements in house prices. It’s reached the almost farcical point of minor monthly price movements making major headlines, on an almost daily basis, by the legion of analysts and data providers pouring over figures. But if life is returning to housing, are these commentators looking in the wrong place for the wrong thing?
The obsession with house prices as a general measure of housing market health is both misleading and quite unhelpful, but it doesn’t seem to stop even more commentators jumping the bandwagon. In part it’s understandable because the media will lap up content which its readers and viewers want to hear – and the ‘what’s my house worth’ motive is hard to deny. And the market commentators, working as most do for self-interest or corporate interest, are rewarded by the column centimetres and media airtime their house price comments attract. But as an indicator of general market health, these indices tell only part of the story, and for much of the industry, it’s not even the important part.
In the main, most price indices reflect movements in established housing stock, recorded by a differing range of methods. They do not indicate that prices per se are rising or falling, but that the halfway point of sales is rising or falling. In the market we’ve been through in recent years, the lack of interest in the top end of the market, compared with continuing turnover at the lower end, has seen the median pulled down. This has been widely interpreted as a general fall in prices (which have definitely occurred) but the extent to which the median price reflects real price movements is far from precise. Neither does the median price reflect anything in the way of market activity for new housing stock – sales of new detached houses, new vacant land sales, or new apartment sales. It’s a measure of second hand stock trading only, which is its second weakness. Further, movements in median prices on a month to month basis – as are now frequently reported – are ridiculously short term. Analysis even of annual movements is problematic but to read anything much into month to month median price movements, city by city, is taking it too far.
Another measure much loved by the media and some data producers are auction clearance rates. These don’t matter much in Queensland where very little actually sells by auction but even in Victoria and NSW where auctions are more accepted, clearance rates aren’t really a reflection of market health. You can have rising clearance rates on smaller volumes and in a falling market after all.
A final problem with our obsession with price indices is that rising prices are interpreted as good news. If you’re selling or an investor with multiple holdings, they are. But for new entrants they’re not. We’ve had an affordability problem of generational magnitude in this country for a decade now. Recent falls in prices, falls in interest rates and rising wages have helped close that gap. The last thing we really need now is for rapid price inflation and a return of a wider affordability gap.
So if median price movements or auction clearance rates which dominate media and industry commentary on the housing market aren’t really all that helpful, what is?
The answer I’d suggest is volume. Volume of activity indicates that buyers and sellers agree on pricing. It indicates confidence in the market, more so than micro movements in median pricing. It generates taxes for governments which right now desperately need them, allowing them in turn to spend, which the economy also needs. It’s like the blood in your body: things are much better when it’s flowing. You don’t need more but you have to worry when it stops.
The sort of volume indicators that will signal genuine signs of improvement for the housing market are things like housing approvals, housing commencements, the volume of new housing finance commitments, and the volumes of stock traded in the market – both new and second hand.
And when it comes to looking at the various volume indicators, month on month movements are just as flawed as they are for price movements. Look instead for 5 and 10 year trends and compare where we are now relative to previous peaks and troughs. For example, the graph below shows home lending trends nationally since the 1991. (Full story here). The steady decline in owner occupier lending since the onset of the GFC puts us at generational lows, which can also suggest we have some significant upside once confidence returns.
A similar graph, this from a recent UDIA bulletin (full story here) suggests things have been picking up in Queensland since early 2011 but also points to significant potential for improvement. A longer term time series would have helped put this into a clearer perspective.
Long term housing approval data tells a similar story. This chart by Macro Business’ ‘Unconventional Economist’ (full story here) was released early this year and shows long term data to the end of 2010. The subsequent fall in the Victorian market seems obvious now in retrospect. Reasons for optimism that activity will increase in the Queensland market, based on this long term trend, seem equally justified based on the historic perspective.
If volume indicators are perhaps the ones to watch, what are the things that might drive volume?
Falling interest rates clearly are starting to stimulate market interest. Further falls will hopefully trigger rising inquiry levels and greater volumes of market activity. Employment remains relatively strong and those with jobs have enjoyed, mainly, incomes that have kept pace with inflation (apart from rising utility costs and their impact on household budgets). Falling house prices have also helped close the affordability gap and stamp duty incentives on new construction and various planning policy undertakings in different states will help lower the delivery cost of new stock. All of this points to an improvement. Confidence in our national government and in our economic future remain significant brakes on enthusiasm but confidence can shift up or down quickly. Resolving the political impasse of our national government would help confidence immeasurably and that opportunity is coming increasingly closer.
But there’s one more ingredient which I don’t hear many people debate, and it’s neither economic nor political. It’s biological.
Consider for a moment the generation of people in their early twenties when the GFC first arrived. Housing prices were still rising (fast) and stories were everywhere about a generation happy to rent rather than buy – a generation that had ‘given up’ on ‘the dream of home ownership.’ That generation has been deferring that housing decision for what will next year be five years. If they were in their early twenties then, they’re in the late twenties now. If they were in their late twenties then, they’re in their early thirties now.
If they’re still living at home, or sharing a house with others, or renting some dive, they’re quite possibly over it by now. The longing to find a mate and to raise a family in a home of your own, much as it’s unfashionable to talk about in this age of gender neutrality and same sex couples, is as irresistible an urge as humanity itself. The world population would not be growing if it weren't.
That compression of demand in recent years due to the deferment of decisions on family and housing must, at some point, decompress.
The hope is that this decompression when it happens leads to rising volumes of activity and rising new housing construction, and not simply to rising prices. The signs of life we should be looking for are those which point to just that.