Weekly economic briefing: The house price cycle

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

The house price cycle

Australia’s housing market has slowed.

At the end of March, CoreLogic’s RP Home Value Index indicated that national dwelling prices fell by 1.0% in the March quarter, bringing annual price growth down to just 0.7%. The March fall in value was led by the high-priced Sydney market, which fell by 1.7%. But Sydney wasn’t the only market to correct, with Melbourne (–0.5%), Adelaide (–0.4%), Canberra (–0.2%), Perth (–0.2%) and Darwin (–0.1%) all recording falls in the March quarter, while Brisbane was flat. Hobart – which typically lags the nearby Melbourne market – bucked the national trend, with a quarterly gain of 3.4%, and its annual rate of growth (13.0%) showing a clean pair of heels to Melbourne (5.3% year-on-year).

The data also says the distribution of price growth is changing. Sydney and Melbourne have dominated the most recent price cycle. Now it looks like they may be taking a step back – in part due to changing interstate migration flows amid stretched affordability in the two biggest cities. In particular, the flow of people out of New South Wales has increased, leading to Queensland overtaking Victoria to be the highest recipient of net interstate migration over the past year.

There are a range of factors which have been restraining dwelling price growth lately. Affordability in Sydney and Melbourne has become very stretched. A regulatory crackdown by APRA since early 2017, with a focus on interest-only loans, has slowed lending growth to investors, lending standards more generally have been tightened, making it harder for some would-be buyers to obtain credit, and interest rates for investors have edged up. At the same time, the supply of new housing has also increased of late, helping to explain why prices are taking a breather after a prolonged run-up.

Chart 1 below shows the ratio of the number of dwelling commencements to Deloitte Access Economics’ estimate of the increase in the underlying demand for dwellings (reflecting the number of new households plus the replacement of demolished housing). After a period of below-average building activity, both before and after the GFC, we have more recently been building more dwellings relative to underlying demand.

However, after a couple of years of above-average increases in housing supply, by 2016-17 a pick-up in population growth had brought the ratio of new supply to new demand back to its long-run average. Recently, the ABS announced Australia’s population grew by a stunning 396,000 people over the year to September 2017, driven by net overseas migration of around 250,000 people. Looking ahead, dwelling commencements have been gently moderating, and we expect housing investment to decline over the next couple of years, suggesting that the change in the supply–demand balance may once again point to higher prices (again) and stronger rental growth.

Chart 1: Dwelling supply and demand

Source: Australian Bureau of Statistics Cat 8752, Deloitte Access Economics

 

In the short term however, changes in investor activity can have a bigger impact on house prices than these underlying supply–demand drivers. Most of the slowdown in the Sydney and Melbourne property markets seems to be linked to waning investor demand, amid the tighter lending practices.  However, it also looks as if the slowdown in investor lending may have more or less run its course (see Chart 2).

Chart 2: Monthly housing finance to investors

Source: Australian Bureau of Statistics Cat 5609, Deloitte Access Economics

 

Australia’s capital city housing still looks very expensive based on any historic or global comparison, and high levels of household debt remain a significant risk factor for the Australian economy going forward.

For now however, the recent house price moderation does not appear to be turning into a rout. Underlying demand for housing continues to be supported by key drivers – led by strong population and employment growth, the maintenance of record low interest rates, and continued investor interest in the sector.

For more information on the Australian brief, please contact co-authors David Rumbens and Andrew Ponsonby.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Brexit transition deal boosts UK business sentiment

  • The latest Deloitte survey of UK Chief Financial Officers (CFOs) released this morning shows that business confidence has edged up and is running not far off its long-term average. CFOs seem to have shrugged off weakness in equity markets and concerns about trade with perceptions of uncertainty dropping to the lowest levels since the spring of 2016, before the EU referendum. This finding fits with our own “Worry Index” which tracks newspaper references to terms relating to uncertainty and risk. It dropped to a ten-year low in the first quarter.
  • The announcement of the Brexit transition on 19th March seems to have had a positive effect on the corporate mood. 84 CFOs responded to the CFO survey before the deal was announced, 22 after. Those who answered in the wake of the announcement showed significantly higher levels of optimism and risk appetite than earlier respondents. Latter respondents were also less negative about the long-term effects of Brexit.
  • For the first time in two years CFOs do not rate Brexit as the main risk facing their businesses. Brexit has dropped to second place, with concerns about slower UK growth now at the top of the risk league.
  • Such uncertainties about prospects for activity in the UK are reflected in the balance sheet strategies being pursued by large businesses. CFOs in businesses that derive most of their revenues abroad report a clear focus on expansion, especially introducing new products or services and moving into new markets. Their counterparts in businesses deriving most of their revenues from the UK are operating more defensively, with cost control as their top priority.
  • With the unemployment rate at a 43-year low, labour shortages are emerging in the UK economy. 31% of CFOs report that recruitment difficulties or skills shortages have increased in the last three months, with none reporting a decline. CFOs have also brought forward their estimates for the timing of interest rate rises, with 96% expecting rates to be higher in a year’s time.
  • The effect of the transition announcement on this quarter’s survey results underscores the sensitivity of sentiment to developments in the Brexit negotiations. The moment of truth on Brexit is approaching. The UK government hopes to strike a deal with the EU and have it endorsed by Parliament this year. Whether it succeeds in doing so seems likely to be a major driver of business confidence through the rest of this year.
  • To read the full report and download the survey data please click on the link below: www.deloitte.co.uk/cfosurvey

PS: Two weeks ago we argued that the trade spate between the US and China represented an economic and a geopolitical contest. An article in the FT by Richard Starpoli, former Chief Information Officer for the US Department of Homeland Security, lends support to this view. In it Mr Stapoli wrote that tariffs on Chinese imports to the US, “are long overdue and they must be only the first step to safeguarding the technological interests of America and the world. We are in a new cold war with Beijing, to retain control of the technology critical to the modern economy.”.

PPS: We recently wrote a briefing on the advantages of cash whilst noting the rise of digital payments. Last week the head of Sweden’s Central Bank, Stefan Ingves, warned of the dangers of a completely digital payments system controlled by private companies. The governor cautioned that a lack of public control would leave the country vulnerable in the event of a serious crisis or war.

PPPS: We recently wrote another briefing on the value of a university degree. Last week we came across figures published in 2015 by The Chartered Institute of Personnel Development – which represents people working in HR – showing that 35% of bank and post office clerks have degrees, ten times the percentage in 1979 and the number of newly-employed teaching assistants with a degree has increased from 5.6% to 36.9% since 1979.

 

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended last week up 1.6% at 7,172.

 

International economic briefing by Ian Stewart

Economics and business

  • China announced tariffs on 106 US products in retaliation to the Trump administration’s threat of import duties following Beijing’s alleged theft of intellectual property
  • President Trump responded by ordering his administration to plan a further $100bn in import tariffs on Chinese goods, prompting fears of a trade war
  • Global manufacturing activity appears to be decelerating according to the latest PMIs which show declines in Europe, China and Japan
  • UK service and construction sector PMIs dropped in March to their lowest levels since the EU referendum, driven by severe cold weather
  • The euro area unemployment rate fell to its lowest level since 2008 in February
  • UK grocery price inflation fell sharply in Q1 2018 to 2.5%, having remained above 3% for most of 2017, according to Kantar Worldpanel
  • A new study by the OECD found that 14% of jobs in developed economies were at high risk of being automated, much lower than previous estimates
  • The first commercial cinema in Saudi Arabia will be opened by the Chinese owned company AMC Entertainment this month
  • Jamie Dimon, the head of JPMorgan Chase, warned that the US economy is at risk of overheating
  • Three out of four UK companies pay men more than women with an average gender pay gap of 9.7%, the FT reports
  • Music streaming company Spotify floated on the New York Stock Exchange with an initial valuation of $26bn
  • Blackrock, the world’s largest asset manager, is to offer a range of funds that exclude firms which manufacture or sell firearms
  • The proportion of Brits paying the top rates of tax has doubled in the last 20 years

 

Brexit and European politics

  • The UK Brexit committee has issued 15 key tests to assess any final Brexit deal based on the UK Brexit Secretary David Davis’s comment that “any new deal would be at least as good as what we have now”
  • The FT reports that Brexit uncertainty is causing a shortage of software engineers and pushing up salaries in the fintech sector, with a number of companies opening new EU offices to retain talent
  • Auto maker company, Vauxhall, announced that it will almost double the production of one model in the UK plant as a sign of confidence in post-Brexit Britain
  • The number of Chinese citizens acquiring UK “golden visas” which give residency in return for investing £2m or more in assets, rose 56% last year, compared to the prior year
  • The FT reports that shipping groups are boosting Ireland-EU routes to bypass UK ports ahead of Brexit
  • A survey showed that more than a fifth of British manufacturers are planning to lay off workers and 58% are planning to increase prices to mitigate the costs associated with leaving the EU
  • Édouard Philippe, the French prime minister, announced the country will reduce its number of MPs by a third before its next election

And finally…

Italian authorities rounded up a few dozen of around 1,000 cattle, on the loose in Calabria since the 1970s due to a rural legend that they belonged to two mafia families – Al Cowpone


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