Australian house prices in a delicate balancing act

Who would you believe on house prices – a ratings agency or the general public?

It is probably not such a tough question for anyone who remembers the appalling performance of financial products with triple A ratings awarded by ratings agencies to junk financial products before the global financial crisis (GFC) but it is still an interesting conundrum.

One of the prime offenders in the GFC debacle, Moody’s, recently claimed that house price falls across the country are going to accelerate this year, with parts of Sydney and Melbourne likely to face drops of more than 15% over the next 12 months.

Moody’s is bearish but some consumers becoming upbeat

At the same time the Westpac-MI Consumer Sentiment Survey for April found that Australians have started to turn positive on the housing market, on measures including the outlook for prices or whether now is a good time to buy.

Indeed, the views on whether now is a good time to buy a home rose to a four-year high in April, and the sentiment towards the outlook for prices was also much firmer, although there are some that remained pessimistic.

On the ground, some housing indicators such as clearance rates, building approvals and housing finance have also improved recently as home price falls have also slowed.

Some of that might be explained by the time of the year or a positive reaction to the Federal Budget but it is hard to square the positive consumer reaction with Moody’s views, which have become progressively more downbeat.

Price falls will be more dramatic, led by Melbourne

In January, Moody’s forecast Sydney house prices would drop by 3.3% but now it believes the drop will be 9.3%.

That comes after national dwelling values fell another 0.6% across the nation’s capital cities in March, led down by Sydney and Melbourne

Moody’s is even more bearish on Melbourne, expanding January’s forecast of a 6% decline to an 11.4% tumble by the end of the year.

Drilling further into specific areas, Sydney’s inner south-west is tipped to suffer falls of 14.4%, Ryde the worst performance of a 15.8% slump after respective falls last year of 8.1% and 11.3%.

While all Sydney suburbs are expected to fall, the least declines are likely to be seen in the northern beaches with a 4.3% slide, and the Blacktown area which should lose 6.1%.

The Moody’s picture for Melbourne is even worse with the inner east set to fall by 16.3% after falling 5% last year, while in the inner south Moody’s thinks prices will slump 14.2% after last year’s 4.4% decline.

All parts of Melbourne are set to drop, with smaller falls in the city’s north-east and west which are predicted to lose 8.5%.

Hobart is the only city in which Moody’s raised its estimate with a rise of 4%.

Nasty cycle of weak consumption and more unemployment

Moody’s claimed that house prices are being driven down by soft household consumption and low wages growth and that downside pressure would worsen as the negative wealth effect concerned many more households, causing consumption to slide further and unemployment to rise.

It could not have been a more different picture for the Westpac Consumer Sentiment Survey which was taken after the budget and saw a sharp improvement in the measures of the outlook for prices and whether now is a good time to buy.

The “time to buy a dwelling” index rose a further 2.4% to 119.4 in April, which is a four-year high that has increased 33% from its mid-2017 low.

Importantly, the index is now tracking very close to its long run average of 120, with a reading of 100 indicating that the number of optimists and pessimists are the same.

The other interesting factor is that Melbourne and Sydney, where the biggest recent falls have happened, had been behind the improvement in the index.

Lower prices leads to more affordability

The fall in prices is lifting sentiment is some areas with affordability improving.

Similarly, the majority of the improvement in the time to buy index was in New South Wales, with April recording the big turnaround after the budget was announced.

Another potential factor feeding into improving consumer confidence in the property market is the Reserve Bank’s change of heart to stop talking about lifting interest rates and moving to a more neutral stance.

That led to a flurry of media and other speculation that interest rates could be on the way down.

However, it should be noted that the fall in housing prices has seen many new home owners facing negative equity, meaning they are now battling a mortgage that’s worth more than the property itself.