House Prices

It’s too early to make the call about just how long the recent pick-up in housing prices will last, and whether it will gather pace.

The current upswing is weaker than past cycles and is being weighed down by a general reluctance among first home buyers to enter the market and a desire by existing home owners to make hay from lower interest rates by paying down their mortgages rather than trading up into shiny new abodes.

There have been suggestions big income earners may have been influenced to re-enter the property market in the wake of muted changes to superannuation rules for those earning over $300,000 a year.

Commonwealth Bank economist says the two bigger factors driving house price increase have been lower interest rates – the 2 percentage points down since late 2011 – and pent‑up demand created by years of slower housing construction.

Could further rate cuts drive up prices? The consensus is an interest rate cut remains on the cards for later this year but it’s probably not just around the corner.

The Reserve Bank didn’t see the need to cut rates early July, noting: “The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values and further effects can be expected over time. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.”

However, the Reserve Bank Of Australia, which believes it has inflation in check for at least the next year or two, also stated “the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand”.

On the supply side, building construction rates remain sluggish.

Although, building approvals, which are a leading indicator of housing construction, have been trending up. “In April, building approvals surged by 9.1 per cent and are now 27.3 per cent above year-earlier levels,” a note from the Commonwealth Bank .

Cautions that building approvals are notoriously volatile though, and can be skewed in one month if a large apartment development is included, as each unit is counted as a dwelling.

Once the May building approval rates are released, there have been prediction’s of a  drop of about 1 per cent.

The current cycle of residential growth continues it could add 2-3 percentage points to Australian GDP growth over an average two to three-year cycle.