The week ahead: Halting Aussie housing poses a recovery problem - Westpac

Analysts from Westpac have cautionary words about this week's upcoming Aussie housing signals, the EU's Brexit Summit, as well as key flash PMI's for Japan, Europe, and the US.

Key quotes

• Mixed signals on housing but adjustment process seems likely to have further to run

The Westpac Melbourne Institute Index of Consumer Sentiment rose 2.8% to 104.3 in November from 101.5 in October. That was a surprisingly strong result. In particular, respondents are much more positive about their own finances. That is despite consistent reports around weakness in the housing markets in the major capitals and the sharp falls in the equity market through October.

The Westpac Melbourne Institute Index of Consumer Sentiment rose 2.8% to 104.3 in November from 101.5 in October. That was a surprisingly strong result. In particular, respondents are much more positive about their own finances. That is despite consistent reports around weakness in the housing markets in the major capitals and the sharp falls in the equity market through October.

Consumer expectations for house prices posted another fall in November. The Westpac Melbourne Institute Index of House Price Expectations fell 2.3% to 99 – on par with the weakest read we have ever seen on this index, when it was first compiled back in May 2009. 

In this cycle, Sydney dwelling prices have already fallen by 8.7% while prices in Melbourne are down by 5.1%. New lending for housing is also contracting. New lending for “upgraders” (owner occupiers excluding First Home Buyers) has fallen by 13.2% over the last year (October 2017 to September 2018) but more significantly has fallen by 10.7% in the two months to September.

 Banks have tightened credit conditions such that when demand for credit recovers (as may be implied by the “Time to Buy” index for NSW) it may not be as simply accommodated as was the case in those previous periods. This will complicate the usual adjustment process. Markets stabilise when prospective buyers feel encouraged to re-enter the market. Affordability returning to equilibrium and price expectations turning positive are generally the triggers for markets to recover. The “Time to Buy” index for NSW is sending an encouraging early signal but if prospective buyers are unable to secure adequate funding to enter the market, the move to the new equilibrium may be more extended. In summary it is apparent that this cycle is quite different to the two previous down cycles for dwelling prices. Affordability is more stretched and sources of adjustment are more restricted. Furthermore, credit conditions indicate that a recovery in affordability and demand may not be accommodated through credit supply in the same way we saw in previous cycles. 

• The week that was

Labour market data provided two contrasting perspectives on Australia’s economy this week. Meanwhile, consumer sentiment strengthened, and business conditions remained above average. Following last month’s 5.0% unemployment rate, a level historically regarded as consistent with full employment, the Australian labour force survey for October was keenly awaited. It certainly did not disappoint, with the unemployment rate remaining at 5.0% despite a partial reversal of the 0.2ppt decline in participation seen in September.

Moving offshore, data released this week for China points to the investment trend having troughed. That said, the acceleration in activity will be slow in coming amid headwinds from ongoing structural change in the finance sector and, to a lesser extent, uncertainty associated with trade policy. On that front, murmurs of the US’ being willing to compromise with China on trade bolstered markets overnight.

For the US, data has been light but broadly supportive of the ongoing robust, non-inflationary uptrend in activity continuing, with the CPI benign in October (annual core inflation at 2.1%yr) as retail sales beat expectations (0.8%). Chair Powell again showed confidence in the US economy and the outlook this week despite weakening residential investment and uncertainty over the lasting benefit of fiscal policy to growth. Recent market volatility is not a material concern, nor are global risks and trade tensions. But all are being watched closely. 

For Europe (and the UK), Brexit has again been the focus. A brief respite from Brexit uncertainty was seen mid-week as the UK Cabinet rubber stamped a transition deal agreed by UK and European negotiators. But multiple ministerial resignations the day after consequently put Prime Minister May’s position and the deal in jeopardy. It is not at all clear if the current deal will remain let alone what a replacement deal might look like.