No shock that the Reserve Bank left interest rates on hold today, and looks set to for months to come yet.
Notably, we got a slight shift in tone on house prices at last.
The RBA documented that recent data "foreshadows a solid growth in dwelling contruction" and that "credit growth remains low overall but is picking up gradually for households.
Dwelling prices have increased significantly over the past year."
This is a shift in sentiment an acknowledgement of prices rising "significantly" in response to low interest rates.
The housing market in Australia is interest rate sensitive since the majority of mortgages are on variable interest rates.
The Housing Industry Association (HIA) produced an instructive chart on borrowing rates for mortgages and small business loans today, showing the respective slide in tandem with the cash rate in recent years.
Fixed mortgage rates have fallen too as mortgage competition hots up. NAB announced today that it had shaved another 5bps off its 2 year fixed rate today to just 4.84% to bring itself in line with the Commonwealth Bank and Westpac.
That's very cheap credit.
The response, as identified by the RBA, has been a strong pick up in dwelling prices, mainly in Sydney, Melbourne and Perth.
It's worth noting, however, that if you put Sydney to one side, dwelling prices in the major other capital cities are essentially only where they were at the previous peak in 2010, and lower in real terms (quite a lot lower in Brisbane's case).
Source: RP Data
Whether or not you agree with them, it's worth understanding why the Reserve Bank saw an increase in dwelling prices as a necessary precursor to a swelling of dwelling construction.
That is, that the main supply constraint was property prices themselves.
In recent years, capital city dwelling prices have been below what the RBA considers to be production cost (at least, that's how I read their rhetoric) and so the way to get supply flowing again was to cut the cost of financing projects and get prices heading north in order to stimulate construction activity.
I looked at production/construction costs here the other day, and noted why my view (and that of the RBA per its research data) was that prices in the large capital cities would not fall over a prolonged period of time since the cost of dwelling construction was ultimately too high for that to eventuate.
The RBA has never wavered from its view that there was no bubble, and that now prices are now back above cost and the result should be a flood of new supply.
Evidence? Look at the developer's gross and net profit margins. Look at the losses developers make when they the government requires them to provide affordable housing.
Anyway, whether you choose to believe the RBA and its theory or not, what has actually happened is that prices have risen "significantly" - in the Board's own words - and monthly building approvals are now absolutely flying, up to their highest level in a decade.
That was a bit of chat last month about approvals being weak, but approvals by their very nature are a volatile data set, so the trend is the thing to watch.
Breaking down the numbers, private sector houses approvals are up 26.4% y/y:
Private sector dwellings approvals are up by a massive 46.3% y/y, which now makes the total dwelling units approved chart look very healthy:
One disappointing aspect to date for the RBA is that residential construction work done has yet to show a material pick-up.
This is presumably due to (1) approvals do not always translate into dwellings dwellings (2) lag and (3) most approvals are for attached dwellings which are less labour intensive than houses (thus, less dollar spend).
However, the HIA sees the number of starts this year breaking the 165,000 threshold for only the second time this decade and with approvals in the last 3 months hitting a 200,000 annualised pace, the residential construction outlook appears to be healthy for the economy.
See here for more information on construction, where Matusik provides some nice graphics to break it all down. Not great to date but the approvals data suggests a strong pick-up in construction in the pipeline.
Observing what is happening in the harbour city, I have little doubt that Sydney is in the midst of a great apartment construction boom, having experienced its great boom a little over a decade ago.
Caveat emptor - some of that new stock is very expensive.
Where to next?
How long dwelling prices will continue to rise for is anyone's guess.
The best indicator we have towards what is coming next for the property markets is usually the ABS housing finance data, but the next housing finance release isn't until March 12.
In the meantime, the best proxy I know of, the AFG mortgage index, released its February data today here, which showed the Group's strongest February on record processing some $3.7 billion of mortgages in the month (+27% y/y).
Of course, AFG's figures are only a snapshot or an indicator, nothing more than that.
Notably, AFG makes the comment that it believes in the integrity of its first homebuyer figures, which will cause a ripple when the media picks up on it tomorrow.
Whether or not AFG is correct on this point, it is the case that in Sydney many first-timers are electing to buy rental property as a first move rather than a place of residence.
The ABS data on March 12 will shed more light on where prices are likely to head next.
Source: AFG Online
Tomorrow, we have the joy of the National Accounts to look at. Can't wait!