The east stirs...

Old news?

There was some interesting and welcome debate today as to whether housing finance figures from last year can predict what happens to housing prices this year. 

Housing finance figures and the trends buried within them from months ago are both interesting and relevant, even if they are not timely.

But in my experience there are more pressing indicators of sentiment.

After all, if there are only crickets turning up at open homes then sellers can be quite quickly inclined to drop the asking price.

On the other hand, if opens are busy then vendor expectations are lifted accordingly, even if a sale isn't immediate.

That's just the way it works, and agents for good quality homes are reporting busier open homes now, although some of that may be a seasonal impact.

That's also why I don't think housing credit or even loan approvals are a great leading indicator. 

In fact, Domain ran a piece last week showing that the best time to buy Sydney property in the past 15 years was in February 2008 during the financial crisis, when credit growth had tanked and sentiment was at scary lows.

I bought several Sydney properties for myself around that time, which I still own today, and three things I can clearly recall.

Firstly, it was very nerve-wracking - you had to be able to hold your nose and act regardless of the conventional wisdom - but on the plus side you could make low-ball offers and have your offer taken seriously.

Secondly, unless my memory is playing tricks nobody was using a 'credit pulse' or a 'second derivative household debt accelerator index' (or whatever) to try to pick the market turning point.

Actually they were, and to all intents and purposes they were basically useless. 

And thirdly, the buyers at that time had the rare opportunity to buy top-quality assets as there was so little competition. 

The year ahead

Borrowing capacity was cut in 2018, and sharply so for many investors.

Plenty of budding investors simply couldn't get mortgages altogether, mortgage processing times ballooned from weeks to months, and there were far fewer Chinese investors due to capital controls and punitive taxes.  

And all of that naturally made a big difference to the housing market, knocking prices down and bringing a once-rampant construction cycle to an abrupt end. 

Offsetting that, the RBA has shown that most buyers don't use anything remotely close to their borrowing capacity, with only about 1 in 10 borrowers doing so.

Plus there is another unique factor to this cycle which rarely gets any airtime. 

And that is Aussie households are now sitting on more than $1.1 trillion of cash and deposits - well over double what household had access to a decade earlier - something that is unprecedented, and a result of lower mortgage repayments for incumbent homeowners. 

Some of that might be in offset accounts, or lines of credit, but either way it's a lot of cash that might be called upon if required in more buoyant market conditions. 

And my thinking is that housing market sentiment can turn around on a dime, but only if and when banks are allowed to lend without the undue constraints of 2018. 

We've seen that play out often enough before with interest rate cuts.

None of this is to downplay the impact of the downturn, which has evidently been harsh or even severe on some parts of the Sydney housing market, and the credit squeeze has clearly also had a dire knock-on impact to the rest of the economy.

In fact, almost every market release for the month of December was desperate, even prompting financial markets to price a rate cut.

East stirs

In the eastern suburbs of of Sydney, good quality stock is commanding interest. 

Indeed, a tiny 52 square metre apartment on Bronte Road with no parking but with ocean views fetched $1.46 million this week prior to auction at gazillions over the asking price, so there's a little bit happening (an anecdote of some interest to me personally, since I bought a place on Bronte Road in 2007). 

And there were a few sales in the auction rooms tonight, although listing volumes are well down...

Credit crunch reality bites

An interesting sub-plot is that as Aussie banks all but went on strike over the last two months of 2018 in anticipation of the Royal Commission final report, bond yields nosedived as activity in the economy shrivelled.

It wouldn't be at all surprising if growth in the economy was flat or negative for the quarter, but we won't know about that for a few weeks yet. 

The 10-year bond yield dived dramatically from 2.76 per cent in early November 2018 to just 2.06 per cent earlier this week. 

A year ago it was up at around 2.90 per cent. 

Consumers are eyeing up a cut to the cash rate - or at the very least no imminent hikes - while lower 2-year and 3-year fixed rate mortgages are increasingly being made available to housing market investors.

Elevated funding costs were a challenging issue throughout 2018, especially around the last financial year end, although now off their peaks. 

Moreover the threat of sharp monetary tightening around the world seems to have eased, with the window for rate hikes closing as Germany slides towards recession, Britain dithers with its Brexit woes, and the Fed doves up.

Finally for today, in my view house price indices also often lag the reality.

For example, my experience in Sydney was that housing prices peaked way back on 25 February 2017 - with some outlandish auction frenzies taking place in the first quarter of that year, and on that day especially!

But the official figures didn't record any declines for months to come.

That's the lag effect of settlements and data availability, I guess, and it'll likely be the same when the market turns in the other direction.

By the time prices are officially rising again the nadir will probably be 3 to 6 months in the rear view mirror.