Australia’s property-led recovery

The housing market is officially in recovery mode.

This morning’s new property data shows house prices rose 3.3% during the June quarter on a national basis, and were down just 0.1% for 2008-09. To ram home the recovery message, the Australian Bureau of Statistics released data showing building approvals jumped 9.3% in June.

While some commentators had predicted that house prices could fall by as much as 40%, it appears that these fears were completely overblown. Our property sector appears to have come through the global downturn almost completely unscathed.

But now the big question is: Can it continue?

There are two schools of thought here.

The first suggests that the Government’s enlarged First Home Owners Grant has helped push up demand and prices for all houses (hard to argue against this) to unsustainable levels. When the enlarged grants run out in December, the market will cool and prices will fall. This will be exacerbated by an increase in unemployment and interest rates, which will particularly put pressure on the first home buyers who have dived into the market.

The second school of thought says the market can continue to grow. As first home buyers leave the market, cashed-up investors will step in. Underlying demand for houses (we need about 150,000 more homes than we build each year) should also help support prices.

So who is right? It’s too early to say.

There’s little question that the phasing out of the First Home Owners Grant and the expected rise in unemployment should take some heat out of the market over the next six to 12 months.

But now we are through the absolute worth of this downturn, it’s hard to see house prices slumping. Businesses and consumers appear to have taken the necessary steps to reduce debt and generally clean up their personal and business balance sheets – therefore, they should be able to absorb the slow increase in interest rates that economists are predicting over the next 18 months.

So while the spectacular house price gains we saw over the past decade are unlikely to be repeated, and it’s even possible that prices could fall in the next 12 to 18 months as the jobless rate jumps, big, sustained falls in house prices like we’ve seen in the US look increasingly unlikely.

Indeed, the dangers appear to be more skewed towards house prices rising unsustainably and, as RBA Governor Glenn Stevens suggested earlier this week, creating a housing price bubble. A lack of finance and shortages of available land mean the supply of new houses is likely to remain insufficient.

In the long-term, preventing this bubble looks to be a much bigger concern than any house price slump.