SQM Research‘s newsletter was earlier this week and began with a bearish maul of Queensland:
SQM Research has long been predicting turmoil for the Queensland property market and over the past several months we have seen this come into being, with certain pockets of this northern state suffering substantial house price declines.
This week’s (as well as many other’s) top ten list gives us a little bit of insight as to the state of real estate on the coastal islands off the mainland that belong to the greater Brisbane region. With three of our top ten properties being located in this part of the country and all experiencing discounts of 40% and above, it is obvious that there is cause for genuine concern for this area and there has been for quite some time.
There are many possible reasons why properties in this area are suffering severe price slashes. SQM Research sees the most probable cause to be that these types of homes are commonly bought as investments, weekenders and holiday houses.
In the event of general financial instability, which let’s face it- the nation is definitely experiencing at the moment, these are the types of assets that are the first to be liquidated. Our guess is that many of these homes are being flogged off by owners in dire need of cash/liquidity, to the point where even a loss in the hundreds of thousands is stomached – albeit reluctantly.
I don’t think anyone who follows the housing market would be too surprised by that assessment of Queensland, although there are still some parts of the state, particularly those areas connected to the mining sector, that are still showing capital growth.
Louis Christopher, the company’s CEO, goes on to discuss the latest housing finance figures:
The housing finance approvals are out, this time for the month of December 2011 and once again they record a rise in housing finance approvals, excluding refinancing. The number of owner occupied housing finance approvals (excluding refinancing) rose by 2.2% and out of that, the number of finance approvals for First Home Buyers rose by 2.8%.
This is a housing measurement that we closely follow. Time and time again it has been a solid confirmation indicator as to the overall strength of the market and any turning points. It has rarely given off false signals.
While we give this measurement great respect, sadly it is still not perfect, as it can be a little laggy given its reliance on settlements and the public data does not give an adequate breakdown of investor activity in that we don’t know the number of housing approvals for investors (The ABS does not publicly release this).
While we do know that in December the total value of what investors bought via taking out a loan, rose by 7.5%, it would be most helpful if the ABS were to also provide the total number of loans approved for investors as they do for the other categories as the value estimate can be greatly skewed by what investors actually bought (e.g. buying at the top end of the market).
The Unconventional Economist covered the drivers of the latest housing figure recently. You can read his post here to get the full details. From that post I present the following chart:
Now back to Louis Christopher.
There has been two very different views portrayed by media outlets on these numbers. The mainstream media has stated that the index was driven by investors, while the more sceptical commentators suggested that the number were driven by NSW First Home Buyers who were cashing in on an expiring stamp duty concession. The opinion being these First Home Buyers won’t be around anymore following the expiry of the benefits and so the market will remain in a downturn.
Let’s have a look at the charts and see what we can make of it. Firstly, the overall results. As it can be seen, there is now a clear, rising trend of housing finance approvals. It appears this trend started around June 2011 from what was very, very low levels of activity. Notably, there has been a clear pick up in the overall number of First Home Buyers, which has been commonly seen in recent years as a sign that the market might be recovering on the back of new demand.
While the trend has changed and there has been a pick-up in housing finance demand, the truth is that in absolute terms, no one should be getting overly excited by these numbers…yet. We have only just crossed over the 2008 lows after all and still below the levels needed to get house price growth equating to inflation. Our red dot marks the point where we believe housing finance approvals need to be in order to get growth equating to CPI out of residential real estate.
When looking at the state break-up, it is very clear that most of the activity has been driven by NSW, followed by Western Australia and Queensland. That seems reasonably logical to us as we have seen our stock on market numbers certainly peak in WA and QLD with NSW stock levels falling very quickly over the past two months.
There is a risk here that NSW may drop off again, bringing the overall numbers down. This has happened after the end of each successive housing stimulus package. Bearing in mind that the Stamp Duty Concessions available to First Home Buyers in NSW ended on January 1.
I am also concerned about the potential uncertainty and negative sentiment created by what the banks did last week. As discussed in the Sun Herald (click here to read article) – who is running the show now? Who is behind the curtain and how much power do they have? What will the banks do next? All these questions must be running through the minds of would be property buyers and existing property owners, particularly the ones who are overstretching themselves in debt.
Nevertheless we will give this result largely in favour of the bulls. There does seem to be some evidence pointing to drivers beyond NSW First Home Buyers.
However, in order to meet our forecasts of 2-7% capital growth for 2012 as per our September Housing Boom and Bust Report ( and depending upon the city concerned) we need to see housing finance approvals continue to rise from here with only one or two months allowed for any monthly declines. Or in other words, we have about six months of grace to see the housing finance approcals move up our little red dot. If we get to a July reading that still hasn’t made it at that point, then it is unlikely we will meet our range.
I disagree with this analysis. VIC is still trending down. QLD and WA are off their lows but can still be seen as caught in larger downtrends. I am personally struggling to find any significant uptrends in the data outside of NSW. In that regard I think it is fairly obvious from the last chart presented and the chart of NSW first home buyers shown above, that the stamp duty changes in NSW have had a major impact on the national aggregates. I have also previously shown that the leading indicators from AFG suggest NSW is likely to see a larger than normal drop in market activity in January, and the first home buyer activity in that state also shows a large and unseasonal decline.
As I noted last week, Mr Christopher is making a brave call in his prediction of capital appreciation for 2012, and that was before the latest non-standard rate rises from the banks.
Having said that, given the unusual dynamics (lower unemployment is bad for banks?) and contradictory data coming out of the Australian economy at the moment, it is difficult to make predictions of any kind.
