There has been a lot of noise in the media in recent months surrounding the dramatic fall in new housing approvals. This is generally an indicator of consumer confidence and spending sentiment.
If more consumers are willing to take on 30 years of debt, then they generally have a positive view of their future prospects. This includes their ability to generate enough income to meet there debt repayments and live comfortably. Less consumers willing to take on debt is an indicator that they are not so comfortable about their future and are sending their money accordingly.
While new house approvals paints a picture of consumers current thoughts and spending propensities, it does not necessarily reveal the potential direction of the housing market in the future. For a look into that crystal ball, it may be better to look at the overall housing loan approval data.
The latest data from the Reserve Bank of Australia (RBA) shows declining overall housing approvals. The interesting feature of this data is the gap between current owner-occupier and investor approvals. The difference between them is greater now than at at any other time in the last 15 years. In fact, the investor loan approval value is nearly back to the 2003 value. This has been dropping consistently since late 2016.
This is a great illustration of the cyclical nature of not just the housing market, but the economy and economic principles in general.
The data from the RBA sets up a classic supply and demand scenario to drive housing prices back up. We currently have less new housing approval, less overall owner-occupier loans and less investor loans. Yet we have a growing population, and they need to live somewhere. Lower new home approvals means less new homes. Less investor loans means a reduction in potential rental properties available. Decreasing owner-occupier loans means less renters buying homes. What does this mean?
There is a strong potential that the supply and demand principle will flex its muscle. The data suggests that we may be coming into a period in the near future of reduced rental availability and increased rental demand. This could possibly lead to increase in asking rent on properties as our economy improves. This increased rental yield, particularly as housing values are currently low, could entice some investors back into the housing market. Record low interest rates will also spur investors on. This will increase demand for housing purchases, which is the foundation for driving prices back up.
There is certainly no real crystal ball we can look into to determine the future. A look at the RBA data however, does reveal the potential for an investor led recovery of the housing market. If it does eventuate as described above, it will be a great example of the pricing effect of supply and demand and how that drives the cyclical nature of all of our markets.
To discuss how the economy may be affecting you, give the team at Steve May Financial Services a call and start a conversation today.
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Nick Shanley, Steve May and Luke Styles are Authorised Representatives of Sensibly Pty Ltd (AFSL 533923)