Property activity surges on low rates

18th Mar 2015By: Tim Lawless

Since the cash rate was cut to historic lows back in February, we have seen some interesting evolutions in the housing market and the economy.

The market appears to have responded immediately. The weeks following the downwards movement saw auction clearance rates surge back to levels unseen since the frothy market conditions of 2009 and they have remained high. Additionally, we have observed a surge in activity across both our real estate platforms and valuation platforms.

New records

CoreLogic RP Data’s real estate platforms are used by around 70% to 75% of all real estate agents nationally. The number of reports being produced by real estate agents hit a new record high over the month of February, indicating a substantial rise in the number of homes being prepared for sale.

Our valuation platforms, which account for more than 95% of all mortgage related valuation instructions, also saw a marked increase in activity, with the number of mortgage related events surpassing the record highs of November last year. The rise in activity across these platforms implies more home loan originations and refinanced loans are underway.

Our daily home value index also showed a further rise in February, with dwelling values across the combined capital cities now 1.6% higher over the first two months of the year.

How long?

The question now is, how deep will the stimulus from lower mortgage rates be, and how long will it last?

While consumer confidence saw a decent improvement on the back of the rate cuts in February, the March reading saw most of this improvement retrace. According to the Westpac Melbourne Institute Index, consumers are once again more pessimistic than optimistic, which may flow through to less demand for high commitment purchases such as housing.

Another headwind is the weaker level of economic growth, higher unemployment and ongoing political uncertainty. Australia’s pace of economic growth, which was recorded at 2.5% over the 2014 calendar year, is tracking below the ten year average (2.8%) and well below the 15 year average (3.0%). The jobless rate saw a slight improvement in March, but is still well above previous lows at 6.3% in February. At the national level, there is a lack of confidence in the country’s leadership which also contributes to lower consumer and business confidence.

From a lending perspective, we are likely to see tougher lending conditions, particularly to investors, as APRA becomes more vigilant about excessive growth in lending to investors and the RBA continues to sound warnings about the speculative nature of investor activity in the Sydney and Melbourne housing markets. As banks work to remain within APRA’s benchmarks of limiting their growth in their investment loan book to around 10% per annum, it may be the case that investment demand is stymied. On the flip-side, a high level of competition in the mortgage space may limit the impact as borrowers can shop around for their loans from many lenders.

Capital gain impact

The wash up of all this is that the rate of capital gain is likely to continue to drift lower over 2015, even in the face of lower mortgage rates. We saw the rate of capital gain across our combined capital city index peak in April last year, at 11.5%. At the end of February, the rate of growth had moderated to 8.3%. If this scenario does play out, it will be a welcome trend for the Reserve Bank, which has become increasingly uncomfortable with the pace of house value appreciation. Although there are concerns about the pace of growth in the capital city market, it is important to remember that it is largely Sydney and Melbourne where the bulk of growth is occurring.