House price bounce gets built in

New housing data clearly shows house prices - but not apartment prices - are set to rebound.

New housing data clearly shows house prices - but not apartment prices - are set to rebound.

The latest residential building approval numbers, tagged as “incredible” by CBA’s economics unit, certainly justify some of the surprising optimism we heard from the major banks last year when the market still looked weak.

The stand out figure is the level of new approvals for free standing houses. House approvals in December bounced ahead by 14.9 per cent but apartment approvals only limped along by 2.5 per cent.

Higher approvals are expected to lead to higher prices for residential property in the near term.

If so, then current forecasts of a 10 per cent increase across the board in dwelling prices for the coming year appear feasible (CBA’s own forecast is 8 per cent).

On a yearly basis, the figures are even more dramatic - approvals for detached houses are up 55 per cent.

Indeed the figures are so strong even sceptics who believe the market is recovering largely thanks to the government’s HomeBuilder scheme grants will have to also consider that bank lending is now also “surging” according to CBA.

Perhaps, the most important factor is not spelled out in any data release.

Home buyers are now convinced that rates will stay low for a very long time.

No wonder there is such conviction among home buyers with the Reserve Bank consistently promising to keep rates where they are for at least three years.

The RBA message is, in turn, constantly reinforced by market players such as the CEO of Mortgage Choice, Susan Mitchell, who says she does not expect the cash rate to rise for at least three years given the latest inflation and labour market data.

That’s a line no doubt repeated by every mortgage broker and estate agent across Australia.

But it just so happens that observation might not be appropriate for much longer.

The RBA now says the policy will be reviewed later this year.

A report from the economics team at NAB Markets Research this week noted how the Reserve Bank’s latest statement kicked off by removing the automatic roll forward implied by the previous “for at least three years guidance”.

The other issue raised by the latest housing market numbers is whether the recovery will lure back property investors who have dropped from around a third of the entire market to less than a quarter.

Certainly there is a practical barrier for investors if apartments remain much less likely to create good capital gains as opposed to houses, since the entry points for free standing houses is much higher.

But investors are also keeping an eye on rental demand and even though rentals saw some recovery in recent weeks, investors remain concerned about the longer term outlook.

Early signs of how a property market might perform with a sudden absence of renters is most obvious just now in the student accommodation market.

Among the worst performing zones across the country are units in popular student areas such as Melbourne’s Carlton which has been the weakest unit market across the city.

Darren Langer, head of fixed income at Nikko AM, watches the market closely for trends that might affect residential mortgage backed securities.

As Langer suggests: “You have very strong housing formation just now and there is also a big drop in immigration. If people are moving into houses then there is less renting activity. In that situation investors are asking, where will the renters come from?”