Housing market not in a bubble

Paul Bloxham, the Chief Economist at HSBC, talks about why we aren’t in a housing bubble, and why there’ll be a slowdown in price growth in 2018

Introduction: Housing market not in a bubble

Ross Greenwood: Let’s go down to property prices and in particular the chief economist of HSBC Australia Paul Bloxham, a former Reserve Bank economist also who today has indicated that he believes that property markets, housing markets in particular, in Melbourne and Sydney are set to be at a turning point. Now what he means by that is the very strong double-digit growth that those markets have experienced over a long period of time. That quite clearly have directed policy of government and also of the Reserve Bank with interest rate settings over the past two or three years. So as a result if they start to slow then maybe the settings of the regulators and also of even the Reserve Bank starts to change a little bit as well. Let’s get Paul Bloxham on the line right now. Many thanks for your time Paul.

Interview: Paul Bloxham, Chief Economist of HSBC Australia

Paul Bloxham: Good morning, Ross.

Ross Greenwood: So just give me what’s going through your head in regards to this line call on housing markets in Melbourne and Sydney because quite clearly those two markets have demonstrated significant different attributes and performances to every other capital city in the country?

Paul Bloxham: Well, that’s right. So we’ve seen a lot more strength in those markets and we think that makes a lot of sense. We’ve seen very strong demand for housing in Sydney and Melbourne driven by a few factors. One has been population growth, the economies in most states have done better than Western Australia and Queensland of course which have been suffering from the end of the mining boom. We’ve seen stronger foreign demand in those particular cities as well.

But we do think that we’re going to see some cooling in these markets very soon. And we think part of that stems from the fact that we’ve seen a bit of a pullback in foreign demand, we’ve seen more supply added to the market particularly of apartments in Melbourne and that’s already cooled that market to a degree. And then the final factor that’s at work that we think is really going to come into play next year is that we think the RBA will be starting to list interest rates from early 2018. And that, we think, will be the main thing that really slows the housing market down in Sydney and Melbourne.

Now we’re not expecting house prices to fall we think that house price growth will slow down from double-digit rates this year to single-digit rates for those two cities. And the apartment market in Melbourne already has cooled down, we think that apartment prices could fall a bit. But we do think that the overall market particularly the detached markets in those two cities will still show a growth but less growth.

Ross Greenwood: Okay. So then talk me through what you believe will take place inside the Reserve Bank that might prompt it to raise interest rates. Where does the pressure come from because quite clearly the Reserve Bank would be highly conscious of raising interest rates when Australian households are very heavily indebted. And they would be concerned that if they put pressure on the household sector they could really see the economy start to slow. So the timing of that interest rate rise if it does come has got to be fairly finely judged?

Wages growth is key

Paul Bloxham: Well, there’s one key factor at work here, we think, for the RBA and that is they’re watching wages growth. It’s really all about wages growth and as you know wages growth has slowed right down. It’s been running at multi-decade lows recently and the key question is when does wages growth start to pick up? Now our view is wages growth will start to pick up in the second half of this year and we think there are a number of things at play.

One we’ve seen a rise in commodity prices which typically proceeds to pick up in wages growth. Two corporate profitability has improved as well and usually when corporate profits pick up it takes a few quarters but some of that gets through to wages growth. And then finally we’ve seen an improvement in the labour market, the unemployment rate has been coming down, employment growth has been picking up. Usually a tighter labour market means a bit of a pickup in wages growth.

Now we’re not expecting a really strong pickup in wages growth, it’s just expected to edge higher but we think the RBA is going to be quite keen to want to move off its very low policy setting. As soon as it really does see signs of wages growth picking up because one of the things it doesn’t want to do is over inflate these housing markets. It will want to start lifting rates we think as soon as they’ve got any chance to do so. And again it’s really very much about watching that wages growth story.

Ross Greenwood: Because one of the things that we saw, again, are positive for Australia’s economy is today trade numbers came out very strong trade numbers with a rebound in coal exports. Just to explain, the trade surplus that Australia is currently enjoying is all about the amount of money that we earned from exports going out of the country as compared with the money we pay for the imports coming into the country. So those trade numbers again give a fairly good reflection of just the way the economy is performing?

Paul Bloxham: That’s right. And there’s a number of positives in those numbers. Firstly the big bounce back we saw in May was really driven by the fact that there was a very weak number in April because cyclone Debbie disturbed coal exports which fell in that month. So we’ve seen a big bounce back from that but it’s not the only story. Exports are actually broadly quite strong and not just coal, but we’ve seen a strong pickup in LNG exports.

All that capacity we’ve been building in recent years is starting to come to market and that is going to continue to ramp up we think over the coming quarters. And we’re seeing quite a solid pickup in services exports. That’s our next growth story in our view and that is a pickup in education and tourism. And those things have been driving particularly the New South Wales and Victorian economies and of course Sydney and Melbourne. And so, that’s a positive sign and we think that strong export story is going to continue to play through it.

Ross Greenwood: It’s going to be fascinating because the currency is also important here. Because one of the things that’s associated with the rising Australian dollar is an improved export performance which is what we’re seeing. And as a result of that you start to see rises in commodity prices and therefore a rise in the dollar. To overcome that in the past, the Reserve Bank has tended to hold interest rates low or to cut interest rates. But this again is one of these things because if the dollar starts to rise that also takes away some of Australia’s competitiveness internationally.

Paul Bloxham: That’s right but you’ve got to keep in mind that we’re not doing this alone. Global growth is also lifting interest rates are rising elsewhere in the world and of course that’s putting some downward pressure on the Aussie dollar at the same time. So we think the RBA can start to think about potentially lifting its cash rate from early next year in part because other central banks are also lifting their interest rates. And so the Aussie dollar might not necessarily rise even though the RBA starts to lift its own rate.

Ross Greenwood: Gee, it’s an interesting thing because already Canada has flagged that it will be raising interest rates at central bank. Even the UK notwithstanding all of the nerves about the Brexit and the way in which that will be structured, and the political situation in the UK there’s even been suggestions rates could rise there. The US we know is likely to again raise interest rates some suggesting at a September meeting. So all these things play into the narrative that the Reserve Bank is going to consider and therefore households and businesses have got to consider as well?

Paul Bloxham: They certainly do. We’re seeing the most synchronized upswing across the world that we’ve seen in quite some time. And that’s really part of the story as well, it’s helped to support commodity prices which are helping to support Australia’s economy. And what we know is that typically when the global economy is in an upswing Australia also does see a pickup. That’s how it’s worked in the past and we think that’s going to play through as we look over the next few quarters as well.

Ross Greenwood: There you go. So you’ve heard a few things here from Paul Bloxham. Number one that there’s a cooling in house prices coming in Melbourne and Sydney as a result of rising interest rates, likely next year from the Reserve Bank and in response to rising interest rates around the world. And the Australian dollar most likely will be wanting to rise but maybe held down only because of the increasing interest rates in other parts of the world. The HSBC Australia chief economist Paul Bloxham always great to have you on the program.

Paul Bloxham: Thank you.

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