Housing and Finance in Australia…more weakness to come.

We all like our stories to have happy endings and your blogger prefers to write upbeat pieces rather than the negative fare we have been serving up of late. But the reality is we can only deal with the economy we are given. So it is today that we got some data in Australia that suggests further weakness ahead for House prices and demand for credit. By inference it also implies overall continued weakness in the domestic economy because of the role housing plays in the “wealth” and well-being effect on Australian households.

Let’s look first at the RP Data – Rismark House Price Index which was released this morning for May. The raw data showing a fall of 0.5% after last month’s fall of 0.1% was revised to -0.3%. In seasonal adjusted terms the fall in May was 0.3% after last months 0.3% was revised to a fall of 0.4%.

As the chart above shows there is no hiding from the fall in house prices both in Nominal terms but more importantly for me from an economic point of view is the fall in “real” or inflation adjusted house prices. I think this is where the real house price adjustment will occur through time.

But that’s not to say nominal prices won’t pull back the 10% or so we’ve talked about in the past. As you would have seen we have modelled the relationship between the quarterly moves in the ABS house price data series and the total monthly value of housing finance ex-refinancing and we see a 0.97 correlation since the mid 1980’s in trend terms.

The second piece of data out today was RBA private sector credit.

The first thing to highlight is that the month on month increase of 0.3% was better than last month’s 0.0% outcome but the year on year growth rate dropped to 3.1% from 3.3% last time. Importantly when we break the data down into the sub-components we see that the annual growth rate of Housing Credit is now at another all time low.

This month unfortunately even business credit looks like it might be turning as you can see in the sectoral breakup below.

So add all this data together particularly with the 97% correlation and you get an outlook for house prices that suggests further weakness ahead. Equally it suggests that Banks are going to need to try to steal each others customers to get the sort of growth rates they have become used to – so further earnings pressure on this front is also highly probable in the year ahead.

But we still don’t buy any talk of a housing crash and the good news is though that this data highlights that the RBA should be on hold for some time.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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