Looking at the state by state data provides a clearer understanding of where most of the activity is occurring.  New housing finance commitments were up a stunning 19.6% in New South Wales and 13.9% in Western Australia.  The Northern Territory also showed a strong improvement with total commitments up 20.6%, however the series is much more volatile than in the larger states.

Looking specifically at New South Wales, where housing finance commitments comprise just under one third of all commitments nationally (32.9%); up from just 26.9% two years ago.  The very large majority of new commitments are related to established dwellings (90.4%) compared with just 5.5% for the construction of new dwellings and 4.1% for the purchase of new dwellings. The buyer types have swung quite dramatically towards first home buyers, with this segment of the market comprising 26.4% of all owner occupier commitments in December (up from a recent low of 15.8% in September earlier in the year).  In fact, first time buyer finance commitments were up 76.1% in December 2011 compared with December 2010 compared with a 2.4% rise in non first home buyer commitments.  The significant rise of first time buyers highlights the affect of stamp duty exemptions the New South Wales Government provided over the September quarter and in all likelihood we will see the number of first timer loans fall away sharply over the first few months of 2012.

First home buyer’s aside, my view is that we are likely to see housing finance commitments continue to show modest improvements over the coming months.  New mortgages (excluding refi’s) went as low as 28,131 in February 2011 – a level not seen since May 1995.  Mortgage commitments correlate very well with housing sales; and with transaction levels running around 15% below the five year average towards the end of last year, an improvement in selling volumes will be very much welcomed by the industry.

Based on the total value of sales in 2011, which were down 18.3% compared with 2010; agent commissions are likely to be down about the same amount.

At the same time, according to the latest IBISWorld Real Estate Industry report, the number of people employed in the industry has fallen by around 1,800 over the past year after rising by 940 employees in 2010/11.  The reduced number of agents suggests the commission pie needs to be cut into fewer slices, which is likely to have eased the income fall on a per agent basis.  In fact, the report suggests that income per employee in the real estate industry hasn’t change a great deal over the past four years, remaining around $59,000 since 2008 after generally trending down since 2002.

For real estate agents or agencies looking for what are potentially the most lucrative markets around the country, the below table outlines the top 100 suburbs across the country based on the gross value of combined house and units sales.  Clearly the level of competition needs to be assessed in these markets, however the list makes a good start.

More than half of the list shows a median house value higher than $1 million dollars, highlighting the fact that prestige markets attract significant commissions; but keep in mind that sales volumes in many of these areas tend to be lower so competition for income is generally tight.

Another interesting observation is the change in rankings over the past five years (I’ve included rankings based on the total value of sales last year, in 2010 and five years ago).  Suburbs such as Kew (Melbourne),Castle Hill (Sydney) and Paddington (Sydney) have moved into the top ten; Paddington has seen the biggest shift, five years ago the suburb was ranked 27^th based on the gross value of sales.

Areas of the Gold Coast have slipped down the rankings due to falls in both value and volumes, however Surfers Paradise remains in the top ten (slipping from the number two position five years ago).  Hope Island is the second Gold Coast suburb to make the list at number 70 (ranked 9^th nationally five years ago), while Southport is now ranked 86^th after previously being the 7^th highest grossing suburb five years ago.

Outside of the capital cities and Gold Coast, Port Macquarie recorded the highest gross value of sales last year and is ranked 21^st (no change over last year and five years ago).  The suburb of Orange has shown a surge upwards in the rankings, moving from 137^th nationally five years ago to 54^th last year.

PDF document: Top 100 suburbs, total value of house and unit sales

Another reason for the upswing in fixed rate mortgages comes back to the widening gap between variable and fixed rate loans.  In November, the average interest rate on a three year fixed loan was 6.4% compared with the average variable rate of 7.55% – a gap of 1.15 percentage points which is only slightly lower than the October 2011 gap which was 1.3 percentage points (the largest positive gap on record).  We would need to see more than four standard (ie 25 basis points) rate cuts (fully passed on by the banks) for the variable rate to get this low.  Clearly many borrowers saw the value in locking their mortgage into a fixed rate when the variable rate was so much higher.

Of course the cash rate (and variable rate) has been cut twice since the start of November and by January the average standard variable rate was 7.3%.  The average three year fixed rate has fallen to 6.35% – a slightly narrower gap of .95 basis points.  With further speculation about rate cuts over 2012 (financial markets are predicting rates will fall by almost another 100 basis points by the end of this year) we may find that fixed rates slip a bit further yet.

It’s interesting to look back at how consumers chose to structure their loans during the 18 months leading up the GFC.  At the time housing values were surging (firstly in Perth, then in Brisbane, Melbourne and Adelaide), interest rates were accelerating upwards and the absolute severity of the looming GFC simply wasn’t on the radar.  More than a quarter of new housing loans were locked into a fixed rate contract just before the peak of the interest rate cycle (average variable interest rate peaked at 9.6% in July/August 2008.  Those that fixed their rates at this time were soon to be sorely disappointed because rates took a swift diver to historic lows from September 2008.

That large hump of fixed rate mortgages have been expiring and continue to work their way through the refinance process – one of the reasons that refinance activity has been consistently trending upwards (up 12.5% on a year ago based on the November ABS data).

So the big question is, for prospective home buyers, would you opt for a fixed or variable rate mortgage?

The first three years of US home prices coming down could be characterized as a reasonably steep downwards trajectory.  Using a compounding growth rate, between April 2006 and April 2009 the annual rate of decline averaged 11.4% or 30.5% overall.  Most of the home value destruction was over and done with in the first three years directly after the market peaked.  Home values have come down a further 1.9% year on year (on average) since that time.  Note, if you would like a complete run down on the US housing market, you can’t go past the ‘Market Pulse’ report from CoreLogic (January’s report was released last week).

Similarly, in the UK (based on the Halifax Index) the initial period of decline showed the steepest trajectory with home values falling by 10.5% per annum over the first 24 months post peak.

Using Property IQ’s House Price Index for New Zealand we can see a similar trend with the steepest trajectory of decline being recorded across the first 16 months after price peaked (down 9.6% over that period or 7.7% on an average annualized basis).

Looking at Australia, while there isn’t a long time series of data since the market peaked back in October 2010, values are down 3.8% in total (3.5% on an average annualized basis). The downwards trajectory in Australian dwelling values fits reasonably closely with the US trajectory over the same 13 month time frame (US prices were down 4.4% over the first thirteen months post peak compared with the 3.8% fall in the Australian market).  Six months later the US market was recording falls of 1-2% month-on-month as the US banking sector imploded, unemployment and mortgage defaults rose swiftly and the GFC spread around the world.

If the November results from the RP Data – Rismark Hedonic Index remain consistent (November month on month result was +0.1% s.a.) and we see another flat result for December, it may provide the best indication yet that the Australian housing market is flattening out.  The risk of a US style housing meltdown are looking increasingly remote.  The key factors to watch will continue to be interest rates and the labour market data.  With inflation tracking lower than expected, speculation about further rate cuts is likely to improve market sentiment.  In balance, unemployment is ticking upwards and the banks are looking unlikely to pass on any cash rate cuts in full.  Overall I think we can expect market conditions to remain reasonably flat over the first six months of 2012 at least.

Housing finance commitments, exluding re-fi’s to owner occupiers, increased by 2.5% over the month and it was the seventh time in the last eight months commitments increased.  Refinance commitments on the other hand fell for the second month in a row, down 2.5% over the month.  It would appear that the surge in refinance activity that has occurred since the middle of 2010 is now abating.  Over the year, non-refinance commitments have increased by just 1.0% while refinances are 12.5% higher.

Despite the fact that there is some positive movement in non-refinance loans, commitments for the construction of new dwellings continues to disappoint, down -0.4% for the month and down -6.3% over the year.  While finance commitments for new construction fell, commitments for the purchase of new dwellings rose by 1.9%, the second successive monthly increase and commitments for the purchase of established dwellings increased by 1.6%, the eight consecutive monthly increase.   While the number of commitments for the purchase of established dwellings has increased by 7.1% over the year, commitments for the purchase of new dwellings has fallen by -11.7%.

The weak housing finance data for new dwellings highlights the challenges developers and builders are facing as the market continues to focus on existing housing supply rather than new housing stock; an issue which probably relates to price sensitivity and a preference for living closer to the city within established neighbourhoods.

Additional data highlights that the number of first home buyer finance commitments is trending higher.   In November, first home buyers accounted for 20% of all housing finance commitments with 10,136 commitments.  The 20% share of the owner occupier market was the highest proportion since February 2010 and the 10,136 commitments was the greatest volume since December 2009.  Just 9 months ago the proportion of first time home buyers in the market was below 16%.

Across individual states, the number of first home buyer commitments was the highest since October 2009 in New South Wales, December 2009 in Queensland, Western Australia and the Australian Capital Territory, January 2010 in Tasmania and September 2010 in the Northern Territory.  The result suggest that the lower interest rate environment and the fact that home values have been falling for most of the last 12 months is encouraging a greater number of first home buyers into the market.

In terms of the value of finance commitments, there has also been an increase over the month with commitments up by 2.1%.  The value of owner occupier commitments rose by 2.2% compared to a 1.8% increase in investor finance commitments.  Total commitments excluding refinances rose by 2.8% over the month, the largest monthly increase since September 2009.  The increase in the value of finance commitments to go along with the increase in volumes and is a welcome development for housing market participants.

Overall, the results highlight that the interest rate cut in November had a positive impact on demand for housing finance.  The impact of the cut has also been reflected by the first positive monthly movement in home values (0.1%) since December 2010 and a 6.3% monthly increase in consumer confidence however, it did nothing for retail trade with figures flat over the month.

From here it will be interesting to see whether the improvement gathers pace as the November rate cut was followed by a further interest rate cut in December and the prospect of more cuts in 2012.  Undoubtedly rate cuts, plus the fact that home values have been in decline for much of 2011 improve housing affordability and make buying a more attractive prospect.  Not to mention that over the past 12 months rental accommodation has become more expensive with capital city rental rates up 5.0% over the year.  However, despite the December rate cut, consumer confidence fell in December by -8.3% which indicates that lower interest rates alone may not be enough to lure consumers back to their old spending patterns.

With consistent reporting of the weak European economy weighing heavily on the attitude of respondents, many felt that the economy and their finances were going to be in a weaker position over the next one to five years.  If these feelings are reflected throughout the community demand for housing finance may remain at low levels despite the recent improvement.

In which direction do you think housing finance is headed from here?

The number and value of advanced resources projects is at an all time high with most of these projects located in Queensland (31) and Western Australia (40).

Additionally there are a further 404 ‘less advanced’ projects that are either undergoing feasibility study, awaiting approval or awaiting final investment decisions.  These include 14 proposed LNG developments which have the potential to add 75 million tones to Australia’s annual LNG production capacity.  BREE also point out that there are 15 less advanced iron ore projects which have an estimated capital expenditure of $1 billion or more.

In their ‘Resources and Energy Quarterly’ for December, BREE outline their forecasts for the sector and acknowledge there is some risks based on the global economic woes, specifically European sovereign debt and the liquidity crisis.  Additionally there has been some weakening in the spot prices for key commodities such as iron ore and metallurgical coal.

The bulk of the demand for mineral and energy commodities will continue to be supported by China, India and other non-OECD economies.  Within the OECD, demand for Australian commodities is likely to be strongest in Japan where the infrastructure spending post earthquakes and tsunami will be high.  Economic growth is likely to slow across our major export markets (China GDP is projected to ease to 9%, India’s economic growth is expected to slow to 7.5% and Japan’s economy should increase by 2.3%) however BREE have suggested the improved economic conditions in the ASEAN countries, where GDP growth is expected to be around 5.5%, should offset any slowdown in export growth.

Growth across the sector will be accompanied by employment growth.   The size of the mining industry work force increased 19% during 2010/11 and is up by more than 170% over the past decade.

BREE is forecasting improved performances in the volume and value of key Australian commodity exports.    Exports of iron ore, which is Australia’s largest commodity market, is forecast to increase by 13% in volume and 11% in value.  The export of metallurgical coal, the second largest commodity export, will rise by 7% in volume and 13% in value.

Based on the above information it looks like the resources sector will continue to benefit from ongoing demand for Australian commodity exports.   A direct benefit will continue to be seen in those housing markets that are closely tied to each of the respective commodity markets and the major service centers that provide essential services and a large component of the labour force to the mining regions.  Mining related investments are of course very sensitive to movements in commodity prices and global demand; however there doesn’t appear to be any cracks emerging in these markets just yet.

The indirect benefit, of course, will be seen in robust local economic conditions and a continuation of the two speed economy.  The most recent forecasts from the RBA show GDP growth at 4% by June 2012 before easing to 3-3.5% by December 2012 and underlying inflation tracking around 2.5% to 2.75%.

In terms of the volume of owner occupier finance commitments, these increased by 0.7% over the month and by 6.3% over the year.  The volume of owner occupier finance commitments increased for the seventh successive month in October.

At RP Data we like to drill down further into the data, looking at the volume of refinance commitments (which create no new transactions) and the volume of non-refinance commitments (more reflective of a property transaction).  In October, refinance commitments fell by -1.8% however, they are 17.8% higher over the year.  On the other hand, non-refinance commitments rose for the eighth successive month and increased by 2.0% in October.  Over the year, total growth in non-refinance commitments has been fairly limited at just 1.2% however, over the last eight months the volume of commitments has increased by 10.6%.  The data shows that in recent months non-refinance activity has grown however, over the last 12 months the growth in owner occupier finance commitments has almost entirely been driven by refinancing activity.

If we focus on the total value of housing finance commitments we see that the total value fell by -2.5% over the month with owner occupier finance commitments falling by -1.2% and investment finance commitments down -5.5%.  Once we remove the value of refinance commitments, the total value has fallen by a lower -2.4% over the month.  Over the past 12 months, the total value of finance commitments have fallen by -0.7% with owner occupier commitments up 3.5% and investment commitments down -9.3%.  When refinances are removed from the data, the total value of housing finance commitments have fallen by -5.4%, slightly greater than the -4.0% fall in capital city home values over the same period.

Over the last decade, the total value of housing finance commitments has increased at an average annual rate of 5.9% while over the same period, capital city home values have increased by 6.4% annually.  Over the same period, the total value of housing finance commitments excluding refinances have increased at an average annual rate of 4.7%, growing more slowly than both capital city home values and total housing finance commitments.

Clearly the availability and growth in housing finance has contributed to the growth in property values over the past decade.  Since the beginning of 2009, capital city home values have increased by a total of 13.2% however, growth in housing credit has been much more limited.  The total value of housing finance commitments has increased by a total of just 2.7% since the start of 2009 (almost three years) and when refinances are excluded growth is again much lower at just 0.7%.

Despite the fact that the volume of housing finance has been picking up over recent months it does not look as if there will be a rapid expansion in credit for housing over the coming year.  The European sovereign debt problems look as if they will persist at least during the first part of the year, likely resulting in limited credit availability.  Australian households are continuing to take a cautious approach saving 10% of their disposable income and the latest results of the Westpac-Melbourne Institute Consumer Confidence Survey show that 34.9% of respondents believed that the wisest place for savings was either a bank, building society or credit union with a further 26.6% believing that paying down debt was the best way to save.  Overall, these options accounted for 61.5% of responses.

Clearly the typical consumer knows that their debt levels are high and the responsible thing to do is have less debt.  In light of these figures, I would suggest that the growth in housing finance may increase a little further but it will likely take some time until we see the value of housing finance commitments growing at an annual rate of around or in excess of 5% annually oncemore.

The Australian Bureau of Statistics released Gross Domestic Product (GDP) figures this week for the September 2011 quarter.  GDP measures the market value of all goods and services produced within an economy over a certain period.  In essence, it identifies whether or not an economy has grown or contracted over that period.  Over the September quarter, GDP increased by 1.0% following a 1.4% increase in the June 2011 quarter.  Over the past year GDP has increased by 2.5%.  Over the past decade, GDP has recorded average growth annually of 3.0% so in light of the overall state of the world’s economy the figure is quite good.

The GDP data showed that consumers are continuing to act in a cautious manner with households saving 10.1% of their disposable income.  This is an improvement on the 9.1% they were saving over the last quarter and continues the trend of households saving more since the onset of the Global Financial Crisis.  In the years preceding the crisis Australian households were saving very little, in fact over the past decade households have saved an average of just 4.6% of their disposable income.  Although savings are below their recent peak of 12.4% in December 2008 they remain at levels not previously seen since the mid to late 1980’s.

The data also highlighted that disposable incomes are growing, having increased by 6.0% over the 12 months to September 2011.  Clearly much of the growth in disposable incomes is being saved as highlighted previously.  Although many Australian’s feel as though they are doing it tough, and undoubtedly some are, disposable incomes have grown at an average of 4.1% over the past decade indicating that disposable income growth is currently at above average levels however, Australians are generally choosing to pay down debt and save rather than spend.  In light of this many Australians likely feel as if we have less money due to the fact that we are paying off debt and saving at rates we haven’t done so in many years so in effect it feels as if we have less money.

Although households continue to save, the growth in disposable incomes is leading to growth in household consumption.  The GDP figures reveal that household consumption is continuing to grow, up 1.2% over the quarter and 3.8% higher over the year. Household consumption has grown at a rate above the decade average of 3.4% over the past 12 months.

The data also revealed that the expenditure on dwelling investment fell by -2.9% over the year but was up 0.9 percent over the quarter.  The fall in dwelling investment over the year is reflective of weak new dwelling construction activity, falling property values and lower sales activity.  While investment in dwelling construction has been extremely low, non-dwelling construction investment has surged, up 24.4% over the quarter and 32.7% on an annual basis.

Overall, the GDP data highlights that the economy is continuing to grow however, consumers continue to take a cautious approach.  In light of the ongoing volatile global economic conditions this is certainly not a bad approach and getting debt levels back to a manageable position is a good idea.  The data also highlights the ongoing weakness of the housing construction sector.  While consumers continue to act in a cautious manner it seems unlikely that there will be any substantial turnaround in housing construction activity nor is it likely that property values will show any significant growth.

(note we are using median values in this analysis – RP Data values every residential property across the country each week using an automated valuation methodology – the median value provides a better indication than a median price about true value of properties within a suburb rather than simply the median price of any homes that have transacted over the analysis period).

So why aren’t first home buyers and low income families rushing into these markets?

Well these suburbs are generally cheap for a reason and demand to live in these locations can be low.

Often they are plagued with social issues and high crime rates, they are poorly serviced by transport options, the homes are interspersed with industrial land uses or the suburb is simply far removed from any working node, retail amenity or essential infrastructure such as schools and health care.  Sometimes the suburb simply has a bad reputation based on what the suburb used to be like before it gentrified; reputations and stigma can be a hard thing to shake.

The full list of suburbs where the median value is below $300,000 is included at the end of the post.

The typical argument to improve housing affordability revolves around ensuring the Government releases a sufficient supply of strategically located land that is well connected with transport infrastructure and is associated with essential amenities.  While there have been some areas around the country where housing supply has been sufficient, for the most part Australia remains an undersupplied housing market (the National Housing Supply Council report is due for release shortly which will provide a much anticipated update to their housing supply report last released back in April 2010).

Moving away from the supply side debate, perhaps another idea to improve the housing affordability situation in Australia is to focus some efforts on improving the liveability within some of the more strategically located suburbs that currently feature low housing prices.  The Brisbane SCIP (Suburban Centre Improvement Projects) program is a good example of how a Local Government can work with local businesses to improve the streetscape and outlook of a suburb’s commercial and retail heart.  The outcomes from this programme rely on financial commitments from local stakeholders together with Government funding and in most instances the benefits of the investment well and truly outweigh the costs.

Infrastructure spending is another solution.  Opening up affordable suburbs that aren’t currently well serviced by public and private transport infrastructure increases demand for housing in these locations.  New roads, rail and busways are expensive and considering the frugal nature of Federal and State budgets at the moment we can’t expect a great deal of improvement here apart from those projects already underway.  Prospective home buyers seeking an affordable option would be wise to check out local infrastructure plans and projects and examine the housing markets along the path of these projects.

Another course of action is to look at medium and high density housing options.  Clearly more and more buyers are turning to apartments and townhomes as an alternative to detached home for the more competitive price points.  Across the combined capital cities the difference between the median house price and median unit price is a substantial 11% or $50,000.

Finally, if you are using median prices or values as a guide to help your initial property search, don’t forget that medians are simply the middle price or value.  There are equally as many homes with a value lower than the median as there are homes with a value higher median.  Many prospective buyers don’t consider a particular location because the median price is too high, forgetting that there are likely to be homes priced available at prices well below the overall median.  A good idea may be to look at the range of sales over the past 12 months, that way potential purchasers can analyse the whole gamut of properties which have sold over the period.

Housing affordability is a complex issue, and with the Government seemingly reluctant to make any serious commitments to improving housing supply or come up with any new ideas about how to tackle the situation (as Caryn Kakas from the Residential Development Council pointed out in the Financial Review yesterday, the Government has no forward looking housing policy) there needs to be some strategic consideration of other alternatives.

Population and more importantly, the change in population, is intrinsically linked with housing demand.  To put it simply, more people means more homes.

Unfortunately, for such an important indicator, we only see quarterly updates of Australia’s population estimates at a macro level (ie national and state).  More geographically granular updates are released only annually.  Additionally, there is a long time lag for updating population data.   The official estimates at a state and national level are currently up to date as at March 2011 with the June quarter estimates due to be released on December 19^th.

As can be seen from the graph below, total population growth has eased since peaking back in the March quarter of 2008 (+0.63% over the quarter – note that there is some seasonality in population growth and Q1 typically shows a higher rate of growth than other periods).  Part of the slow down can be attributed to the migration cuts brought in by the Federal Labor Government (the migration intake quota was virtually halved).  Additionally we have seen a swift rise in the number of permanent and long term departures from Australia which has only recently started to reverse.

In fact, based on the more timely migration data released by the ABS (migration data is released monthly, about a month and a half in arrears – so quite a timely data set in comparison with the demographic statistics report which is quarterly and released about six months in arrears) we are now seeing an ongoing trend of higher net migration rates; fewer residents leaving and more new or returning residents arriving.  The migration data is also quite seasonal, with spikes being recorded during February and July each year.

On a rolling annual basis, the September results for net migration were the highest since August 2010.  This is likely the result of the improved migration intake, with the Federal Budget announcing a 10.5% uplift in the skilled migrant intake and a 7.4% increase in the number of migrant families.   The trend of fewer long term and permanent resident departures is also helping to drive the net migration figures upwards.

Almost without doubt, as the ABS progressively release the new demographic data for the June and September quarters of this year we will see an improvement in population growth figures.  Theoretically the uplift in population growth should translate to greater housing demand; so we should start seeing that reflected in some improved dwelling approval and commencement figures.  That will be a welcome development by the residential building sector where the latest construction data from the ABS showed the value of residential construction was down 3.9% over the year.