• Australian capital city dwelling prices rose 1% in August according to CoreLogic. After a 10.2% decline over 22 months (which was worse than the decline seen in the GFC), average prices have now had their second rise in a row and their strongest since April 2017. Dwelling prices are still down 5.9% from a year ago.
• Sydney dwelling prices rose a strong 1.6% which is their third gain in a row and Melbourne prices rose 1.4% which is also their third gain in a row.
• Prices also rose in Brisbane (+0.2%), Hobart (+0.5%) and Canberra (+0.8%) but fell in Adelaide (-0.2%), Perth (-0.5%) and Darwin (-1.2%). Perth prices are now down 20.6% from their 2014 high and Darwin prices are down 30.7% from their 2014 high. 

The boost from the election result which removed the threats to negative gearing and the capital gains tax discount, RBA rate cuts, and positive headlines around the relaxation of the 7% mortgage rate serviceability test and tax cuts have helped provide a bounce in home buyer demand at a time of low listings.

This is clearly evident in a continuing rebound in auction clearance rates where August saw the best monthly average clearance rates in Sydney since March 2017 and in Melbourne it was the best month since August 2017.

See the next two charts.

While this has come on very low volumes, its usually the case that improved clearance rates lead a pick-up in volumes and this may already be starting to be seen with listings picking up in recent weeks and is likely to become more evident through the Spring selling season.

As can be seen in the charts above, the rebound in auction clearance rates points to a rebound in home prices in Sydney and Melbourne and this is already starting to be seen.

Based on past relationships the current level of clearances points to annual house price growth rising to around 10 to 15% over the next 9 to 12 months. 

Our base case remains that house price gains will be far more constrained than this.

Compared to past recovery cycles household debt to income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged with more to come and this has already pushed up Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak.

So notwithstanding the bounce in Sydney and Melbourne prices seen in August we don’t see a return to boom time conditions and expect constrained gains through 2020 – eg around 5% or so (which we have revised up slightly).

However, the rapid rebound in Sydney and Melbourne property prices to annualised gains around 15% in August has raised the risk that we may see much stronger gains. There are three key things to watch going forward:

• First and most immediately the Spring selling season is worth watching - if auction clearances remain elevated as listing pick up then it will be a positive sign that the pick-up in the property market has legs.
• Second, housing finance commitments - so far its remained weak despite the pick-up in clearances. This may be because the many of the buyers who have come back into the market so far already had finance lined up and were waiting to buy. And in any case it has come on low volumes. For 10-15% price gains in Sydney and Melbourne housing finance will have to pick up significantly.
• Finally, unemployment will be important beyond the next few months. If it picks up significantly in response to slow economic growth then it will be a big constraint on house prices and could result in forced property sales and another leg down in property prices. This is not our base case but is the key risk in terms of the property outlook. 

Much higher unemployment is something the RBA is keen to avoid – in fact it wants unemployment to fall to 4.5% or below – so our view remains for further cash rate reductions in November and February next year taking the cash rate to 0.5%.

An obvious issue though is whether the rebound in the Sydney and Melbourne property markets will present a problem for the RBA in terms of cutting interest rates further.

This will no doubt cause some consternation at the Bank.

But as we saw over the 2011-17 period the RBA will do what it believes is right for the “average” of Australia as opposed to one sector or a couple of cities.

However, it may have to return to tighter regulatory controls again if it needs to cool the Sydney and Melbourne property markets once more for financial stability reasons.

In other words, we don’t see the rebound in the Sydney and Melbourne property markets as a barrier to further monetary easing, but if it continues to gather pace then expect a tightening of the screws again from bank regulators.