Have we reached the bottom of the housing market?

The heat has come off the housing market, but we should be wary about getting too excited, too soon. 

One of the weirder responses to the Australian federal election result is articles suggesting that somehow all will be improved in the economy because the anticipation of an ALP win was the big driver of economic pessimism.

This view is most egregiously put forward with respect to the housing market, where the story goes that as Labor was proposing changes to capital gains tax and negative gearing, people were holding off buying homes because of worries about house values. Thus with the Coalition winning the election, the market will now rebound.

Now, there is frequently not much logic with markets which will often react to “the vibe” as much as reality, but nothing about the election result has changed the fundamental picture of the economy. And given the ALP was grandfathering the negative gearing and CGT changes, logic would have you thinking that it would drive people to enter the market in order to take advantage of them before the changes came into effect.

As it is, the latest figures on the housing market suggest any improvement had started before the election result, but we should be pretty wary about getting overly excited – when we talk improvement we really mean “less bad”.

The latest housing finance figures show that the value of housing finance commitments in April was 19% below what they were a year earlier.

House prices should still be expected to stay weak, and most likely falling, for at least the next six months. While the level of housing commitments does not lead perfectly to house prices, historically they lead the market for a good six months.

This suggests that while things should be getting less bad for house prices, any talk of a market rebound is still some way off. The Reserve Bank cutting interest rates will have an impact – but as it coincides with winter, which is generally the poorest time for house selling, any rebound will likely be slow to come.

The bottom of the housing market looks to have been reached, but the return to the surface still has a way to go.