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House prices set to rise

House prices look likely to recover, thanks to falling interest rates, and more rate cuts could be coming, further accelerating the recovery.

The number of home loans for owner occupied housing rose 1.8% in August, compared to a fall of 0.8% in July, according to data released today by the Australian Bureau of Statistics (ABS). Economists had only been expecting a rise of 1.5%.

And the data doesn’t include any effect of the latest 0.25% cut in official interest rates in October, which points to a rising recovery in Australia’s housing industry. That news is likely to be welcomed by struggling construction supply companies including Boral Limited (ASX: BLD), Brickworks (ASX: BKW), CSR Limited (ASX: CSR), and Fletcher Building Limited (ASX: FBU). Boral chief Ross Batstone said in July that conditions in the building and construction industry were the worst he had seen in 20 years.

Property investors still appear to be uninterested, with the value of new investment loans falling 0.8%. Despite their negative view, Aussie Home Loans chairman, John Symond last week suggested that housing prices had bottomed and should recover from here.

There’s already hard evidence that lower rates and increasing confidence in the economy are spurring property sales. The Real Estate Institute of Victoria reported a 62% auction clearance rate for Melbourne on Saturday, while Sydney clearance rates are running around 63%, according to Australian Property Monitors.

The RBA has warned that it’s closely watching the housing market for signs of a new housing price bubble, although a fall in the value of new investment property loans should put the central bank at ease – for this month anyway. A sharp jump in investor mortgages could indicate that speculators were entering the market.

Economists are forecasting further cuts in the official cash rate, as the RBA looks to stimulate the economy and curb the high Australian dollar. AMP’s Shane Oliver expects the RBA to cut rates by another 0.25% as early as next month, and another cut in February or March next year, to take the official cash rate to 2.75%.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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