• There is a raft of reasons why home prices have posted solid gains in recent months. Low interest rates have played a role together with firm population growth, tight rental markets and a desire by investors to move money away from cash-based investments to property and shares.
• But the best way to prevent irrational optimism developing in the housing market is if new supply lifts to meet higher demand. And that is precisely what is happening. New home sales are rising off a low base, but the annual gain of more than 33 per cent, is one of the fastest annual growth rates recorded.
• The sharp lift in new home construction and sales may raise fears of a repeat of the US situation where supply outstripped demand, causing prices to fall. But lenders in Australia have been reluctant to advance funds to developers unless new developments have 80 per cent plus pre-commitments. So the concern is unjustified at present.
• While it is encouraging that housing supply is lifting to meet demand, and investors are putting money to work in property markets, those same investors should be heeding the advice of the Reserve Bank Governor to make “sensible assumptions about future returns.”
• The Housing Industry Association believes that there is still a shortfall of new housing stock. The complication is the shift by Australians to more efficiently use their housing space, with more people occupying the bigger homes. Not only are Gen Y staying longer at home with their parents or moving out and sharing accommodation with a number of people, but older parents are choosing to live with their children.

What do the figures show?

New home sales

• New home sales rose by 6.4 per cent in September according to the Housing Industry Association, the sixth gain in seven months and after a 3.4 per cent increase in August. The number of home sales (6,914) is a 27-month high. The lift in sales is the biggest in 17 months.
• The annual growth rate of 33.3 per cent is one of the fastest rates recorded. The HIA indicate that it is the fourth fastest annual growth rate behind 39.1 per cent in October 2001, 68.6 per cent in December 2001 and 35.4 per cent in April 2002.
• House sales rose by 4.5 per cent in September while apartment sales rose by 19.9 per cent. Over the year house sales are up 37.3 per cent while apartment sales are up 12.8 per cent.
• In September private detached house sales increased by 15.7 per cent in Victoria, 4.6 per cent in South Australia, and 2.1 per cent in Western Australia. Monthly sales fell in New South Wales (down 2.9 per cent) and Queensland (down 5.1 per cent).
• The HIA note: “Over the September 2013 quarter, detached house sales increased in three of the surveyed states – NSW (+3.5 per cent), Victoria (+10.2 per cent), and Queensland (+3.8 per cent). Detached house sales declined over the September quarter in SA (-0.7 per cent) and WA (-3.3 per cent). Compared to their ten year average, detached house sales are lower in four out of the five states, with WA being the exception. The largest shortfalls are for Queensland and SA.”
• The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia’s largest 100 home builders. The survey covers around 8 per cent of the home building industry.
• The Reserve Bank Governor will be pleased to see housing supply lifting to meet higher demand. But only when rental vacancy rates are near three per cent (supply and demand in balance) will the RBA be more confident that growth in home prices will ease to more sustainable rates.
• Interest rate settings are on hold until 2014. The Reserve Bank has no pressing need to move rates in either direction.
• The outlook for building material suppliers, developers and consumer durable retailers is positive.

What is the importance of the economic data?

• The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia’s largest 100 home builders. The survey covers around 8 per cent of the home building industry.

What are the implications for interest rates and investors?

• The Reserve Bank Governor will be pleased to see housing supply lifting to meet higher demand. But only when rental vacancy rates are near three per cent (supply and demand in balance) will the RBA be more confident that growth in home prices will ease to more sustainable rates.
• Interest rate settings are on hold until 2014. The Reserve Bank has no pressing need to move rates in either direction.
• The outlook for building material suppliers, developers and consumer durable retailers is positive.