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- How long will this this credit squeeze last?
- It’s not all bad news.
- The housing market has weakened further than ANZ expected three months ago, across a range of indicators
- The current cycle is being driven by regulatory changes and tighter credit availability.
- Credit shocks tend to cause a step change, rather than a prolonged downturn
- Aside from the credit tightening, the fundamentals of the economy and the housing market look solid
- First home buyers are still supporting the lower end of the market, but this impact is already easing
- The drop in prices is already helping affordability
- Slowly does it: vacancy rates are falling and rents are nudging higher
- Financial stability — the risks are receding
- The risks look to have receded somewhat, assisted by the broad strengthening of lending standards
- Household financial stress does not appear to have risen, assisted by low interest rates and a build-up of mortgage buffers
- WHAT CAN YOU DO TO STAY AHEAD IN THE CURRENT MARKET?
Some of our property markets were soaring for the last few years, well they were in Sydney and Melbourne, but now prices are coming back to earth.
And while some commentators felt our 2 big property markets would stabilise by the middle of the year, it now seems that our housing prices will keep falling for the rest of the year and possibly into 2019.
Nationwide dwelling prices are only 1% lower than a year ago.
The Sydney property market has been the main catalyst of the current weakness (-4.2% over the last year), and Melbourne real estate has recently joined in.
Like all other property cycles I’ve invested in it’s finance (or difficulty getting it) that has put an end to this particular cycle – but his time round we’re experiencing a credit squeeze (tightening credit availability), rather than rising interest rates which have ended previous cycles.
In particular property investors are finding it harder to access credit, and things are getting worse as lenders change their serviceability criteria.
How long will this this credit squeeze last?
APRA started exerting it’s influence in 2014 and we started seeing the effect of their macro-prudential controls in 2015.
APRA has done it’s job and is starting to loosen its grip, but now the spin off from the Royal Banking Commission is slowing down lending approvals , and it’s likely that credit conditions will remain tight for the rest of this year.
This means the borrowing capacity for most investors has contracted.
In a recent report to its institutional and professional clients ANZ Bank estimate that if changes to lending policies cause a 10-15% decline in new loan sizes, this implies a 5-10% y/y fall in prices.
Below is a summary of ANZ’s latest housing market update and Chart Pack.
It’s not all bad news.
Aside from the tighter credit conditions, the fundamentals of our economy and housing markets look solid and are still supportive for our property markets.
- Australia’s economic growth is back around its longterm trend, and the outlook is broadly positive.
- We are seeing ongoing employment growth, and wages are improving (albeit slowly).
- Population growth is still running at well above average levels.
However ANZ expect nationwide housing prices to decline by 4% in 2018 and a further 2% in 2019.
Both the Sydney and Melbourne property market are expected to be the primary drivers of this fall, as their high prices and highly leveraged households will be more sensitive to tighter credit conditions and rising interest rates.
ANZ forecast both cities will see prices fall around 10% peak-to-trough, with Sydney property faring slightly worse than Melbourne.
Perth and Darwin are forecast by the ANZ to stay in negative territory over the next two years, with their outlook hindered by the last adjustment of the mining boom.
While Brisbane still has plenty of apartment supply to come, improving population growth is likely to soften the extent of near-term price falls. At the same time houses in Brisbane’s inner and middle ring suburbs are increasing in value.
Canberra and Adelaide are forecast to out-perform according to the ANZ, as their relative affordability should insulate them from the worst of the credit tightening.
Hobart’s bull run is expected to reach a conclusion, as Tasmania remains challenged from an economic and demographic point of view.
The housing market has weakened further than ANZ expected three months ago, across a range of indicators
With fewer bidders attending each auction and less competition, auction clearance rates are lower. But still not in worrying territory
Finance approvals are down across the board, but investors are finding it much harder to get finance.
*Nationwide, 40% of housing sold in 2017 was via auction. Auctions are most common in Sydney and Melbourne, accounting for 50% and 60% of sales respectively Source: ABS, CoreLogic RP Data, RBA, ANZ Research
The current cycle is being driven by regulatory changes and tighter credit availability.
Rather than stopping this property cycle with high interest rates, as has happened in the past, currently investors are bearing the brunt of the current tighter lending policies:
ANZ estimates a 10-15% decline in new loan sizes implies a 5-10% y/y fall in prices
Source: ABS, ANZ Research
Credit shocks tend to cause a step change, rather than a prolonged downturn
The credit impulse is likely to stay weak until later this year, but ANZ don’t expect that to continue into 2019 in the absence of another credit shock.
Aside from the credit tightening, the fundamentals of the economy and the housing market look solid
- Employment growth is still solid, and wages are (slowly) improving
- Population growth is well above historical averages, and supply hasn’t kept up with demand
Source: ABS, CoreLogic RP Data, ANZ Research
First home buyers are still supporting the lower end of the market, but this impact is already easing
Stamp duty discounts in NSW and VIC have helped a wave of first home buyers supporting prices in the lowest price quartile but this was never going to be a permanent solution for first home buyer affordability.
Source: ABS, CoreLogic RP Data, ANZ Research
The drop in prices is already helping affordability
Sure it’s difficult for first home buyers to save a deposit, but due to low interest rates, mortgage repayments are in line with longterm averages.
Source: ABS, CoreLogic RP Data, Residex, ANZ Research
Slowly does it: vacancy rates are falling and rents are nudging higher
Source: ABS, REIA, Residex, ANZ Research 13
Financial stability — the risks are receding
The ANZ report says:
While the level of household debt remains high and a medium-term risk for the economy, the RBA concluded in the April Financial Stability Review (FSR) that “most aggregate indicators of financial stress remain low”.
Non-performing housing loans remain a low share of banks’ balance sheets.
Macro prudential measures and a broad strengthening of lending standards have, according to the RBA, resulted in an improvement in “the risk profile of new housing lending and the resilience of household balance sheets”.
There is some concern about borrowers transitioning from interest-only to principal-and-interest loans, and the FSR warned that “liaison with banks suggests a small minority will face difficulty affording higher scheduled repayments”.
Our assessment is that it represents a small, but not insubstantial, drag to household spending.
The Brisbane market remains carefully monitored given the large amount of development, but prices have performed better than we expected and the peak completion rate is now behind us.
Indeed, the FSR reported that the supply of new apartments “has been absorbed without significant disruption’.
Relative housing affordability and rising population growth look to be providing support to the Brisbane market.
The cooling of the housing market — which has accelerated since the FSR was published in April — will provide some comfort about medium term financial stability.
Lower house prices should, over time, translate into slower growth in housing credit and overall household debt.
High household debt does leave households sensitive to interest rate increases, although we expect interest rates to remain low by historical standards for some time to come.
Importantly, households have built up significant mortgage buffers.
The risks look to have receded somewhat, assisted by the broad strengthening of lending standards
Source: ABS, APRA, RBA, ANZ Research 18
Household financial stress does not appear to have risen, assisted by low interest rates and a build-up of mortgage buffers
Source: ABS, RBA, Securitisation System, ANZ Research 20
WHAT CAN YOU DO TO STAY AHEAD IN THE CURRENT MARKET?
As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
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