What risks do our property markets face?
That's exactly what we cover in our recently released quarterly Residential Property Risks & Opportunities Report by RiskWise Property Research.
Our objective is to provide you with a risk heat map of the residential property market and to provide a comprehensive review of the major risk factors.
From the second half of 2017, the major risks associated with the residential property market increased significantly.
Credit restrictions and the Banking Royal Commission:
Credit restrictions, in particular, have had a direct impact on the Australian housing market, mainly from the second half of 2017.
As a result, dwelling prices in Sydney and Melbourne have shown a decelerated growth rate, followed by price reductions in Sydney and, to a lesser extent, Melbourne.
There are now fewer property investors active in the residential property market.
With borrowing capacity reduced, investors have found it more difficult to secure access to credit.
In a relatively short period of time, the landscape for residential property in Australia has significantly changed.
As per CoreLogic, the annual rate of dwelling price growth has significantly slowed to 0.2% nationally, which is Australia’s slowest annual rate of price growth since October 2012. 
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established in December 2017.
The Commissioner is authorised to submit an interim report no later than 30 September 2018 and will provide a final report by 1 February 2019.
The Royal Commission is likely to recommend increased scrutiny of expenses in relation to mortgage applications, while reducing reliance of Household Expenditure Measure (HEM) benchmarks.
More generally, there is expected to be behavioural change with more responsibility placed upon borrowers and mortgage brokers to declare factually complete and accurate information for mortgage applications.
Housing affordability:
Affordability has had a major impact on the housing market, particularly in Sydney and Melbourne which are considered very unaffordable from a price-to-income ratio perspective.
These capital cities also deliver low rental yields and therefore a low investor serviceability ratio. 
Therefore, these capital cities have experienced a sudden change in the property market due to the credit restrictions.
Affordability will continue being a key driver in the market, particularly following the likely recommendations of the Royal Commission (some of which have already been implemented by a few of the major lenders).
While the other property markets are greatly more affordable, most of the states in Australia (such as WA and SA) experience below-average economic growth and a relatively high level of effective unemployment.
Economic indicators:
Poor wage growth, a relatively high level of effective unemployment and low GDP growth have forced the RBA to keep the cash rate at a record low.
This is unlikely to change in 2018 and 2019 due to poor wage growth experienced across Australia, as well as the low consumer price index which is just below the RBA target of 2-3 per cent.
It should be noted that the economic growth and the effective unemployment rate are greatly varied across Australia. 
In a low-growth environment, the states generally produced average or below-average economic output, which has been inconsistent across the states.
Economic growth, government spending and business investment have a strong correlation with healthy employment markets, strong population growth and, particularly, external and internal migration, and vice versa.
This has resulted, until the end of 2017, in strong demand for dwellings mainly in NSW and VIC and to poor demand for dwellings in areas that experience poor economic growth, such as WA and the NT.
However, as mentioned above, credit restrictions have had a major impact on the housing market in NSW and VIC, and currently the annual rate of dwelling value growth in Australia has significantly slowed to 0.2 per cent.
It is likely that the solid economic growth that is followed by strong population growth in Sydney and Melbourne will mitigate, to some extent, price reductions in these capital cities.
However, the majority of the states and territories are projected to experience very slow improvement to their economic indicators and, therefore, besides a small number of exceptions, population growth and demand for dwellings is projected to be soft in the next couple of years.
Unit oversupply:
A large number of areas in Australia are experiencing unit oversupply.
Areas with a high level of stock and a large number of units in the pipeline and unit building approvals suffered from poor and often negative capital growth.
This has also significantly increased the settlement risk of off-the-plan units, particularly in large unit blocks. 
Oversupply of units has led, in many cases, to voluntarily lending restrictions by the major banks, such as lower LVR for new units in some postcodes across Australia.
These lending restrictions are in addition to broader lending restrictions that have been set by APRA to significantly reduce investor activity and to mitigate the financial risks associated with residential property lending.
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These restrictions have proven to be very effective, triggering reduced demand for new dwellings and a reduction in new dwelling commencements.
Legislation and regulation carry high risk in the next couple of years.
The potential win of the Labor party and dramatic changes to negative gearing and capital gains tax for residential properties, are likely to change the entire landscape of residential properties in Australia and, in particular, impact new units.
State-by-State Overview
On the back of unprecedented property price growth, New South Wales displayed strong economic fundamentals.
With high economic growth, substantial state government investment in key infrastructural projects and its ongoing attractiveness for private investment, NSW was in a strong position.
However, its key weakness is housing unaffordability with a very high dwelling price-to-income ratio.
Therefore, lending restrictions have had the greatest impact in NSW, and resulted in significantly reduced demand for dwellings, price reductions, lower auction clearance rates and poor growth projections for 2018 and 2019.
Victoria attracts the highest population growth across all states and territories. 
The state also enjoys a solid economy and a healthy job market.
However, due to rising property prices and low rental returns, investment serviceability has become increasingly difficult.
Overall, the state performed well for houses, and is likely to experience ‘soft lending’ and solid capital growth in the medium to long term.
However, lending restrictions and reduced property investor demand have led to modest price reductions and they bring high risk for properties not suited to families.
With the Queensland Government taking significant steps to grow its economy, the local property market is likely to prosper in the medium to long term.
However, the economy, demand for dwellings and the strength of the housing market are greatly varied across the state.
Some areas, particularly in South-East QLD, such as the Gold Coast and the Sunshine Coast, enjoy good population growth and healthy demand for dwellings (particularly houses).
Other areas, such as Central QLD, are still experiencing poor demand for dwellings, very high vacancy rates and very soft property market. 
In this edition of the report, houses in QLD have been upgraded to low-medium largely due to the strength of the SE QLD property market.
This area is experiencing strong demand and are projected to deliver healthy capital growth.
South Australia performed below average on each of our economic indicators.
The state is facing dwelling oversupply with just under three times the stock required to meet population growth.
However, SA delivered strong housing affordability relative to NSW and VIC.
This factor mitigates, to some extent, the risk associated with houses in SA.
The worst performer was Western Australia with its struggling economy and unattractive employment market.
High levels of oversupply and low migration have impacted capital growth and rental returns, particularly of units in central Perth. 
Tasmania leads the country in investment serviceability with its high median rental returns and low average dwelling price.
The state delivered consistent capital growth as well as strong rental returns for both houses and units.
However, its outstanding growth rate is unsustainable, and it is projected these will decelerate within 12-24 months.
The Northern Territory experienced poor population growth resulting in negative dwelling growth and a very soft property market.
That poor level of population growth (largely due to the departure of a large number of employees, following the end of the mining boom), enabled the state to perform well across each of the economic indicators.
Residential Risks & Opportunities 8 Poor demand for dwellings and price reductions, combined with relatively high median household income have resulted in its exceptionally low price-to-income ratio, the lowest in the country. 
However, the housing market is projected to remain soft, particularly for units.
The Australian Capital Territory also delivered solid economic growth and experienced the second largest population growth rate in the country, delivering solid capital growth and a healthy property market.
While growth rates have decelerated in recent months, dwellings in the ACT present a relatively low level of risk and are projected to deliver modest capital growth in the next couple of years.
