Housing market weakness challenges ANZ's view on price direction
Of course, there is not just one housing market in Australia, and the picture is different across the capital cities. Prices in Sydney have been falling for most of the past year, and now sit 4.2% lower than the peak of July 2017. Melbourne was initially more resilient, but has since recorded slightly larger price falls than Sydney in each of the past three months. In contrast, prices are still rising in Hobart and Canberra, while the post-mining boom decline in Perth prices continues to ease.
As well as the price falls in Sydney and Melbourne lasting longer than expected, the scale of decline in recent months has accelerated somewhat. Sydney recorded declines of 0.2% and 0.3% m/m in each of the first three months of the year, but April and May saw this pick up to falls of 0.4% m/m and 0.6% m/m respectively. Melbourne has transitioned from small price rises in January and February to declines for the past three months. The starting point for these major markets is therefore weaker than we previously expected.
FURTHER WEAKNESS IS IN STORE
Our expectation that prices would have begun stabilising by now was based on auction results, which had settled through the end of 2017 and opened 2018 at reasonable levels. Consistent with this, the pace of house price declines had been moderating since a large decline in October. However, this was not sustained, and nationwide auction clearance rates have fallen from an average of 66% in February to just 58% in May. This is the weakest monthly result since the start of 2013, and suggests that prices are likely to come under further pressure over the near term.
Click here to enlarge
This weakness is challenging our previous view that prices would stabilise and then recover somewhat to finish the year in positive territory. There are still a number of headwinds that are likely to weigh on prices through the remainder of 2018, including the shift away from interest only loans, and the ongoing tightening of credit availability. It is important to acknowledge that this cycle is being driven by different factors than previous price downturns. Previous periods of falling housing prices (Figure 3) have coincided with increases in mortgage rates and/or mortgage rates hitting elevated levels. Neither is the case this time. Interest rates have increased from their 2016 and 2017 lows, to the tune of 5bp for owner-occupiers and 35bp for investors, but these movements pale in comparison to previous cycles. Nor are interest rates high. Servicing costs are around the long-run historical average, even with mortgages that are much larger than in the past.
The primary driver behind this slowdown in prices is the availability of credit, rather than the cost of credit. Banks have responded to regulatory requirements by implementing a combination of lower loan-to-income ratios, lowering estimates of rental income from investment properties and raising expense estimates. Ongoing changes in this space cannot be ruled out, which is something we will be watching closely. Indeed, the RBA noted in its June meeting that “there may be some further tightening of lending standards”. Developments of this nature will continue to apply downside pressure to house prices.
The key question is how far this pressure will extend? We can’t be certain of this given the unprecedented factors driving the slowdown. We think developments through 2017 and early 2018 are instructive, however. The additional tightening in credit to investors triggered by the regulator in early 2017 was the catalyst for the weakness through that year, in our view.
But the impact of this had faded by the end of the year, with the auction clearance rate starting to rise and the pace of decline in house prices easing considerably. This indicates to us that if the fundamentals of the economy remain supportive the impact of credit tightening on house prices is not permanent.
With this in mind we think the solid fundamentals of the Australian economy mean that by late this year the impact of the current credit tightening will likely be fully priced and the market will have stabilised. We will publish updated forecasts for house prices in our upcoming housing chart pack.
There is necessarily an element of conjecture in this view. We will need to watch the data carefully to see whether things evolve in this manner.
Click here to enlarge.
Daniel Gradwell is a senior economist at ANZ
