Tighter credit conditions to cool Sydney, Melbourne property market heat
Near-term strength in the Sydney and Melbourne property markets will continue but cool as tighter credit conditions impact, according to the April Australian economic outlook report from NAB.
The report said these effects will be compounded by modest wages growth/ deteriorating affordability and new additions to the housing (apartment) stock but with growth moderating.
"Our national forecasts for houses in 2017 are 7.2 percent in 2017 (previously 3.4 percent) and 4.3 percent in 2018," NAB said.
"Unit prices are forecast to rise 6.8 percent in 2017 (previously 0.8 percent), but will fall modestly in 2018 (-0.4 percent).
"Regarding the housing market performance over the past month, there are still no signs of the market cooling in Sydney and Melbourne, with annual prices growth hitting multi-year highs in both cities.
"Auction rates have also been elevated for both cities, pointing to tight market conditions, while the NAB Residential Business Survey shows that sentiment in both these markets was strong in Q1 2017 – although also suggests that tighter credit conditions are becoming a greater constraint.
"New building approvals have come off their highs, but the trend has turned positive again more recently.
"That is a surprise development given our expectation for the industry to self regulate supply in light of growing settlement risk and over- supply concerns in some segments (namely CBD apartments) – suggesting we could see the construction cycle extend a little longer than expected, although economic modelling still points to significant downside risks to construction.
"Overall, dwelling investment is expected to rise 2 percent in 2017, before turning modestly negative (-1.1 percent and -3.5 percent in 2018 and 2019 respectively).
"Regulators have again moved to tighten lending standards for housing loans, particularly for interest-only and investor lending.
"Against a backdrop of below-target inflation and elevated unemployment, policy makers are unlikely to address their concern about household balance sheets via interest rates, with further macro-prudential measures possible.
"We expect the RBA to remain on hold for an extended period, before some small hikes in late 2019 as domestic demand starts to improve.
"The big news in the last month has been the renewed focus on macro-prudential measures to contain what are perceived as emerging risks in the property market.
"APRA announced new measures in late March, most notable of which were limitations on interest only lending imposed on ADIs. While more severe measures had been anticipated in some quarters, and could suggest more to come, the likely impact is nonetheless unclear – macro prudential measures can be effective in the short-term, but their longer term impact is more questionable.
"NAB Economics assessment is that the new policies will likely slow mortgage lending growth in the near-term, albeit fairly modestly. For now though, housing finance continues to grow briskly, with investor loan approvals now back near levels seen before the last round of prudential tightening by APRA.