“It’s All Good” or “Oh @%&#, We’re Screwed!”
Australian Property Market Update
10th April, 2018
- As fewer capital city buyers step up to bid on homes at auction, pressure is mounting on sellers to lower price expectations.
- Prices are falling in Sydney, Melbourne and Adelaide, while Brisbane and Perth are standing strong with modest growth.
- Expensive, prestige properties have been hardest hit, with the less-expensive unit market showing higher demand.
- Analyst opinions are mixed on what the future holds for Australian home prices.
Housing Supply and Demand
The number of homes brought to auction this week rose on the back of the Easter weekend slowdown. Auction volume nearly tripled this week from the previous week’s 670 auctions. Preliminary results show sellers eking out a success rate just under 65 percent. Last year at this time, the nationwide clearance rate was sitting around 75 percent.
Here are the latest preliminary capital city results, as reported by CoreLogic:
In Sydney, Australia’s most expensive capital city, demand for units is strongest. A whopping 76.6 percent of units taken to auction attracted a successful bidder, while only 62.4 percent of house auctions cleared.
Recent Changes in Home Prices
Over the month of March, dwelling values fell about a quarter of a percent in Sydney, Melbourne and Adelaide. In Brisbane and Perth, home values increased by a similar amount.
Corelogic’s monthly data below shows that units fared much better than houses.
It wasn’t just the past month where price weakness is evident in Sydney, Melbourne and Adelaide. Looking back over the quarter, prices are down in all three capital cities. Brisbane and Perth, on the other hand, have continued rising over the past three months.
Where to From Here?
I guess that depends on who you ask. Here are some of the more recent property market forecasts, ranked from rosiest to gloomiest:
ANZ: “It’s All Good”
According to economists at ANZ, “most of the slowdown has already occurred.” Since they don’t expect the RBA to be able to raise the cash rate in the near term, they expect home prices to mostly flatten out in 2018 and then start rising again in 2019.
I find it hard to take these Aussie big bank economists seriously since they are incentivised to remain optimistic and prop up homebuyer psychology. That said, I think they’re onto something when it comes to the RBA’s intentions. I don’t see our central bank voluntarily raising rates anytime soon.
If the RBA decides we need further monetary easing to stimulate the economy (an even lower cash rate), ANZ’s rosy prediction of rising prices may come true. Lower mortgage borrowing costs would almost certainly lead to higher home prices.
Apart from further rate cuts, I can’t see home prices rising without broader inflation, especially in wages. It seems ANZ agrees. If you dig a little deeper into their report, you’ll find a similar, more circumspect view: “we continue to be cautious given that credit growth continues to outstrip income growth.” Let’s not forget, that’s an unsustainable path.
AMP: “Buckle Up”
Economists at AMP are echoing a similarly cautious tone. From an incentives point of view, AMP is pulled in two directions. While their core business has historically been financial products related to insurance and the share market, they do write some home loans. Perhaps this would lead them to take a more neutral position.
AMP suggests that a housing price crash is unlikely for three reasons: low rental vacancy rates in capital cities points to a housing under-supply, debt serviceability is still strong, and mortgage stress remains low (at least based on current low interest rates).
According to their chief economist, “to see a property crash we probably need much higher interest rates or unemployment (neither of which are expected) or a continuation of recent high construction for several years (which is unlikely as approvals have cooled from their 2016 highs).”
Even amidst their cautious optimism, AMP is calling for additional price falls of 5 percent through 2018, and further moderate declines through 2019.
Morgan Stanley: “Brace Yourself”
Economists at Morgan Stanley sound a little more bearish. They’re saying that “conditions for housing for the remainder of 2018 continue to look challenging,” citing “further regulatory tightening of credit, an increasing stock of properties to be settled, and continued uncertainty on government policy.”
Of course, as an investment bank whose core business is selling managed funds in the share market, it pays to sow a little doubt in the minds of property investors. Or perhaps another way to look at it is they have nothing to lose by telling the truth.
Morgan Stanley pulled up short of giving a specific price movement prediction, saying they are “cautious on the outlook not just for housing, but the broader economy in 2018, given the leveraged exposure of the economy to the property market.”
Capital Economics: “Hold on Tight”
Capital Economics chief economist Paul Dales added to the mix this week with a rather gloomy report. He expects interest rates to begin rising in the medium term, leading to downward pressure on prices.
He says, “While prices may only edge lower this year and next, higher interest rates will probably mean they fall more sharply in 2020 and 2021.” By that time, he expects house prices across Australia’s capital cities to fall by 10 percent from their peak.
UBS: “Oh, %@&!. We’re Screwed!”
Economists at UBS highlighted some harsh realities to their clients this week, and added in some doom and gloom for good measure. With the view that the availability of cheap credit is propping up the housing market, UBS warned that a credit crunch could be just around the corner, leading to steep declines (a la 20 percent) in what buyers are able to pay for a home.
What would be the source of such a credit crunch? UBS is concerned about the Royal Commission into bank lending practices, and what its findings could mean for how banks may start to calculate borrower living expenses.
It seems that many lenders, especially in the broker network, have been using an outdated benchmark guide without validating borrowers’ actual costs of living. Their method may be over-estimating serviceability, and if the Royal Commission decides banks need to enforce stricter standards, UBS suggests mortgage borrowing limits might fall by 35 percent.
If such a tightening of credit led to a 20 percent fall in house prices, it would take us back in time, in terms of Sydney and Melbourne house prices, to late 2015. When you look at it from that perspective, maybe it’s not that far out of the realm of possibility.
Where Do You Stand?
So, there you have it. Apparently, no one really knows where house prices are heading. That means it’s up to you to form your own opinion, clearly determine your desired outcome, and filter your decisions through a due diligence system that will keep you from buying something you later regret.
Which of the five economic outlooks above do you think is most accurate?
Take a moment to share your view in a comment below.