Australian house price growth has slowed this year, falling back to an annual pace of 5.5% in the year to November, according to data released by CoreLogic.
While affordability constraints, an increase in housing stock available for sale in some cities, higher taxes on foreign buyers and capital controls in China have all likely contributed to this deceleration, seeing annual price growth slow from 11% in the middle of this year.
Daniel Gradwell and Joanne Masters, Senior Economists at ANZ Bank, think tighter restrictions on interest-only lending from Australia’s banking regulator, APRA, is the main reason why the housing market is cooling.
“The cooling market has been driven by regulatory changes,” the pair wrote in a note released this morning.
“APRA’s tightening on investor borrowing and interest-only loans has resulted in higher interest rates for those borrowers, and lowered demand for housing.”
With those restrictions unlikely to be lifted any time soon, given housing credit growth is still outpacing growth in household incomes, an outcome that regulators are attempting to reverse, Gradwell and Masters think the slowdown in the housing market will continue well into 2018, especially given the Reserve Bank of Australia (RBA) is likely to increase interest rates in their opinion.
“Weaker auction results point toward further slowing as we move into 2018. Our forecast that the RBA will increase interest rates next year will also work to lower price growth,” they say.
As opposed to the majority of other forecasters, ANZ is forecasting that the RBA will lift rates twice in 2018, leaving the cash rate sitting at 2%.
However, even with the prospect of higher mortgage rates, Gradwell and Masters don’t believe the housing slowdown will become anything more sinister than that, especially if the RBA leaves interest rates on hold as many in markets currently expect.
“If the RBA doesn’t tighten then prices will likely slow less than we forecast,” they say.
“Importantly, there is still nothing to suggest to us that prices are going to enter widespread declines.”
In their opinion, households are in a position to absorb a modest increase in borrowing costs.
“We believe households will be able to absorb the 50 basis points of rate rises we have forecast in 2018, as many people have solid mortgage buffers,” they argue, adding that “over 70% of people are ahead of their mortgage repayments, and nearly 50% are more than three months ahead.”
Gradwell and Masters say that higher interest rates will only become an issue for the housing market if they increase faster and higher than what almost any economist currently expects.
“While repayments have been manageable in this low interest rate environment, households will be sensitive to interest rate increases. We estimate a 2% rise in interest rates would see mortgage affordability blow out to the worst levels on record,” they say.
“But it’s hard to envisage 2% of rate hikes coming through with inflation and wages growth so soft.”
A 200 basis point increase in the cash rate, taking it back to 3.5%, would see it return to a level that the RBA currently deems to be neutral for the economy, neither stimulating or detracting from economic activity.
Aside from the risks of a more aggressive tightening cycle from the RBA, something that appears to be remote at best given how weak inflationary pressures currently are, Gradwell and Masters suggest a more plausible risk to watch next year is in Australia’s apartment market.
“We remain on watch for signs of rising settlement risk, particularly in Queensland where the significant increase in supply of apartments is set to peak in 2018,” they say.
“Encouragingly, settlement failures remain around historic norms to date and macro-prudential measures have had an impact. The RBA’s assessment of the risk points to some delays, but not increased failure, in settlements.”