Australian house prices look set to fall in 2018

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When it’s all said and done, 2017 will be regarded as a year of two halves for Australia’s broader housing market.

The first, a period of rip-snorting price growth, especially in Australia’s southeastern capitals, fueled by low interest rates, strong population growth, lower-than-usual market turnover and an abundance of investor activity.

However, following the introduction of tighter macroprudential measures on interest-only lending from Australia’s banking regulator, APRA, at the end of March, the property market has cooled substantially in the second half of the year, especially in Sydney and to a lesser degree Melbourne.

Annual house price growth has more than halved on a national weighted basis, largely due to a recent pullback in Sydney property values which have now been falling for several months. Melbourne price growth has also slowed, albeit it remains in positive territory.

Auction clearance rates in both cities sit at multi-year lows while housing finance has also moderated, especially for investors.

To Cameron Kusher, Research Analyst at CoreLogic, it’s the latter that largely explains why the housing market has slowed so sharply in recent months.

“The transition has been largely driven by significant shifts in the lending environment,” he says.

“Credit growth limits for investors were already in place however, origination limits were introduced for interest-only mortgages at the end of March 2017.

“As a result of these changed regulatory policies, lenders have begun to charge premiums on the interest rate for investor and interest-only mortgage products.”

In his opinion, those trends are likely to be seen again next year, resulting in a further slowing in the market.

“Throughout 2018, we’re expecting to see a further slowdown in national housing market conditions,” he says.

“Credit policies are likely to remain tight as regulators keep a watchful eye out for a rebound in investment credit growth or, a reversal in the trend towards fewer mortgages with a loan to valuation ratio of more than 80%.”

As a result, he predicts that prices will fall next year on a weighted national basis.

“National dwelling values will fall further in 2018, driven lower by falls across Sydney and to a lesser extent, Melbourne,” Kusher says.

“After values surged 75% higher over Sydney’s growth cycle and 59% higher across Melbourne, it’s rational to expect some slippage in dwelling values across these cities.”

Although he expects that house prices will weaken a touch next year, Kusher, compared to more bearish forecasters, says it’s unlikely to be anything more sinister than that, especially given the likelihood that official interest rates will be left unchanged by the Reserve Bank of Australia (RBA).

“Interest rates are likely to remain on hold in 2018,” he says, arguing that an increase in borrowing costs “would stifle household consumption and business investment and could cause financial distress in Australia’s highly indebted household sector”.

Kusher, like many others, thinks there’s little chance that interest rates will be lowered either, suggesting that this would risk reigniting the housing market as seen when the RBA last cut rates in the second half of 2016 which contributed to the surge in house prices seen earlier this year.

“We’re likely to see regulators and policy makers looking to encourage households with high levels of debt to reduce their exposure while rates remain low,” he says.


“Because currently, household debt levels are at record highs, a factor which has been called out by the Reserve Bank repeatedly, as well as international institutions such as the OECD, BIS and IMF.”

Kusher says that it’s likely that some households may use this period of low interest rates rates to pay down debt.

While that will help to strengthen household balance sheets, Kusher says this come at the expense of retail spending, especially on discretionary items.