Australia's housing downturn is 'probably past the worst' but don't expect a 'V-shaped recovery' in prices

Quinn Rooney/Getty ImagesTough slog ahead for prices, says ANZ.
  • There’s suddenly a bit of optimism that Australia’s house price downturn — already one of the longest and largest on record — may soon come to an end.
  • HSBC thinks prices will bottom this year. ANZ shares a similar view.
  • ANZ expects prices will fall a further 5% before stabilising late this year, helped by rate cuts and improved affordability.
  • With tighter lending standards now in place and a large pipeline of new apartment supply still to come, it says there’s unlikely to be a “V-shaped recovery” in prices.

Something unusual is happening in Australia’s housing market, at least compared to what’s been seen over the past couple of years.

After one of the largest and longest downturns on record, there is suddenly a bit of optimism around that prices may soon start to bottom.

Hot on the heels of HSBC forecasting that values are likely to bottom out in the second half of this year, ANZ’s Australian economics team has expressed a similar opinion.

“There are some green shoots appearing,” said ANZ economists Felicity Emmett and Adelaide Timbrell in a note released on Thursday.

“Auction clearance rates have been edging higher since late 2018, price declines are moderating, and sentiment looks to be improving.

“Importantly, access to finance looks to be stabilising.”

Tighter lending standards, initially targeted at investors and interest-only borrowers before evolving to greater scrutiny on household expenses and existing debt levels, has been a major factor behind the decline in prices seen since late 2017, seeing median values fall nationwide by 7.9% and more than 10% in the capitals in average weighted terms.

ANZ Bank

“The tightening in credit has been the major driver of weakness, in our view,” said Emmett and Timbrell.

“The average maximum borrowing capacity for housing loans has fallen by 30% at ANZ — other major banks have experienced similar declines.

“This tightening is continuing, with banks responding to issues raised by the [Banking] Royal Commission around responsible lending as well regulatory changes.”

While that’s expected to continue for some time yet, something that along with a large pipeline of new apartment supply is expected to see prices nationally fall by a further 5% this year, according to ANZ’s latest forecasts, Emmett and Timbrell say improved housing affordability will help to stabilise prices next year.

“Improving affordability will be an important ingredient in turning around the current cycle,” they said.

“If prices fall in line with our expectations and the economy remains in good shape, demand and sentiment should turn around.

“We are unlikely, however, to see a V-shaped recovery”.

So no major rebound in prices on the horizon, just a stabilisation, even with the likelihood of rate cuts from the RBA.

“We expect the RBA to cut 50 basis points this year,” said Emmett and Timbrell.

“With credit availability still constrained, we do not expect these cuts to have a material impact on housing prices though they will likely lessen the downside risks.”

In the past, rate cuts have acted to spur on lending, leading to price rises — substantially in some cases — as seen in recent decades.

However, with maximum borrowing capacity now constrained by greater scrutiny of expenses and exiting debt levels, along with APRA’s minimum 7% mortgage serviceability test still in place for new home applicants, ANZ doesn’t see a similar scenario occurring on this occasion.

“We are probably past the worst and prices should begin to stabilise by late 2019,” said Emmett and Timbrell.

“Nationwide, we think prices will fall close to 15% [from the previous cyclical high].”

This chart from ANZ shows the bank’s price forecasts for individual capital cities for this year and next, along with actual price movements in previous years.

ANZ Bank

“Sydney is set to see the largest correction, down around 20%, while Melbourne prices will also be down sharply by around 15%,” said Emmett and Timbrell.

“The spill-over into Brisbane and Adelaide looks relatively modest at this stage, while Hobart prices have held up well.”

Elsewhere, Australia’s mining capitals — where prices have fallen substantially further than longer than the national price cycle following the end of the mining boom earlier this decade — are expected to have mixed fortunes.

ANZ tips prices to stabilise in Perth next year but expects further weakness in Darwin.

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