House prices in Australia, particularly in Sydney and Melbourne, have risen sharply since the global financial crisis, propelled higher by a combination of lower interest rates, strong population growth, a pickup in local and foreign investor activity and the favourable tax treatment of housing.
However, that’s begun to change in recent months.
Price growth is slowing and, in the case of Sydney, Australia’s most expensive housing market, prices are now starting to decline, creating all sorts of speculation as to what it could mean for the economy, especially when it comes to household spending, residential construction and employment growth, along with the asset quality of banks.
Curbs on interest-only and investor lending, higher fees for foreign buyers, an increase of stock available for sale and affordability constraints in some individual markets have all acted to slow price growth without the need for the Reserve Bank of Australia (RBA) to lift official interest rates.
While the factors many not be the same, Australia is not alone when it comes to a slowing housing market.
As seen in the chart below from Fitch Ratings, many other major nations — both developed and developing — are also expected to see house price growth slow in the year ahead.
So what specifically does the group expect from Australia’s housing market this year?
In one word, stability.
Not a crash or a boom like some more extreme forecasters are predicting just stability.
And that includes mortgage arrears which are expected to remain stable at low levels.
“Fitch believes the adoption of APRA-prescribed serviceability practices by lenders in 2016 has improved borrower ability to service mortgage loans originated since then,” the group says.
However, for some, it warned that “the rising cost of living and sluggish wage growth are likely to increase pressure on recent borrowers who have little disposable income”.
Following the introduction of discounts on stamp duty charges from the New South Wales and Victoria state governments, that’s likely to include many first-home buyers.
While the proportion of first-time buyers (FTB) in these markets has increased in recent months, Fitch says the boost is unlikely to last.
“Fitch expects the increase in FTB to be temporary,” it says.
“Low income growth, tighter underwriting and rising living costs will maintain pressure on affordability for prospective buyers. As mortgage rates are currently low, any material rate rise will weigh further on mortgage affordability and serviceability.”
As for growth in total mortgage lending, Fitch says the RBA will likely receive some welcome news, predicting that annual credit growth will continue to slow, closing the gap between household indebtedness and incomes.
“Fitch expects mortgage lending growth to slow to around 4% in 2018, based on continued record low interest rates and stable unemployment,” it says.
“This will once again be offset by continued underemployment, reduced investor demand and tougher lending practices.”
Specifically, it says recent macroprudential measures introduced by Australia’s banking regulator, APRA, will “reduce the supply of lending to investors and moderate the house price growth in Sydney and Melbourne in 2018”.
Tying it all together, Fitch is forecasting that house prices in Australia’s largest cities — Sydney and Melbourne — will stabilise this year due to due to low interest rates, falling rental yields, increasing supply, limited investment alternatives and growing dwelling completions, partially offset by high population growth”.