ANZ now thinks falls in Australian house prices will be larger and longer

Philippe Huguen / AFP / Getty Images
  • Housing indicators are weakening in Australia, from prices to clearance rates, credit growth and new home sales.
  • ANZ, previously one of Australia’s most optimistic outlook forecasters, now says the slide in prices will be larger than it previously thought, with the subsequent price upswing arriving later.
  • It believes the latest downturn has been driven by credit rationing from lenders, something it says is unlikely to place significant, and prolonged, downward pressure on prices.

Home prices are still falling in Sydney and Melbourne, dragging annual growth nationally into negative territory for the first time in years.

Auction clearance rates are at multi-year lows, and housing credit growth, particularly to investors, is slowing fast, reflecting restrictions on interest-only lending from Australia’s banking regulator, APRA.

Tighter lending standards for borrowers, this time based on income and debt levels, are also beginning to filter through the banking system.

Official interest rates are unlikely to fall much further, if at all, and with short-term market interest rates elevated compared to normal levels, there’s even some speculation that out-of-cycle mortgage rate increases could arrive at some point in the future.

For the once high-flying Australian housing market, the backdrop now looks a whole lot different to a year ago.

Given the headwinds for prices, there’s no shortage of analysts out there forecasting that the Sydney and Melbourne-led slowdown will persists for some time yet. Some believe it could be years, rather than months or quarters, before prices begin to lift again.

It’s enough for ANZ Bank, previously one of the most optimistic forecasters in Australia, to change its tune, predicting the slide in house prices will be larger than it previously thought, with the subsequent price upswing arriving later.

“Our expectation that prices would have begun stabilising by now was based on auction results, which had settled through the end of 2017 and opened 2018 at reasonable levels,” says Daniel Gradwell, Senior Economist at ANZ.

“However, this was not sustained, and nationwide auction clearance rates have fallen from an average of 66% in February to just 58% in May.

“This is the weakest monthly result since the start of 2013, and suggests that prices are likely to come under further pressure over the near term.”

The relationship between auction clearance rates and national price movements in average weighted terms can be seen in the chart below.

ANZ

Rather than being driven by higher interest rates — something that has usually driven prior downturns in the past in Australia — Gradwell says this event has been as a result of tighter lending standards introduced by lenders.

“The primary driver behind this slowdown in prices is the availability of credit, rather than the cost of credit,” he says.

“Banks have responded to regulatory requirements by implementing a combination of lower loan-to-income ratios, lowering estimates of rental income from investment properties and raising expense estimates.”

Gradwell says even tighter lending restrictions could be introduced, something the RBA flagged in its June monetary policy statement.

It’s worthwhile remembering that the RBA sits on Australia’s Council of Financial Regulators, along with APRA, ASIC and Treasury. Therefore, its acknowledgement that “there may be some further tightening of lending standards” hints there could be further restrictions to come.

In Gradwell’s opinion, tighter lending restrictions will place further downside pressure on house prices. The only real question, he says, is just how much that pressure will be?

“We think developments through 2017 and early 2018 are instructive,” he says.

“The additional tightening in credit to investors triggered by the regulator in early 2017 was the catalyst for the weakness through that year, in our view. But the impact of this had faded by the end of the year, with the auction clearance rate starting to rise and the pace of decline in house prices easing considerably.

“This indicates to us that if the fundamentals of the economy remain supportive the impact of credit tightening on house prices is not permanent.”

With recent history as a guide, Gradwell says the downside pressure on prices as a result of income and debt-based lending restrictions is unlikely to be significant or prolonged.

“We think the solid fundamentals of the Australian economy mean that by late this year the impact of the current credit tightening will likely be fully priced and the market will have stabilised,” he says.

“There is necessarily an element of conjecture in this view. We will need to watch the data carefully to see whether things evolve in this manner.”

It’s likely that many homeowners, particularly in Sydney and Melbourne, will be hoping that Gradwell’s forecasts are right.

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