2019 Residential Property - The Year Ahead
Forward Supply Indications
According to new research from Domain Group, falling property prices will stabilise in 2019 before moving into a moderate growth phase.
Domain has modelled median house and unit prices in the capital cities to the end of 2020. Solid population growth, low unemployment and low interest rates underpin property price growth in the period to end of 2020.
Domain predicts unit prices will be more resilient, due to stamp duty concessions in Sydney and Melbourne. Unit prices are expected to grow nationally by two percent in 2019 and three percent in 2020 after bottoming out to their 2016 levels early next year. Read the full story here.
Some Headline Figures
History will record that the banking royal commission was resisted until the need became irresistible. Tighter regulatory rules were never going to be enough, but in combination the market has been well and truly up-ended.
There are some key figures that demonstrate why all this has been necessary, and I suggest that what’s currently happening will in the long-run, leave the market stronger. There’s a silver lining.
By having the current credit-crunch we may have avoided some more nasty shocks that the market could have delivered outside of the controlled, if admittedly, alarming breadth and findings of the royal commission.
The major banks and the housing market are very much aligned. The banks hold about 60-65% of their assets as home loans, loans that increased in value by 30% over the last 5-years.
Of these loans valued at around $650 billion, about 40% are or were interest only, that is until APRA restrictions set a limit of 30%. Borrowers were facing $120 billion in loans maturing in 2021 and that could see potential re-payments increase by 30-50% and eroded the banks securities.
In addition to restricting interest-only loans APRA also instructed the banks to be more selective in their lending to investors and some developers of high-rise apartment projects. However, it must be noted that the banks have been subjected to stress-testing and all passed as sound and all were well within tight regulatory tolerances.
Where to Now
These figures look daunting and it remains to be seen to what extent the steps the regulator and Federal Government will take in the light of the royal commission.
Any policy will have in mind the security of the banks, and the general health of the economy. There will be a need to limit the scale of any possible losses incurred by banks in the improbable outcome of a severe property market downturn.
The dilemma that is facing the RBA and the government is that by tightening lending standards too far, we run the risk of causing property prices to fall further, magnifying the challenges facing the banks and the wider economy.
Financial markets are complex and key factors also include interest rates, the level of unemployment, the role of secondary lenders, policies like lending to investors and encouraging first time buyers.
There are related impacts outside of the banking system such as tax policy, the impacts on established trade up and down buyers, loans from family and from superannuation, it’s a complex mix and unfortunately, what we are now seeing is borrowers taking much of the burden and it’s starting to show.
According to figures from the ABS, home lending activity is at its lowest level since 2013 and in the September quarter figures had fallen 13.5% lower than the level a year ago.
The number of loans to owner occupiers purchasing established homes (excluding refinancing) was steady in September but was down by 2.5% in the quarter and was 11.7% lower than a year ago.
First home buyer activity has retreated following the improvements of 2017. Lending to first home buyers was down by 2.0% in the quarter and is down by 3.7% year on year.
The value of lending to investors continued to slide down by 5.0% in the quarter and is 18.2% below 12 months ago.
APRA’s restrictions were designed to curb high risk lending practices but we are now seeing ordinary home buyers experience delays and constraints in accessing finance and disrupting lending for new residential buildings. When banks apparently start making loan-application judgements based partly on how much fast-food you might buy, then the pendulum has swung too far.
A more complete view of the effect on actual building activity will not be clear until the second quarter of 2019 and reversing activity will not be a quick task.
With the prospect that the release of the banking royal commission findings may see further upheaval in the banking system, there will be a pressing need to re-build and maintain the flow of housing finance.
In New Zealand, we have already seen some minor easing of restrictive policies, and there is room to suggest the same here.
Banks may have lost their customer focus, but a credit crunch will ‘punish’ homebuyers unreasonably.
Back to the BBQ
Last week I noted that chatting around the Aussie BBQ had turned negative as far as housing was concerned. This week I was at a Christmas BBQ held for residents and their families at a new housing estate.
Those who attended this function on a hot Sunday early afternoon, struck me as a stable, well-dressed orderly and an intelligent group of people. They appeared to be a wide ethnic mix including several second and third generation immigrant families - all the kids were well-dressed and attentive to their parents.
The crowd was happily eating a Rotary sausage sizzle, drinking no-sugar Coke, iced coffees and soft-serve ice cream. These are not high-risk customers of the type APRA is so cautious.
The housing estate and its new residents were positive and clearly aspirational, the bedrock of Australian society, and I kept thinking how is this wrong, and how can we allow poor financial regulation and bad corporate culture to take too heavy of a toll on the positive impact the housing market exerts on individuals and their families, on our economy and wider society.
The above article is also seen on projectagenda.com.au