Slowing growth in house prices will continue into 2019. There may even be an actual decline in some markets, as lending standards are tightened further for new investors and the rising amount of new building drags on the residential market.
Increased restrictions on investor and interest-only borrowing have reduced the capacity for investors to bid up prices and this is caused all markets, with the exception of Hobart, to record a slowdown in price growth over 2017/18.
These observations underscore the analysis of housing activity undertaken by BIS Oxford Economics, which notes Sydney and Melbourne, particularly, have benefited from booming investor demand. House prices are expected to backtrack in these cities.
Yet, the prospect for a major correction will be mitigated by low interest rates and a relatively stable, albeit subdued, economic environment.
Strong population growth is also underpinning occupancy nationally, which should help investors generate rental income, perhaps at lower rates in some cities.
This should prevent an excessive number of forced sales coming to the market and driving down prices.
Outside of any negative shock to the economy, or significant rise in interest rates, no significant correction is expected.
Rising supply is becoming an issue. By the end of 2018/19 the Australian market is expected to have experienced four successive years of more than 200,000 new dwelling completions annually.
While near record net migration and population growth is playing a major part in underlying demand, high levels of demolitions in a number of cities are also removing dwelling stock from the market.
The fall in investor demand is now translating to a decline in new dwelling commencements and this downtrend is expected to accelerate in 2018/19 as fewer apartment projects, typically favoured by investors, achieve pre-sales sufficiently enough to proceed to construction.
As a result, supply may fall sharply in 2019/20, but with high immigration likely to the sustained in coming years some markets will begin to tighten again and prices should stabilise and then rise by 2020/21, BIS Oxford analysts conclude.
Specialist commercial property lender, the Thinktank Group, agrees the new apartment market is finally cooling and calculates it has taken four years for the tightening measures from prudential regulator APRA to have had an impact.
This is the first decline in the market for seven years. The main reason is that financing for investors for off-the-plan apartments, which had allowed developers to raise capital and get projects off the ground, is being restricted.
There is also evidence developers that bought income producing assets, especially in suburban markets with tight office and industrial capacity, were taking advantage of this income stream until their development projects were approved.
Thinktank expects that APRA’s efforts and the Royal Commission into financial services will slow both investor and developer access to finance. A more risk adverse environment is likely to be the new norm.
The weakness in the housing market has persisted for longer than ANZ analysts forecast, and peak-to-trough price declines of around 10% in Sydney and Melbourne amid smaller declines elsewhere are now expected.
As the weaker market reflects a tightening in supply of credit rather than tighter interest rates, the impact on the economy is also expected to be less invasive and there are offsets, as the outlook for wages growth and tax cuts are a positive development.
ANZ analysts expect 2018 GDP growth at around the 3% level and a similar outcome in 2019 before a slowdown in government spending, investment and net exports means growth drops to around 2.5% in 2020.
By region, BIS Oxford suggests Hobart and Canberra will show the strongest growth in house prices in 2018/19. A deficiency of dwellings in Hobart is the factor there, while in Canberra relatively high incomes should support further house price growth in 2018/19.
Further out on the timeline the greatest upside to house prices is expected to emerge in Brisbane as net interstate migration flows into Queensland are steadily increasing.
At present there is an oversupply of dwellings in that state, mainly in apartments. After just modest price increases in 2018/19 and 2019/20 BIS Oxford Economics expects a subsequent acceleration.
Meanwhile, house prices in the resource-focused markets of Perth and Darwin, having already experienced significant declines, appear to have bottomed out. Nevertheless, any recovery is expected to be slow given excess stock, low population growth and weak economic growth.
There is a similar story in Adelaide, where a subdued economic environment and limited population growth are dampening prices. Outside of any negative shock to the economy or significant rise in interest rates no significant correction is expected.
Thinktank’s analysis also points out there are significant differences between the greater Sydney and greater Melbourne apartment markets. Sydney’s middle suburbs absorbed much of the new development while Melbourne’s development was focused on the CBD and inner city.
Falling unemployment and higher wages should allow the Reserve Bank of Australia to conclude that sufficient progress has been made towards the mid point of its inflation target and this may prompt it to pull back accommodating monetary policy in 2019, ANZ analysts contend.
While the weaker house price outlook makes the timing for a hike in the RBA’s cash rate challenging, they suspect it will be reluctant to start tightening policy if house prices are still falling.
The first rate hike is expected in August 2019, allowing more time for stability to emerge in the housing industry, and another is expected to follow in November with the cash rate at 2% in 2020.