BILL’S BITES: Property – then and now

In the wake of extensive media coverage, it won’t be lost on many people that house prices are falling under the weight of stretched affordability and tighter credit conditions.

In previous periods of falling house prices in 2008 and 2012, the Reserve Bank of Australia cut rates (from 7.25 per cent to 3 per cent in 2008/09; and from 4.75 per cent to 3 per cent in 2011–12), helping to support house prices, particularly in Sydney and Melbourne.

The difference in this cycle is that RBA rate cuts are unlikely to occur again and lending policies appear to have changed structurally.

At a forum in Portugal in June, RBA Governor Philip Lowe noted that “very high” debt levels and asset prices were the number one domestic risk in Australia. Clearly, Governor Lowe does not plan to repeat the exercise of 2016 when his predecessor, Glenn Stevens, cut rates twice in response to low inflation and new lending to property investors increased by 20 per cent between March and August 2016.

Investor lending has since turned, housing finance approvals last week showing that the value of investor loans fell again in August to be down an estimated 26 per cent excluding refinancing over the past year. Also last week, the Westpac Melbourne Institute Index of House Price Expectations in October dropped 7.4 per cent to 101.4, the weakest level since the first month the survey question was run in May 2009.

With no prospect of rate cuts, tightening in lending policies (as noted by the RBA) and uncertainty about the ALP’s policy on negative gearing and capital gains tax there is no reason to believe that new lending to investors has found its bottom.

Housing credit growth is reflecting this, slowing from 6.2 per cent in 2017 to our forecasts of 5.2 per cent in 2018 and 4 per cent in 2019.

Consequently it seems reasonable that we should prepare for an extended period of falling house prices in Sydney and Melbourne. While the degree of the falls is uncertain, our measures of affordability point to the current pace of price falls of around 5 per cent through at least 2018 and 2019.

This is a key reason why we expect the RBA to keep rates on hold through to the end of 2020.

_{This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information}.