Chris Kohler| Domain| 9 April 2019
Economic experts are at loggerheads over the Australian property market’s health and outlook, with UBS arguing a 35 per cent slump in the mortgage borrowing power of Australians, and steep house price falls, is possible.
Meanwhile, AMP chief economist Shane Oliver expects another 5 per cent fall this year alone, but no house-price crash, and ANZ economists argue the worst is behind the property market and prices will rise this year and next.
Australian capital city house prices fell 0.2 per cent in March – the fifth-consecutive monthly price drop – bringing the annual growth rate to 0.8 per cent, compared with 11.4 per cent in May last year.
With few economists predicting the Reserve Bank will lift interest rates this year, focus has turned to the regulatory reaction to the bank royal commission, and key economic data. The Hayne inquiry has uncovered alarming lending practices, while households remain heavily indebted and house prices sit well above long-term trends, according to some gravely concerned economic voices. Others argue mortgage holders are ahead on their repayments and building up a buffer to approaching higher interest rates.
‘Credit crunch’ is very possible: UBS
House price call: Between flat and -3 per cent in 2018/19, with larger falls possible
The royal commission is “more material” than UBS economists expected, with regulators likely to respond with a tightening of responsible lending laws – a move that could cause mortgage finance to become harder to secure.
Mortgage borrowing limits could fall by 35 per cent in this scenario, as higher living expenses become fully factored into mortgage calculations, UBS economists George Tharenou and Carlos Cacho wrote to clients this week.
“The banks have already moved to undertake more due diligence on borrowers’ living expenses, however the Royal commission suggests this will need to go substantially further,” according to Mr Tharenou and Mr Cacho, who say resurgent first-home buyers will be heavily affected.
“While some may not be impacted by changes (eg, low [loan-to-income] borrowers), many are likely to see a sharp reduction in borrowing capacity, particularly first-home buyers, who are ~12 per cent of total loans, and low income borrowers.”
UBS predicts house prices to sit between flat and -3 per cent year-on-year in 2018 and 2019, but expect a credit tightening scenario would see larger price falls.
More downside ahead, but a crash isn’t likely: AMP
House price call: Around ~5 per cent further to fall this year, with more drops likely next year
While AMP chief economist and head of investment strategy Shane Oliver noted concerns that a house price crash – a 20 per cent fall in national average price – was on the way, he said it was unlikely, for three main reasons.
Supply of dwellings has not kept pace with population-driven demand. “Average capital city vacancy rates are at or below their long-term averages, notably in Sydney”, Dr Oliver noted.
Debt serviceability remains relatively strong, with APRA’s rule tightening leading to a drop in interest-only lending, and mortgage stress appears to be low, for now.
“It is dangerous to generalise” – Property prices have surged in Sydney and Melbourne but have fallen in Perth and Darwin and have seen only moderate growth in other capitals.
“To see a property crash we probably need much higher interest rates or unemployment (neither of which are expected) or a continuation of recent high construction for several years (which is unlikely as approvals have cooled from their 2016 highs),” Dr Oliver wrote.
While no crash is seen to be looming, AMP predicts Sydney and Melbourne property prices “will fall another 5 per cent or so” this year, with further falls likely next year.
‘The worst is behind us’: ANZ
House price call: 1.8 per cent growth this year picking up to 3.6 per cent next year
The slowdown in Australian capital city house price growth won’t deepen from here, according to ANZ senior economists Daniel Gradwell and Joanne Masters, who stand apart from UBS and AMP by predicting prices will rise this year and next.
February saw both ANZ and NAB abandon their call for two RBA rate hikes to take place in 2018, a positive development for the property market, according to the ANZ economists.
“We think most of the slowdown has already occurred,” the economists wrote this week. “We retain our view that prices will not materially decline.”
(Source: ANZ Research)