What’s in store for the Australian housing market in terms of price growth?
This year will not be a bumper one for the Australian housing market; Sydney will drag Australia house prices down this year. But will it be all doom and gloom moving forward? What does the future hold?
Australia and New Zealand Banking Group (ANZ) economists say Australian house prices will start to go up this year, with higher growth expected in 2019.
Australian house prices are 0.8% higher than they were 12 months ago. ANZ forecasts a growth of 1.8 % this year, which will pick up to 3.6% in 2019.
Senior ANZ economists Daniel Gradwell and Joanne Masters said, “We think most of the slowdown has already occurred. We retain our view that prices will not materially decline. Over the near term, auction results in Sydney and Melbourne suggest that the majority of the price growth adjustment is behind us.”
The economists see the strong labour market and rising incomes as the main drivers of price growth, with the absence of an interest rate increase this year also supporting house prices.
However, Morgan Stanley analysts aren’t as confident, seeing risks building in 2018 after several months of house price weakness and a potential for increased regulatory pressure.
“Conditions for housing for the remainder of 2018 continue to look challenging with further regulatory tightening of credit, an increasing stock of properties to be settled, and continued uncertainty on government policy for housing as the election cycle looms,” equity strategists led by Daniel Blake wrote to clients this week.
“This leaves us cautious on the outlook not just for housing, but the broader economy in 2018, given the leveraged exposure of the economy to the property market.”
AMP chief economist and head of investment strategy Shane Oliver said that a looming house price crash was unlikely.
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.
“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.
ANZ predicts that Melbourne and Hobart will continue to outperform the rest of the Australian capital cities, like Sydney and Perth. We discussed extensively the growth of Melbourne and the emergence of Hobart in our 2018 outlook on the Australian housing market.
First-home buyers are replacing investors
Tighter regulations governing the number of investor and interest-only lending has seen a significant pullback in buying activity from those types of buyers, ANZ research shows.
Last year, the Australian Prudential Regulation Authority (APRA) changed the rules for lending to investors and interest-only borrowers. There has been an increase in interest rates for these types of borrowers, and serviceability calculations and loan-to-value (LTV) ratio requirements have also been affected.
We are optimistic that while tightened regulations continue to moderate investor sentiment, it will not be at too substantial an extent, given that the Australian housing market is underpinned by strong population growth and housing demand.
However, despite APRA changes reducing the number of investors in the housing market, to a large extent, the gap is being filled by first-home buyers. Government grants and sizeable stamp duty tax concessions in NSW and Victoria have helped spur a revival among first-home buyers.
Interest rate hike not expected till 2019
The ANZ economists write that high household debt leaves households sensitive to interest rate increases, but this is unlikely to become an issue this year. They predict that the rate hike will come in mid-2019.
“We do not expect the RBA to hike rates until 2019, and then by only 50 (basis points) in the year, which is unlikely to hit affordability in a material way. Moreover, most households continue to hold a solid buffer.”
While Morgan Stanley remains cautious on the property market, the analysts concede consumer confidence has remained above trend, and building activity has also outstripped expectations.
“These factors are holding up better than past relationships with prices would suggest, which in turn sees the broader impact of the slowdown in housing prices being limited – so far,” the equity analysts wrote.
Article by Ian Choong
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