Australia | Jun 22 2017
BIS Oxford Economics suggests house price growth will slow or decline in some areas in the next couple of years, although a crash is not expected.
– Investor demand subsiding
– Apartment completions still elevated
– Modest pressure on prices
– Variations city by city
By Greg Peel
Concern over fast-rising house prices, particularly in Sydney and Melbourne, prompted APRA to initially respond in FY16 by capping the risk weighted capital allowance of banks for investor mortgages. This meant banks had to tighten their lending standards to discourage investors in order to move to within the regulator’s cap.
It worked, for about five minutes. There was an immediate and sharp reduction in investor loan demand and exponential house price growth in the major capitals began to slow, but only briefly. Pretty soon investors were back at it again, exploiting interest-only mortgages to keep monthly repayments manageable. House prices continued to rise.
Given today’s property investor is more inclined to “flip” a property for a capital gain in a rising house price market rather than rather than target a longer term, yield-paying investment, investor loans rely entirely on house prices actually rising. Bubbles typically lead to busts, and in this case the risk of equity-negative investors rushing for the exits. The regulator was forced to act again.
APRA last year specifically restricted the banks’ capacity to write further interest-only loans. As had been the case following the first round of regulation tightening, the banks lifted their rates on such loans in order to discourage investors. It is therefore the opinion of BIS Oxford Economics that the resurgence in house prices seen in FY17 is about to come to an end, leading to slower house price growth or even house price falls in some areas over FY18-19.
While tighter restrictions are dampening the demand side, on the supply side, record new dwelling completions will see most undersupplied markets tip into oversupply, while existing oversupply in other markets is likely to persist, BIS suggests in its Residential Property Prospects 2017 to 2020 report.
House price growth since FY13 has largely been confined to Sydney and Melbourne, BIS notes, although Hobart and Canberra have kicked in in FY17. Brisbane and Adelaide have experienced only limited growth, while Perth and Darwin have seen house price falls due to the decline in resource sector investment and an excess of stock.
BIS believes all cities will see weaker housing markets in FY18 due to APRA’s clamp-down on interest-only loans, just as was seen in FY16. Further complicating matters is the rapid rise of new dwelling completions, which is resulting in a growing supply-demand imbalance that will also contribute to dampen price growth. However the boom in apartment construction is creating a different demand-supply outcome to the detached housing market in a number of cities, which will impact the house and unit markets in different ways.
Apartments v. Houses
New apartment completions will reach a record in FY17, with apartments mostly having been bought off-the-plan by investors. As apartment blocks are progressively completed, most cities will find that tenant demand will not be sufficient to support rents, and consequently values, BIS warns.
Construction of a record 231,700 new dwellings was commenced in FY16, and the economists’ forecast is for 218,000 to have commenced in FY17. FY17 will be the final year of the three-year run of 200,000-plus construction commencements, well above the previous peak of 187,100 in 1994. Underlying demand for new dwellings is forecast to be 172,100 per annum over FY18-20. This estimate takes into account an expected slowing in population growth in line with patchy economic conditions and a relatively subdued employment outlook.
All states are thus expected to experience varying levels of apartment oversupply through the next three years, with the exception of NSW, which remains heavily undersupplied at this stage.
Australia is already experiencing a slower than expected transition from mining investment as the key economic driver to non-mining investment. The greatest offset to declining mining investment in the past few years has been surging growth in housing construction. As construction reaches its peak in FY18 and begins to fall away in FY19, housing will then become a drag on the economy until business investment takes over as the next driver of growth.
BIS sees this occurring at the end of the decade.
Prices
The outlook will nonetheless differ from city to city, and between apartment and detached housing markets. Investors are far less inclined to buy and look to “flip” houses rather than apartments, with off-the-plan buyers often selling for a capital gain even before completion. It is thus the apartment market which will be most impacted by APRA’s investor crack-down, and once expectation of capital gains begins to falter, additional downward pressure on prices will result.
Those investors looking to hang onto their investments for the rent also favour apartments, leaving houses as more the preserve of owner-occupiers, BIS notes. Persistent low interest rates means owner-occupier mortgage demand has stabilised at elevated levels in FY17 rather than retreated. Median prices for houses should continue to be supported as investor demand falls away.
BIS expects the best prospects for median house price growth over the next three years will be in Hobart and Canberra. The Melbourne and Brisbane markets are now moving into oversupply, but the bulk of this is concentrated in apartments and an underlying deficiency of houses remains. The median house price in these cities is also below that of Sydney, hence BIS suggests Brisbane and Melbourne houses, as opposed to apartments, could still see price rises through to 2020.
Perth and Adelaide will likely see ongoing downside in the short term given soft economic conditions, weak population growth and excess supply. But weak conditions and oversupply are expected to bottom out in both states by FY19. An improvement should thus follow, but BIS still believes prices in both cities will only see prices in 2020 roughly as they are in 2017. It will be a similar story in Darwin. Here the market is reliant on the decline in resource sector investment bottoming out in FY18.
Sydney’s median house price is forecast to be modestly lower by 2020. Investor demand will drop off but apartment completions will remain elevated for the next three years.
Don’t Panic
The good news is that word “modestly”. Barring any unforeseen economic shock or a sudden surge in interest rates, house prices are not expected to suffer any major correction a la the US and Europe in the GFC. While investors may be forced to lower rents to attract tenants, low interest rates means most investors are able to ride out a weaker period rather than be forced to panic-sell.
Apartment prices will suffer more than house prices, and already median apartment price growth is running below median house price growth in nearly all capital cities, and many have experienced at least one year in which prices have gone backwards. House prices will remain supported given a number of markets are still estimated to be in undersupply, BIS notes.
The conclusion is that outside of Hobart and Canberra, the median house price in other cities is expected to fall in real terms by FY20. Falls in the median apartment price are expected in all cities, ranging from -2% to -14% on BIS’ estimations.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
