Tighter times in property

Tighter credit conditions and ANZ Research’s expectation the Reserve Bank of Australia (RBA) will hike interest rates twice in the second half of 2019 are driving the view that prices have further to fall.

"Sydney and Melbourne are expected to be the primary drivers of [the] fall.” 

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Nationwide, ANZ Research expects housing prices to decline by 4 per cent in 2018 and a further 2 per cent in 2019. Sydney and Melbourne are expected to be the primary drivers of this fall as their high housing prices and highly leveraged households will be more sensitive to tighter credit conditions and rising interest rates.

ANZ Research forecasts both cities will see prices fall around 10 per cent peak-to-trough, with Sydney faring slightly worse than its southern peer.

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A weakening picture

In recent months, ANZ Research has seen weakness across a number of indicators of the housing market, including auction results, credit growth, new home loan approvals, and actual prices.

Nationwide, prices are now 1 per cent lower than a year ago, reflecting the first trip into negative territory since 2012. Sydney has been the main catalyst of this weakness (-4.2 per cent year on year) and Melbourne has recently joined in.

ANZ Research believes the current cycle is being driven by tightening credit availability rather than rising interest rates which have shaped previous cycles.

Investors in particular are finding it harder to access credit, given ongoing policy changes across the lenders. 

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The key question is for how long will this tightening in credit persist? It’s important to note ANZ, for example, has been making ongoing changes for the past three years. ANZ Research sees the risk credit continues to tighten through to the end of the year.

Beyond that, ANZ expects interest rate hikes from the Reserve Bank of Australia in the second half of 2019 to act as a further headwind to prices, seeing further – albeit much more modest – house price declines in 2019.

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Good news

The good news is Australia’s economic growth is back around its long-term trend, and the outlook is broadly positive. In particular, ongoing employment growth, (gradually) improving wages growth, and population growth running at well above average levels should support house prices in the medium term.

Elsewhere, the housing construction cycle continues to evolve broadly in line with our expectations.

Housing finance approvals for the construction of new dwellings – which have a well-established leading relationship with building approvals – have rolled over and point to further weakness in building approvals in coming months.

However, a large pipeline of work means residential construction will remain at elevated levels over the year ahead, even though we think momentum is slowing.

At the end of 2017, there were still around 18 months of unit and apartment construction activity in the pipeline, concentrated in Sydney.

ANZ Research expects residential construction to be around 1 per cent lower over 2018 and down 5 to 6 per cent year on year in 2019 given weaker approvals and as the backlog of work rolls over.

It also expects some further slowing in 2020 but is constructive on the medium term given ongoing strong population growth (and following a significant period of under investment).

Daniel Gradwell & Joanne Masters are Senior Economists at ANZ