Housing is weak but it won’t last forever

House prices, auction results, housing finance, and credit growth are all soft and suggest further weakness is in store. 

"[A 10 per cent fall] sounds like a significant result but keep in mind Sydney is already halfway there.”

However, these results are still in line with ANZ Research's expectations for this stage in the cycle and the outlook is relatively unchanged.

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ANZ Research still expects prices will fall nationwide by around 4 per cent in 2018 and 2 per cent in 2019. Most of this weakness will occur in Sydney and Melbourne which are forecast to fall by around 10 per cent peak to trough. While that sounds like a significant result but keep in mind Sydney is already halfway there.

The current decline is being shaped by the availability of credit as banks continue to tighten lending standards.

Incoming

In July Australian Prudential Regulation Authority (APRA) chairman Wayne Byres said “the heavy lifting on lending standards has largely been done”.

This suggests APRA will not implement any more policy changes. However banks still have further changes coming, including debt to income limits and Comprehensive Credit Reporting (CCR). This is consistent with ANZ Research’s view credit tightening will persist through to the end of 2018.

ANZ Research believes 2019 will be impacted by the cost of credit as recent out-of-cycle mortgage rate hikes flow though. The Reserve Bank of Australia will likely lift the cash rate toward the end of 2019 which would result in further price weakness in 2020 before the market stabilises over the rest of the year.

Keep in mind that while the price decline in Sydney and Melbourne gets a lot of attention, some other parts of the country are looking better. In particular, ANZ Research is more optimistic on the Brisbane, Canberra and Adelaide markets.

The former is benefitting from accelerating population growth while the latter two are not expected to be highly sensitive to tighter credit conditions, given their relatively strong housing affordability.

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Positives

It is also worth noting that falling house prices are actually a positive for many young people and first home buyers. Deposit affordability has been improving in Sydney and Melbourne in line with the drop in prices, although it is still a significant challenge.

Stamp duty discounts are also assisting many people in New South Wales and Victoria purchase their first property.

Of some comfort around the state of the market, is the risks around financial stability remain in check. Mortgage rates are still at low levels, serviceability is in good shape, and ANZ Research thinks we are halfway through the adjustment from interest-only to principal-and-interest loans.

Daniel Gradwell and Jo Masters are Senior Economists at ANZ