FREE-FALLING AUSTRALIAN PROPERTY MARKET PUTS DECADES OF ECONOMIC GROWTH AT RISK
As downturn enters its second year, concern grows of wider contagion
Apotent combination of nervous buyers, cautious lenders and retreating investors has turned Australia’s once-booming housing market to dust.
With the downturn now in its second year, the question for homeowners, house-hunters and property investors is how much further there is to go. Prices in Sydney, the epicentre of the preceding boom, are falling at an annualised pace of about 8 per cent.
The optimistic view is that with employment still growing, the declines will stay orderly and help return some affordability to a stretched housing market. The nightmare scenario is that the downturn accelerates, piling further pressure on banks and putting Australia’s near-record 27 years of unbroken economic growth at risk.
While the plunge in prices may be welcome news to firsthome buyers who feared they had been priced out of the market, in the past two months there has been a marked drop in loans to owner-occupiers, suggesting people are happy to stay on the sidelines until the market has settled.
It has also become much harder to be approved for a loan. All the major banks have tightened lending criteria and introduced stricter expense verification, lengthening the time it takes to get approval and reducing the maximum amount that can be borrowed. Analysts at UBS Group believe more credit tightening is almost inevitable, and the outlook for banks hasn’t looked as challenging since at least 2008.
Australian regulators tightened lending as investors poured into east coast property markets, taking advantage of record-low interest rates. The measures limiting the availability of credit have weighed on the market, with a slide in housing now in its second year.
While the Reserve Bank of Australia has kept its cash rate unchanged at a record-low 1.5 per cent since August 2016, regulators have cracked down on riskier loans such as interest-only mortgages that are popular with property investors and enforced stricter expense verification that is curbing the amount people can borrow. On top of that, Australians carry some of the highest household debt in the developed world.
“The regulatory measures have significantly reduced the riskiness of new housing lending,” said Guy Debelle, deputy governor of the RBA. “A smaller share of new loans are to investors, are interest-only, have high loan-to-value ratios or are to borrowers more likely to have difficulty repaying the loan.”
Mr Debelle did say that tighter lending to developers was “a higher risk to the economic outlook” than the direct effect of stricter lending standards on households.
At this rate, the downturn is on track to become the largest peak-to-trough decline in home prices in more than 30 years. The biggest drop was in 1982 when Australia, along with most of the developed world, was in the grip of a crippling recession. UBS said this month that house prices could drop 30 per cent in a “deep recession” scenario.
In the worst of five cases assembled by UBS analyst Jonathan Mott, Australia’s 27-year economic expansion ends, unemployment climbs and the central bank cuts interest rates to zero, according to a research report. He currently forecasts conditions as reflecting the third scenario – a housing correction – but warns the risk of a credit crunch “is real and rising”.
“The rapidly deteriorating housing market is a signal of even tougher times ahead. The housing credit squeeze experienced over the last six months is expanding,” says Mr Mott, who is bearish on the nation’s lenders. “The outlook for the banks has not been as challenged since at least 2008.”
As prices decline, fear of missing out has turned to fear of paying too much. Clearance rates at Sydney auctions – a popular way of selling properties in the city – in November plunged to 42 per cent, near levels last reached during the global financial crisis. At the height of the boom, weekly auction clearance rates regularly topped 75 per cent.
Gone are breathless newspaper reports of houses selling for hundreds of thousands of dollars above the reserve price. Instead, auctioneers are struggling to get an opening bid. While sellers are starting to lower their price expectations, buyers are adjusting theirs even faster.
With the economy still humming along, the number of forced sellers is low. However, the stand-off over prices means houses are now taking an average of almost two weeks longer to sell than at the start of the year. That is creating a logjam of unsold homes – the number of total listings in Sydney is 19 per cent higher than last year according to CoreLogic – further reducing pressure on buyers to make a quick decision.
Still, the boom was so explosive prices are only back to where they were a few years ago, meaning few borrowers are underwater.
With the average house in Sydney still fetching more than A$1 million (Dh2.65m) and wages stagnating, the city’s unwelcome status as the world’s second-least affordable housing market is not under serious pressure.
There has been a marked drop in loans to owneroccupiers, suggesting people are happy to stay on the sidelines