Potential for prolonged period of subdued house prices

Australian house prices have fallen for the past 12-months, declining 2.7 percent from their peak in September last year. That’s the latest from property price tracker CoreLogic (formerly RP data).

CoreLogic have previously been criticised by some buyers advocates for relying too heavily on self-reported data from real estate agents – leading to overly positive reports. However, their numbers are somewhat corroborated by the ABS, who recorded a 0.6 percent fall in capital city house prices between the June quarter 2017 and the June quarter 2018.

The biggest falls recorded by CoreLogic occurred in Sydney and Melbourne, with prices in these capitals obviously having the biggest room to fall after three decades of strong gains.

Falling property prices are not coming at the ideal time for Australia’s property market, with the interim report from the Hayne Royal Commission into financial services coming out late last week.

The report heavily criticised the banks for profiteering and failing to meet community expectations. The banks, mortgage lenders, and brokers were also called out over the use of standardised estimates of living expenses in the industry.

Commissioner Kenneth Hayne floated the idea of stricter expense verification for borrowers, with the argument that it would help form a more accurate estimation of a borrower’s ability to repay a loan.

UBS analyst Jon Mott has stated on Saturday morning that such a move would slow lending and could lead to a prolonged period of crimped bank profits, which likely also alludes to a prolonged period of subdued house prices.

“The risk of the current Credit Squeeze turning into a Credit Crunch is real and is rising, in our view. We believe the Australian banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years” Mr Mott said.

House price falls have been forecast in this country for a long time, and after several decades of strong price growth, such a pullback was eventually inevitable. However, given the size of the Australian property market, and the loan books of our banks, there is a serious contagion risk for the wider economy if things start to go off the rails.

Back in June, ANZ Bank’s economists released a report into the housing sector, which predicted there would be a fall of about 10 percent from peak to trough in Sydney and Melbourne, with smaller declines elsewhere. They went further, suggesting that interest rate rises could be a catalyst for price falls “”We note that Australia has had six previous episodes of declining housing prices since 1980, with the peak-to-trough range of 2½ per cent to 8 per cent. Nearly all previous corrections occurred following interest rate rises”.

Whilst officially RBA interest rates haven’t risen in Australia for about 8 years, there have been interest rate rises overseas – which has led to higher funding costs for the banks themselves – most of whom have lifted their variable mortgage rates over the past few months, irrespective of the RBA.

Currently the value of Australian housing stock is more than four times our gross domestic product, far greater relative value than US and UK housing sectors at the peak of their pre-GFC boom. If we see a significant property downturn, there is a strong chance it will lead to a wider economic downturn.