Is this the turn-around after years of price growth?

Australia loves property. For many years it has even been considered something of a collective “dream”; that we would buy a quarter acre out in the suburbs with a Californian bungalow and an extensive backyard.

However, as prices have risen – the dream has become out of reach for some, with home ownership levels falling across most ownership groups over the past couple of decades. This is unsurprising when you consider that while prices have risen, wage growth has stalled.

But things may be starting to change.

Property prices dropped 1.2 percent over the first quarter of 2018 according to Domain Group’s latest house price report. Domain Group now has an annual growth rate of 2.3 percent, the weakest level since 2012.

Even CoreLogic’s “hedonic home value index”, which has historically shown questionably strong price growth, recorded some softness in the March quarter. Price growth was negative across the combined capital cities, and only Hobart recorded price appreciation.

The strength of price growth seen since the early 90’s can be ascribed to a number of factors, but certainly of benefit has been the decline in variable mortgage rates over the period. The decline has seen the average variable mortgage rate fall from over 10 percent in the early 90’s, to around 5.3 percent in 2017.

This decline in interest rates has likely allowed people to service larger mortgages than they could have 20 years ago, which has help to push prices higher.

However, with global interest rates starting to rise after a prolonged period of suppression, we may see an increase in delinquencies on mortgages taken out at lower rates of interest. If this is the case – it may add additional downwards pressure to house prices.

Already, some brokers are starting to downgrade some of the major lenders (UBS today downgraded WBC) over concerns about borrowers’ ability to pay – and there is a belief that lending standards will tighten as a response to the royal commission and rising interest rates.

In this environment it is very hard to see Australian property prices repeating their performance of the last few decades. Instead, I believe we are likely to see a period of stagnating prices.