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Housing slowdown follows ‘unsustainable’ growth

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The big question raised by last month’s slowdown in Sydney and Melbourne’s housing markets is whether this is a blip on the radar, or the start of something more significant.

No one knows the answer yet, but a few important points about the housing market are becoming clearer all the same.

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JPMorgan Australia Banks Analyst Scott Manning discusses his outlook for Australia and New Zealand banks and talks about the housing market.

First, bank lending to property investors in the country’s two biggest markets is coming off the boil.

Second, the recent pace of growth in these cities was unsustainable. Even economists who work at commercial banks that depend on home loans for their profits are saying this.

Contrary to last week’s expectations of a tiny fall in Sydney prices, CoreLogic’s figures on Monday ended up showing prices in Sydney were flat in April, and Melbourne prices rose 0.5 per cent. 

These are not dramatic changes, to be sure. The very fact a flat month-on-month reading in Sydney can grab so much publicity is surely a sign things were getting out of hand.

Further complicating things, the figures take in a month that included Easter and the ANZAC Day long weekend, not to mention a regulator crackdown on interest-only home loans. More data is probably needed to say just how much things are slowing, and whether the market has peaked.

Despite these caveats, the slowdown in prices comes as some other indicators tentatively point to some steam coming out of the housing market.

House prices have grown four times faster than household incomes, UBS reports. House prices have grown four times faster than household incomes, UBS reports. Photo: Louie Douvis

Crucially, however, it remains to be seen whether this nascent slowdown in prices has further to run, or if the combination of cheap credit and strong demand for homes will keep the market ticking along, albeit more slowly than in the past.

Investor lending slows

What CoreLogic calls a “moderation” in Sydney and Melbourne house prices is notable because it follows such extraordinary growth.

Sydney home prices are still up some 16 per cent in the past year, while Melbourne is up 15.3 per cent.

It is no coincidence that over that period, demand from property investors re-accelerated, as a previous crackdown on bank lending to prospective landlord buyers wore off. This resulted in property investors taking out a disproportionate share of new homes loans in our two biggest states.

Stripping out the value of people refinancing their mortgages, the value of new home lending flowing to investors has been running at 57 per cent in NSW, and 46 per cent in Victoria, according to CoreLogic.

There are now signs this lending to property investors is slowing. That softening should affect Sydney and Melbourne more than other cities.

Property investor credit growth has already slowed from 0.8 per cent in December to 0.6 per cent in March, figures showed on Friday, after banks started targeting property investors with higher interest rates late last year.

Bank lending to housing investors is almost certain to keep slowing as a result of the latest crackdown on interest-only loans, which only started to come into effect over the past month. 

CoreLogic’s own data on how many banks are ordering valuations on properties also dipped from record highs in April, and they expect further slowing in mortgage activity in May.

Financial regulators have also made it clear they will do more if needed. So all up, it is hard to see investors continuing to drive growth in the way they have in Sydney and Melbourne.

Affordability constraints biting

Regulator-led crackdowns aside, common sense also tells you property prices cannot continue to outpace growth in the pay packets of people buying the houses. Yet that is exactly what has been happening lately, with households making up the difference by borrowing more.

UBS economist George Tharenou says home prices, on average, have been growing at four times the speed of household incomes, which he notes is “unsustainable”.

Senior economist at Westpac-owned St George Bank, Janu Chan, also says the price gains of the past six months can not continue, though it is too early to say if this is the beginning of a slowdown.

“In our opinion, the solid gains in the six months to March in Sydney and Melbourne were unsustainable,” Janu writes. 

However, despite all this, the forward-looking indicators do not currently point to a more significant softening in house prices.

The weekend’s auction clearance rates were still just below 80 per cent in Sydney and Melbourne.

In contrast, when Sydney prices last fell in late 2015, also in response to action by regulators, the clearance rate had fallen below 60 per cent.

While the brakes are being put on property investors, other buyers may step in to pump up demand. Indeed, banks are likely to compete more aggressively to lend money to owner-occupiers, as happened last time there was a clampdown on investors, during 2015.

Just to add to the confusion, there’s been repeated speculation that next week’s budget will include measures to help make housing more affordable to first-home buyers.

But as reported by  The Age economics editor Peter Martin, each of the options being considered would probably allow first-home buyers to out-bid investors, raising prices.

The one thing we can be certain of is that the econocrats at the Reserve Bank, whose job includes maintaining financial stability, will welcome the signs of some heat coming out of the property market. They’ll be crossing their fingers it continues.

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