Changing landscapes


Outlook of housing market and investor demand

With the peak growth rate of November 2016 behind us, capital gains across Australia’s housing market have been losing momentum, with national dwelling values unchanged in October 2017.

Conditions were flat for capital cities and regional areas in October, according to the quarterly housing and economic review. Over the last past 12 months, growth in capital cities (7%) largely outperformed that in regional areas (4.9%).

Tim Lawless, head of research at CoreLogic, attributes the slowdown in the pace of capital gains to tighter credit policies which have fundamentally changed the landscape for borrowers.

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan to valuation ratios or higher loan to income multiples. Additionally, interest-only borrowers and investors are facing premiums on their mortgage rates, which is likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties,” he explains.

“In fact, the peak rate of growth in dwelling values lines up closely with peak growth for investment lending in late 2016. We saw the housing market respond in a similar fashion through 2015 and the first half of 2016 as investors faced tighter credit conditions following the announcement from APRA that lenders couldn’t surpass a 10% speed limit on investment lending,” says Mr Lawless.

Accordingly, the housing market rebounded swiftly in the second half of 2016 once credit limits were reached and the cash rate was adjusted in May and August.

Three capital cities recorded a negative movement in values over the three months ending October 2017:

  • Sydney -0.6%
  • Perth -0.7%
  • Darwin -4.4%

Despite the recent downshift, Sydney dwelling values are up 74% since the start of a growth cycle in early 2017.

The latest CoreLogic Property Pulse explores the influence investors have on the property market at large—the co-relation of a decline in investor activity with a corresponding decline in dwelling values.

Over the past five years, national dwelling values have increased by 39.3%, pushed up mostly by Sydney and Melbourne. In the same timeframe, housing investor finance totaled $695.6 billion. In May 2016, investor activity stood at 54.8% of new mortgages nationally.

However, as discussed, this has changed since investor demand is slowing, falling a further 6.2% in September 2017, with dwelling values falling in the most investor-centric city, Sydney.

Cameron Kusher, analyst at CoreLogic, wonders about the impact of the investor slowdown on the broader housing market. To gauge this impact, Mr Kusher looked at mortgage demand in New South Wales and Victoria, which fell from 63.6% and 54.7% in May 2016 to 50.3% and 43.2% respectively in the last month. He concludes that when mortgage demand from investors fall, so does the rate of value growth.

CoreLogic had previously expressed concern that an increased level of new housing construction and investor participation would drive rents down. Rental growth last year slowed in most regions across the nation. However, rental growth increased by 2.9% over the past year compared to last year’s increase of 0.9%. This can be attributed to rapid population growth, low housing affordability and the rising popularity of AirBnB and similar services, which increased short-term rental supply at the expense of the long-term rental market.

With a predicted rise in mortgage rates, especially for investment mortgages, and the Federal Government’s removal of tax-deductible items associated with investments, landlords will do their best to recoup the higher costs of debt by increasing rental rates.

It is important to note that housing market conditions prevalent in Sydney and Melbourne do not apply to the rest of the country. These two cities are being supported by strong economic and demographic conditions which fuel mortgage demand.

Despite the recent price corrections and slowdown, Mortgage Choice’s latest data shows 64.3% of Australians believe the housing market will continue to perform as it has, maybe even better. Australians have an enduring affinity for bricks and mortar investments.

Mortgage Choice’s CEO John Flavell contends that a plateau in price growth is a long way off from a market crash. For the latter to occur, a number of economic factors must come into play. “First, supply would need to be high enough that it exceeded demand. Second, the cost of borrowing money would need to rise rapidly and unemployment would also need to reach dramatically high levels. Also, there would need to be a large number of people wanting to liquidate their properties at the same time,” he says.

“If all those factors were to occur, a crash could be a possibility, but based on how our economy is travelling at the moment, it is fair to say that we are not in for a crash,” adds Mr Flavell.

Australia Bureau of Statistics data indicate that the population continues to grow steadily—up by 389,100 over the last year alone. Australia has increased its population by one third in the past 20 years, from 18.5 million in 1997 to 24.7 million currently.

Sydney is Australia’s first city to reach the 5 million milestone, with Melbourne closing the gap with the largest population growth in the last financial year, adding nearly 108,000 people to reach 4.66 million. Such strong population growth indicates a continuing strong demand for housing.


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