AMP Capital chief economist Shane Oliver said while the negatives weighing on Australian residential property prices remain significant, in the the past few weeks there have been a number of developments that suggest that prices could bottom earlier and higher than we have been expecting.
“The election outcome removed a key threat, but several other factors also help,” said Mr Oliver.
In terms of the negatives impacting the asset class, Mr Oliver said that credit conditions are still tight with housing finance still falling with a brief bounce in February giving rise to further falls in March and the start-up of comprehensive credit reporting which will see banks crack down on borrowers with multiple undeclared loans.
“The pipeline of units to hit the Sydney and Melbourne markets is still huge also as reflected in a still high crane count,’ he said.
Auction clearance rates have risen from their December lows but this has been largely seasonal with clearances still weak at pre-boom levels.
“Housing is still also expensive compared to incomes and rents. Sydney home prices may have fallen 15 per cent from their 2017 high but this was after a 75 per cent gain since 2012 when wages rose just 14 per cent. Household debt remains very high,” he added.
However, while the drags remain significant, he said, several positives have become apparent over the last few weeks.
First, financial support for first home buyers is now on the way with the Government’s First Home Loan Deposit Scheme.
“On its own it’s not a game changer particularly given that it’s capped in terms of numbers, the borrowers will be taking on big mortgages, which will come with a higher risk of negative equity, borrowers will still have to meet the tougher credit standards of recent times and it won’t kick in until next year,” he said.
“That said, with the Federal budget looking even healthier and probably already in surplus thanks to the surging iron ore price, I suspect that the deposit scheme will morph into a far more attractive home buyer grant at some point.”
Another positive change is the fact that APRA is looking to relax the 7 per cent mortgage rate serviceability buffer.
“This was inevitable given APRA’s move to focus on more fundamental credit standards and 7 per cent is way out of whack with current interest rates,” he said.
In addition, he said, RBA Governor Lowe has all but confirmed that rate cuts are on the way with his comment that “at our meeting in two weeks’ time, we will consider the case for lower interest rates” after observing that it needs lower unemployment to get inflation back to target.
“We expect 0.25 per cent rate cuts in June and August and that the bulk of these will be passed on to borrowers given the recent reduction in bank funding costs,” he said.
Finally, Mr Oliver noted that the threat of changes to negative gearing and CGT is gone with Labor’s defeat a big negative for property is gone.
“It’s also worth noting that we have not seen much evidence of panic selling or forced selling by the banks despite rising levels of negative equity. Mortgage delinquency rates remain relatively low – even in Perth where prices have fallen 18 per cent and unemployment has spiked,” he said.
“Reflecting the considerations discussed above – notably the removal of the threat of changes to negative gearing and capital gains tax, imminent rate cuts, assistance for first home buyers and APRA’s relaxation of the 7 per cent serviceability test – we are revising the estimate for Sydney home prices to a 19% top to bottom fall, Melbourne to 15% top to bottom and the national average to 12 per cent top to bottom with prices likely to bottom by year end.”
