Dramatic price reductions unlikely
May 17, 2018
While some economists are predicting property prices in Sydney and Melbourne will fall by 10-20 per cent over the next couple of years, analysis by RiskWise Property Research suggests a major price correction is highly unlikely.
RiskWise CEO Doron Peleg said due to a combination of government intervention, regulatory back-peddling and limited alternative investment options, property price reductions were unlikely to fall by such dramatic levels.
“Taking into account the outstanding price growth across Sydney and Melbourne, we’ve only seen some small movements in the property market,” Mr Peleg said.
The RiskWise analysis showed a significant correction in the range of 10-20 per cent of property prices was unlikely to occur for the following reasons:
1. Banks’ Desire to Maintain Market Share and Profitability
While banks are required to maintain high lending standards to comply with the National Consumer Credit Protection Act, they must also grow profitability and deliver strong shareholders returns.
This is strongly driven by the major lenders’ desire to grow or at least maintain market share in the highly profitable residential lending sector, typically resulting in a more attractive lending market for lenders.
Therefore, Mr Peleg said banks have reduced interest rates, (e.g. NAB which dropped its five-year fixed rate for owner-occupied, principal-and-interest home loans by 50 basis points, from 4.59% to 4.09%) making the lending market more accessible for home buyers.
Rates on interest-only investment loans have also been slashed (with Suncorp the first to do this in May 2018) by up to 30 basis points following the decision by APRA to lift lending caps on borrowers. This has fuelled speculation that other lenders will begin reducing investor rates in an effort to increase demand and profits.
2. APRA’s Lending Restrictions
“The continuous flurry of lending restrictions since 2014 have often proven to be too effective, resulting in many of these being formally lifted,” he said.
“The cap on investor loan growth is one such example. Introduced in 2014, this cap required banks to limit lending growth to housing investors to 10 per cent with the aim of cooling the market.
“However, last month, APRA moved to formally lift these restrictions – a move likely to favour housing investors.”
3. A Lack of Alternative Investment Options
The latest analysis by RiskWise Property Research has shown Australia’s Top 3 Major Asset Classes are projected to achieve the lowest returns in a quarter of a century.
“With returns from shares, bonds and residential property likely to deliver the worst yields for investors in 25 years, investors are likely to seek out ‘long term’ investment options – such as property investment in Sydney and Melbourne,” Mr Peleg said.
“If property prices were to drop by around 6-8 per cent, the number of residential investment opportunities would increase – driving demand among investors, upgraders and first-home buyers. That will mitigate, to a certain extent, the price reductions”
4. The Expected RBA Response to Declining Dwelling Prices and Consumer Confidence
An additional reduction in dwelling prices would have a devastating impact on consumer confidence and spending, which is already growing at a slow rate, he said.
The flow-on impact of this would be a reduction of the already low GDP growth and low inflation, triggering the RBA to decrease the cash rate to stimulate growth and avoid a downturn.
A prime example for a policy response by the RBA occurred during the GFC when the RBA lowered the cash rate from 7.25% to 3% between August 2008 and April 2009.
“With stability across financial and residential markets being the primary object of the RBA, a similar response, obviously, to a lesser extent, can be expected if property prices were to dramatically fall” he said.
“And interestingly, even now there are senior economists who strongly believe the RBA should reduce interest rates to achieve stronger GDP and wage growth.”
5. First Home Buyer Grants and Concessions
First home buyer grants and concessions issues by the Federal and State Governments serve two purposes – to create stability in the property market and to help first home buyers increase their share of the market.
“Already introduced measures include a reduced or waived stamp duty as well as grants to buy new established properties,” Mr Peleg said.
“RiskWise analysis has shown these measures have already increased housing demand among first home buyers, with research conducted by Aussie Home Loans in May 2018 showing first home buyers made up 30 percent of consumers considering taking out a home loan over the next year. Investors and movers only made up 24 percent and 22 percent respectively.
“Even more aggressive measures were taken by the Federal Government during the GFC. This included the October 2008 launch of the First Home Owners Boost scheme which provided financial assistance in a successful attempt to stimulate the property market. The scheme initially provided up to $14,000 to those buying or building a new home or $7,000 to those buying an established home. The measures stimulated the housing industry in an effort to alleviate a major decline of the property market.
“But if the Federal Government has the opportunity to boost stability in the property market as well as the market share of first home buyers, this could seriously challenge Labor's policy regarding negative.”