Analyst warns of housing market ‘wild cards’

CoreLogic’s head of research, Tim Lawless, has warned of the potential “wild cards” that could trigger a sharper downturn in the Australian housing market.

Mr Lawless recently dismissed forecasts made in a 60 Minutes report, which suggested that property prices could plunge by up to 40 per cent, and has maintained that the recent slowdown in housing market conditions is “mild” compared to previous downturns. 

However, the CoreLogic analyst has said that household indebtedness, a rise in mortgage rates and a change in government policy could accelerate the decline.

“Several wild cards remain that could have a negative impact on the direction of housing values,” Mr Lawless said.

“Households are more sensitive than ever to interest rate movements due to the record level of household debt. Roughly 70 per cent of household debt is housing-related, which implies small changes to mortgage rates could have an amplified impact on household balance sheets.”

Mr Lawless added that out-of-cycle movements in mortgage rates “could have a negative impact on the market”, but that if the decline accelerates, a rate cut from the Reserve Bank of Australia (RBA) could “place a floor under housing prices”.

The analyst also warned that a change in taxation policy from the federal government could also place further downward pressure on the housing market, claiming that such changes would most likely impact investor demand.

“There is also the potential for changes to property taxation policies that could have a further dampening effect on investment demand,” the analyst said.

“Based on the value of new housing finance commitments, investors still comprise around 41 per cent of mortgage demand, down from 55 per cent in mid-2015.

“Investor concentrations remain well above their long-term averages across New South Wales [49 per cent of housing finance commitments] and Victoria [41 per cent of housing finance commitments], implying Sydney and Melbourne would have more to lose if investor activity were to drop more substantially.

“Investors are already being disincentivised by falling prices, mortgage rate premiums and low rental yields; additional disincentives from tax reform could see demand reduce further, creating some slack in the overall demand composition for Australian housing.”

However, Mr Lawless stated that, on balance, mortgage rates are the lowest they’ve been since the 1960s, and claimed that population growth and a strong labour market would continue to support demand for housing.

Mr Lawless concluded: “Overall, it’s hard to see a scenario where Australian housing values could fall off a cliff.

“For this to happen, we would need to see a material about-face in labour market conditions, a global shock or a material rise in interest rates — none of which seems to be a likely outcome at the moment.”

[Related: CoreLogic slams ‘sensationalist’ reporting]