In his outlook for 2020, Tim Lawless, CoreLogic’s head of research, noted that the 75 basis point reduction in the cash rate in 2019 saw mortgage rates drop by an average of 60 basis points, which contributed to the rebound in housing values in the second half of the year, along with APRA’s serviceability assessment changes.
Looking forward, Mr Lawless said that he expects the cash rate to drop by a further 50 basis points over the first half of 2020 (with most commentators expecting the next cash rate reduction to come in February 2020), taking official interest rates down to 0.25 per cent. This, in turn, would see lenders reduce mortgage rates from their already low levels, he said.
Mr Lawless commented: “While the entirety of any rate cuts won’t be passed on in full by lenders, due to already squeezed net interest margins and to ensure depositors remain incentivised, mortgage rates are likely to reduce even further from their current record lows.”
Speaking to Mortgage Business, Mr Lawless said: “We are expecting the cash rate to come down by another 50 basis points over the first half of the year. How much of that gets passed on to mortgage rates is a hard question to answer. I think, the last few rounds of rate cuts, we’ve seen progressively less being passed on the mortgage rates, as lenders look to protect their net interest margins and continue to incentivise the positives.
“So, chances are we could only see on each 25 basis point cut maybe 10 to 15 basis points being passed on.”
The head of research noted that while lower mortgage rates could support a modest rise in buyer demand, he told Mortgage Business that there was a chance that cutting rates to such low levels could have the opposite eﬀect and dent confidence, which would push households further into savings mode and start deleveraging.
He explained: “The thing about lower rates is that it could actually have the opposite effect on consumer sentiment. We’ve already seen that with the previous rate cut; it spooked the market a little bit. Consumers are looking at the very low rates setting [and are thinking it is] because the economy’s losing momentum and that could actually dampen consumer sentiment.
“So, even if we do see the stimulus of lower rates, it depends how that flows through to the marketplace to mortgage rates and buyer sentiment. Chances are, it will still be positive overall, but maybe not as a stimulatory as what we have seen with the previous rate cuts.”
He added that auction rates are also likely to stay strong over the first quarter into spring but could “ease some of the urgency” that has been seen over the last quarter of 2019.
“As prospective sellers look at the very strong selling rates, the rapid selling time, the high auction clearance rates etc, I do think we will see a lot more stock in the marketplace over the first quarter. And that, potentially, could ease some of this urgency that we’re seeing in the market and start to result in a subtle easing in this rapid rate of appreciation.”
Mr Lawless forecast that both the level and proportion of investor activity is likely to rise in 2020 as they would be motivated by prospects for capital gain, as well as the fact that gross rental yields, although generally low, are likely to be higher than the cost of debt.
He warned, however, that opportunities for positively geared properties should be more abundant as mortgage rates move lower.
“If investor activity trends materially beyond the long-term average (investors averaged approximately one-third of mortgage demand over the past decade), this could be a trigger for another round of macro-prudential intervention from APRA aimed at curbing speculative activity in the housing market,” he warned.
“The previous round of credit tightening specifc to investors occurred when investors comprised more than 40 per cent of mortgage demand, triggering a macro-prudential response from APRA which limited banks from growing their investment loan books by less than 10 per cent per annum.”
Lisa Claes’ predictions for 2020
The CEO of CoreLogic International, Lisa Claes, has also provided her predictions for the year ahead, stating that while the housing market is on the up, advertised stock levels are at their lowest since CoreLogic started tracking in 2007 and affordability “remains a challenge”, with the average person needing to save more than eight years for a 20 per cent deposit, according to CoreLogic.
“Despite these barriers, property ownership remains the great Australian dream, with 86 per cent of Millennials surveyed stating it’s important to be on the property ladder. If this is to happen, 2020 needs to herald a change in policy beyond stamp duty concessions and first home buyer grants to a broader-based land tax,” she said.
Indeed, Ms Claes said that the call for action on stamp duty will “no doubt intensify” in 2020 given that the decline in property values in the first half of 2019, as well as low interest rates, did “little to improve affordability”.
“Policymakers must continue to explore alternative, structural solutions,” she said, adding that CoreLogic will “continue to work with key players across both industry and government to develop new approaches to this housing affordability conundrum”.
Looking at the devastating impact of the drought and bushfires in 2019, Ms Claes said that she expected to see “greater emphasis on property risk management” over the coming year.
“With the growing risk of flooding and bushfires, a property’s hazard profile will become just as important as its physical attributes profile,” she said.
“As such, there will be greater demand from our customers for seamless delivery of relevant data relating to property risks in the same way they leverage property values, ownership and construction data.”
In conclusion, Ms Claes said she expected to see further changes in the real estate industry’s operating environment, with the rise of desegmentation.
“Previously separate market segments will join forces as listing portals become brokers, banks show the same interest in listings as real estate agents do, and insurers and lenders collaborate to apply a more forensic lens to the property risk profile,” she said.
“As new technologies such as artificial intelligence continue to decimate traditional barriers to entry, market competition will also intensify. In step with this trend, CoreLogic will continue to add value by offering data analytics solutions that can integrate seamlessly within our customers’ environments in order to give them the competitive edge in their markets.
“In spite of the many headwinds, 2020 presents opportunities for all industry players to deliver enhanced customer value over the coming year, and that’s an exciting prospect indeed,” Ms Claes concluded.
[Related: 2019 was the year of records: CoreLogic]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.