Falling house prices ‘most serious threat’ to credit

A survey of fixed income investors, conducted between 11 March and 25 March by Fitch Ratings, found that 70 per cent consider tumbling house prices as the “most serious threat” to Australia’s credit markets – including residential mortgage-backed securities – over the coming 12 months.

The Q2 2019 figure represents a significant shift in sentiment from a year ago, when just 29 per cent of investors considered the housing slump a high risk. It is also up from the 40 per cent recorded in Q4 2018.

The majority of survey respondents, or 95 per cent, expect house prices to continue on its downward slide in 2019, with 49 per cent forecasting falls of 5 per cent to 10 per cent, 31 per cent predicting falls of 2 per cent to 5 per cent, and 15 per cent projecting falls of more than 10 per cent.

None of the investors surveyed foresee house prices rebounding in 2019.

However, some respondents (15 per cent) expect increases in prices in 2021, though most (65 per cent) expect the decline to continue.

Ranking second in the list of high risks to credit markets in 2019 is “China hard landing”, which was selected by 44 per cent of survey respondents, followed by “domestic political upheaval” (30 per cent) and “Eurozone sovereign debt problems/deflation” (18 per cent).

The highest proportion of investors, 13 per cent, ticked “labour market conditions” and “regulatory certainty” as “critical” to supporting credit markets and ensuring sustained economic performance in Australia, followed by “house price movements” (11 per cent).

The majority selected all the listed factors – which also includes “continued easy monetary policy”, “political/geopolitical risks”, and “foreign interest in Australian assets” – as “important” to supporting the nation’s credit markets.

However, the investors polled were more optimistic about employment, with none predicting the unemployment rate to exceed 6 per cent over the coming year, compared to the current rate of 5 per cent. The majority of respondents, or 77 per cent, expect the unemployment rate to be 5.5 per cent or less.

“This should provide some support to the property market at a time when house prices are falling, considering the link between unemployment and mortgage defaults. Investors also see no prospect of a rise in the official cash rate over the next 12 months, with 60 per cent expecting a potential cut of up to 50bps and the remaining 40 per cent believing that rates will remain on hold,” the Fitch report states.

Over the next 12 months, 40 per cent of investors expect the official cash rate to remain stagnant at 1.5 per cent, while 32 per cent predict a decrease of 25bps and 28 per cent foresee a 50bps drop.

The May cash rate remained unchanged at 1.5 per cent, despite predictions from analysts – including including AMP chief economist Shane Oliver, NAB chief economist of markets Ivan Colhoun, and managing director of Market Economics Stephen Koukoulas – that the Reserve Bank of Australia would drop the cash rate amid new Australian Bureau of Statistics data reporting flat inflation growth.

[Related: RBA has ‘ammunition’ but might not slash cash rate]