ANZ surprised by prolonged housing weakness

In its Australia Insight: Australian Property Update, published on Wednesday (6 June), ANZ noted that the continual fall in property prices across the country has lasted longer than it anticipated.

“CoreLogic’s housing price data show that the aggregate housing market has continued to soften, with dwelling prices down [by] 0.3 per cent m/m in seasonally adjusted terms in May.

“That is now nine of the past 10 months that have seen lower prices, and the decline has persisted longer than we originally anticipated.”

ANZ acknowledged the differences in market conditions in different regions within the country, but it made particular reference to the fall in home prices in Sydney and Melbourne.

“Of course, there is not just one housing market in Australia, and the picture is different across the capital cities,” the bank added.

“Prices in Sydney have been falling for most of the past year, and now sit 4.2 per cent lower than the peak of July 2017. Melbourne was initially more resilient, but has since recorded slightly larger price falls than Sydney in each of the past three months.

“In contrast, prices are still rising in Hobart and Canberra, while the post-mining boom decline in Perth prices continues to ease.”

Further, ANZ noted the gradual increase in the rate of decline since dwelling values first began to fall.

“As well as the price falls in Sydney and Melbourne lasting longer than expected, the scale of decline in recent months has accelerated somewhat.

“Sydney recorded declines of 0.2 per cent and 0.3 per cent m/m in each of the first three months of the year, but April and May saw this pick up to falls of 0.4 per cent m/m and 0.6 per cent m/m, respectively.

“Melbourne has transitioned from small price rises in January and February to declines for the past three months. The starting point for these major markets is therefore weaker than we previously expected.”

Market softening to continue

The major bank also noted that, based on fall in auction clearance rates, it expects the Australian housing market to weaken further.

“Our expectation that prices would have begun stabilising by now was based on auction results, which had settled through the end of 2017 and opened 2018 at reasonable levels.

“Consistent with this, the pace of house price declines had been moderating since a large decline in October.

“However, this was not sustained, and nationwide auction clearance rates have fallen from an average of 66 per cent in February to just 58 per cent in May.

“This is the weakest monthly result since the start of 2013, and suggests that prices are likely to come under further pressure over the near term.”

Tighter credit conditions driving price slump

ANZ also reported that unlike previous housing market downturns, which were spurred on by a rise in interest rates, the current softening in market conditions is attributable to tighten credit conditions.

“The primary driver behind this slowdown in prices is the availability of credit, rather than the cost of credit.

“Banks have responded to regulatory requirements by implementing a combination of lower loan-to-income ratios, lowering estimates of rental income from investment properties and raising expense estimates.”

The lender added that further regulatory changes “cannot be ruled out” and cited the Reserve Bank of Australia’s (RBA) statement following its cash rate decision for June, in which it said “there may be some further tightening of lending standards”.

“Developments of this nature will continue to apply downside pressure to house prices. The key question is how far this pressure will extend?” the major bank said.

However, ANZ claimed that it can’t be certain that the downside in housing market conditions will continue, given the “unprecedented factors driving the slowdown”.

Moreover, the major bank said that while it believes the macro-prudential regulation imposed by the Australian Prudential Regulation Authority (APRA) were the “catalyst” for weakness in the housing market, it expects the full impact of such regulations to be realised by the end of 2018.

“The additional tightening in credit to investors triggered by the regulator in early 2017 was the catalyst for the weakness through that year, in our view.

“But the impact of this had faded by the end of the year, with the auction clearance rate starting to rise and the pace of decline in house prices easing considerably.

“This indicates to us that if the fundamentals of the economy remain supportive, the impact of credit tightening on house prices is not permanent.

“With this in mind, we think the solid fundamentals of the Australian economy mean that, by late this year, the impact of the current credit tightening will likely be fully priced and the market will have stabilised.”

[Related: Economists expecting property prices to ‘tumble’]