Adjustments in the housing market are “manageable” and “unlikely to derail our economic expansion”, Reserve Bank Governor Philip Lowe said last week as the cash rate remains unchanged and building approvals fall.
Speaking at AFR’s Business Summit on 6 March, Lowe observed that “Australians watch housing markets intensely, perhaps more so than citizens of any other country”.
“Shifts in sentiment play an important role in housing markets,” Lowe said.
Lowe’s comments come as the latest ANZ/Property Council Survey finds one of the big engines of the Australian economy is slowing, hit by tightening access to finance, softening forward work schedules and a less optimistic view of the economy.
The industry litmus test also found industry sentiment was its lowest level since September 2013. House price expectations were the lowest on record, falling 22.5 points since the previous survey.
Over the five years to late 2017, nationwide housing prices increased by almost 50 per cent. Since then, prices have fallen by nine per cent, bringing them back to the mid-2016 level.
“Declines of this magnitude are unusual, but they are not unprecedented”, Lowe said, pointing to price falls in the 1980s, 2008 and 2010.
The nationwide figures mask variation across the country, he added, with the “run-up in prices” most pronounced in Sydney and Melbourne, “so it is not surprising that the declines over the past year have also been largest in these two cities”.
Rental markets provide another window into world of housing. Rent inflation has been running at just under one per cent – the lowest in three decades – although it is, again, a state-by-state story.
The supply and demand story
Lowe placed the responsibility for house price growth and decline squarely on the shoulders of “the inflexibility of the supply side of the housing market in response to large shifts in population growth”.
These population and supply dynamics are starkest in Western Australia and New South Wales, where housing supply has not matched population growth.
“In cities where population patterns and the rate of home building have been more stable, prices, too, have been more stable,” he said.
Strong demand from domestic investors, encouraged by low interest rates and favourable tax treatment, “helped underpin the extra construction activity needed to house the growing population”.
“But the rigidities on the supply side, coupled with investors’ desire to benefit from a rising market in a low interest rate environment, amplified the price increases.”
Foreign investment has also moderated, the timing of which has “broadly coincided with and reinforced the shifts in domestic demand”.
Dwindling credit demand
The Australian Bureau of Statistics says total number of dwelling units approved fell by 28.6 per cent over the year to January 2019 in seasonally adjusted terms – and that number has been falling for the last 14 months
But Lowe said the main story is one of reduced demand for credit, rather than reduced supply.
“When housing prices are falling, investors are less likely to enter the market and to borrow. So too are owner-occupiers for a while.”
The Australian Bureau of Statistics lending data reveals a fall of 15 per cent to households and 6.2 per cent to businesses over the 2018 calendar year.
Lowe acknowledged the role of progressive tightening in lending standards. The RBA’s research suggests that, on average, the maximum loan size offered to new borrowers has fallen by around 20 per cent since 2015. Around 10 per cent of people borrow the maximum they are offered.
Lenders have also become more risk adverse, which has led to an increase in average loan approval times, although Lowe emphasised that “our liaison suggests that application approval rates are largely unchanged”.
Housing correction won’t cost the economy
Movements in house prices influence consumer spending, building activity and the ability of small businesses to access finance. They can also affect the profitability of our financial institutions.
But Lowe remained upbeat, arguing that the “adjustment in our housing market is manageable for the overall economy”.
“It is unlikely to derail our economic expansion. It will also have some positive side-effects by making housing more affordable for many people,” Lowe said.
Head over to the Property Council’s Data Room to explore more housing data, or learn more about how you can help us take the pulse of the industry by being part of the next ANZ/Property Council Survey.