Optimism is growing towards Australia’s housing market

  • Australian capital city home prices have fallen for 19 consecutive months, losing 10.3% in the process.
  • While price declines are spreading, the pace of falls is slowing.
  • Other housing data is also starting to show modest signs of improvement, even before possible rate cuts and regulatory easing are taken into consideration.
  • Based on recent trends, the debate over whether the worst of the downturn is over is slowly turning towards when prices may start to bottom.

Australian capital city home prices have fallen for 19 consecutive months, equaling the downturn seen at the start of the decade, at least in terms of duration.

This downturn has been significantly larger when it comes to how far prices have fallen.

Values are still declining, according to updated figures from CoreLogic released Wednesday, with the median capital city price slipping by a further 0.5% in April in average weighted terms, extending the drop from a year earlier to 8.4%.

Since peaking in September 2017, Australia’s median capital city home price has now fallen 10.3%.

With the exception of Canberra, values fell across all other capital city markets last month, and in regional areas.

Pretty much wherever you looked, there was information for Australia’s housing bears to chew on. It’s been that way for a while now.

However, while price falls have broadened across the country, it’s clear the rate of decline nationally has slowed.

Around the turn of the year, monthly capital city declines topped 1%, led by even larger falls in Australia’s largest and most expensive markets, Sydney and Melbourne.

But now they’re only half that pace, and the trend definitely suggests that may continue in the months ahead.

Here’s an informative charts from Westpac Bank that suggest the worst of the downturn may now be over.

It shows the three-month change in capital city prices in annualised terms, after seasonal patterns have been removed.

While still a stretch to say prices may soon bottom, the pace of declines have decelerated, rather than accelerated, since the early parts of the year.

Aside from the impact macroprudential restrictions from Australia’s banking regulator, APRA, on investor and interest-only lending on prices in recent years, the other noteworthy element of the chart is the influence rate cuts from the RBA have had on valuations in the past.

When the RBA has eased policy, prices typically begin to increase soon after.

It’s no secret that most involved in financial markets believe the RBA will cut Australia’s cash rate again this year.

Even though there’s now greater scrutiny being applied to household expenses and existing debt levels for prospective borrowers, potentially limiting the amount that banks are willing or able to lend, the prior record of rate cuts suggests lower mortgage rates will provide additional support for prices.

There’s even some speculation the floor rate applied by lenders to assess whether new borrowers will be able to service their mortgage in a rising interest rate environment may also be lowered from above 7%, potentially increasing the borrowing capacity for some prospective buyers.

“APRA should consider reducing the serviceability buffer by 50 basis points, to 6.5%, to ease the credit squeeze and provide stimulus to a flagging economy because the current serviceability requirements of 7% can be seen as unreasonably stringent in a low rate environment,” said Jo Masters, Chief Economist at Ernst & Young in Sydney.

“Just as the housing slowdown was initiated via macro prudential control, perhaps macroprudential control holds some power in stabilising the market.”

While monetary policy easing from the RBA and a loosening in restrictions from APRA aren’t guaranteed outcomes by any means, particularly the latter, both outcomes an now being opening discussed among property experts.

With price falls already slowing, and with a number of alternate housing indicators also starting to show modest signs of improvement, the evidence is slowly building that Australia’s housing downturn may now be closer to the end rather than the beginning.

Tim Lawless, Head of Research at CoreLogic, certainly thinks so.

“We are seeing further evidence that the worst of the housing market conditions are now behind us,” he said following the release of CoreLogic’s Home Value Index for April on Wednesday.

“Values are still broadly declining, however the pace of of decline has moderated since December last year and there are some tentative signs that credit flows have improved, albeit from a low base.”

He’s not the only one who thinks there’s now some light at the end of the tunnel for the housing market, especially should the RBA cut rates as markets and most economists expect in the months ahead.

“It’s a while off yet but we expect a combination of RBA rate cuts flowing to lower mortgage rates, improved affordability thanks to lower prices, continuing strong population growth, the prospect of slowing new supply and… a reduction in APRA’s minimum 7% mortgage serviceability test for new home loans to help prices stabilise sometime around next year,” said AMP’s Chief Economist Shane Oliver.

“An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed around four months after the first cut.”

Oliver is forecasting that the RBA will cut interest rates next week, although he admits the decision is a close call. Over the remainder of the year, he expects the RBA will cut Australia’s cash rate to a new record low of 1%, down from 1.5% at present.

Matthew Hassan, Senior Economist at Westpac, is still forecasting that prices will continue to fall over the remainder of the year, although he said the recent moderation in the downturn is “broadly consistent with the improved tone from auction markets and consumer sentiment”.

“While much of the initial moderation in monthly declines appeared to be due to seasonality, the April update shows a clearer shift over and above seasonal variations,” he said.

Like AMP, Westpac is also forecasting that the RBA will reduce Australia’s cash rate to 1% before the year is out.

While the renewed bout of optimism towards the outlook for housing market conditions is premised on factors that have yet to occur, even without them, recent data suggests that the worst may well be over.

And if monetary and regulatory policy also provide support, it may no longer be a question as to whether the worst of the downturn is over but rather when will prices will start the bottom.

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