This article is from the Australian Property Journal archive
THE housing market downturn will have a larger negative impact on the economy than most believe, according to Capital Economics, which has lowered its GDP and dwellings investment forecasts.
However, the Reserve Bank of Australia yesterday moved to quell fears of falling house prices hitting financial stability.
In a speech to the Urban Development Institute of Australia yesterday, RBA assistant governor, financial system, Michelle Bullock, the impacts are not large enough to result in widespread problems in the financial sector.
“This is not to downplay the financial stress that some households are experiencing. But most of the debt remains well secured against property, even with the decline in housing prices. Total repayments as a share of income remain steady and a large number of indebted households have built up substantial prepayments over the past few years,” she said.
“Broadly, the debt is held by households that can afford to service it. Arrears rates, while increasing a bit over the past few years, remain low. Banks are well capitalised and work over recent years to improve lending standards has made household and bank balance sheets more resilient.
“Loans at high loan-to-valuation ratios and interest-only loans are less common than they were and most households have not been borrowing the maximum amount available.”
Capital Economics expects the labour market to slacken soon, with employment growth as a lagging indicator falling to 1.7% this year and unemployment rising to 5.3%, forcing the Reserve Bank of Australia to cut interest rates earlier than anticipated to 0.75% by the middle of 2020.
“The downturn in the housing market will encourage households to live within rather than above their means as housing wealth falls,” Capital Economics senior economist, Marcel Theliant said in a note.
“Indeed, we think that the uptick in the household savings rate in the fourth quarter should be followed by a further gradual rise over the course of the year.”
It now anticipates consumption growth to slow from 2.6% last year to just 1.5% this year, downgraded from its previous forecast of 2.0%, and further below the consensus of 2.6% this year. Capital Economics retains its expectations of 2.0% growth for 2020.
“What’s more, the downturn in the housing market will render construction of new dwellings less attractive. Indeed, the sharp fall in building approvals in recent months suggests that the 3.4% quarter-on-quarter drop in dwellings investment in the fourth quarter will be followed by continued marked drops over the coming year.”
According to Australian Industry Group/Housing Industry Association Australian Performance of Construction Index, building took its steepest monthly fall since 2012 in February, and apartment building continued to weaken as residential new orders dropped to their lowest levels in nearly six years.
“We now expect dwellings investment to fall by 10% this year instead of our previous forecast of a 7% drop. And the plunge in business confidence at the start of the year suggests that non-dwellings investment growth will keep stagnating,” Theliant said.
House prices fell by 2.4% across the country in the December quarter, according to this week’s official data, making for an annual drop of 5.1% that signalled the fastest fall in prices since the global financial crisis.
Prices in Sydney were now 7.8% below where they were in December 2017, while Melbourne prices were down 6.4% down year-on-year.
Last week’s ABS data showed home lending slumped to its biggest fall in more than a decade in January. Investor lending 28.6% over the year to January, while lending to owner occupiers was down 17.1%.
Bullock outlined the RBA’s concern with the potential for the large influx of supply in apartments over recent years to exacerbate declines in housing prices and adversely impact households’ and developers’ financial positions, but said risks currently appear to be “elevated but contained”.
“In a climate of rapidly rising prices, developers are willing to pay high prices for land on which to build apartments. Households, including investors, are willing to purchase apartments off-the-plan, confident that the apartment will be worth more than they paid for it when it is finally completed. This continues as long as prices are rising,” she said.
“This large increase in supply, however, ultimately sows the seeds of a decline in prices which, if large enough, results in development becoming unattractive, new supply falling and the cycle starting again.
“The apartment market is quite soft in Sydney; apartment prices have declined since their peak, rental vacancies have risen and rents are falling. In Melbourne and Brisbane, however, apartment prices have so far held up.
“Liaison suggests that settlement failures have not increased much and, to the extent that they have, some developers are in a position where they can choose to hold and rent unsold apartments. Further tightening in lending standards might, however, impact both purchasers of new apartments and developers.”
Last week’s ABS data showed home lending slumped to its biggest fall in more than a decade in January. Investor lending 28.6% over the year to January, while lending to owner occupiers was down 17.1%.
Australian Property Journal
