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Housing market coming off the boil

More reports have been emerging about the worrying state of Australia’s housing market. But are we set for a bubble to burst in certain markets? Or will it be a gradual easing?

Receiving quite a bit of attention was the recent outlook from the OECD (Organisation for Economic Co-operation & Development) – especially its use of the word “rout”. In its first report of the Australian economy since 2014, the OECD warned that our housing market was showing “hints of a slowdown” in what it identified as an “extreme vulnerability” for the economy.

It stated: “A large drop-off in house prices could cut household consumption and increase mortgage defaults … The market may not ease gently but develop into a rout on prices and demand with significant macroeconomic implications.”

Fitch Ratings’ latest report also highlighted a situation of house prices coming off the boil. Its report covered housing market conditions in 22 countries and stated that a slowdown was “overdue” in some of the hotter markets such as Australia.

“The rate of price increases should slow as home purchases become increasingly expensive relative to household income and rents,” the report stated.

It attributed house-price growth to record low interest rates but “tighter lending standards, including limitations on the growth of investment loan portfolios for authorised deposit-taking institutions, have dampened price dynamics.”

Fitch expects moderate growth in Sydney and Melbourne property prices in 2017, propped up by low interest rates and population growth. Nationally, it expects price growth of 3-5 per cent, while the regional market may again underperform against the capital cities, particularly Sydney and Melbourne.

“Lower growth in regional residential property prices of around 0-5 per cent [is expected], due to falling rental yield pressure, increasing supply and fewer prospects for capital growth for investors,” the agency added.

“Fitch expects dwelling completions, to continue to rise nationwide and peak in 2017, acting as a dampener on prices.”

Meanwhile, Standard Life Investments has called Australia’s housing market “frothy”, blaming lack of supply and the challenges of implementing macroprudential changes when interest rates are so low.



An additional supply of apartments in eastern capital cities like Brisbane is scheduled to come on-stream over the next couple of years. Image courtesy of Veda Dante.


Cash rate remains on hold

But how much longer will we have low interest rates? As expected, the Reserve Bank of Australia left the cash rate on hold at its March meeting, amid concerns of what another cut would do to the property market.

In the accompanying monetary policy statement, RBA governor Philip Lowe said the economic outlook “continues to be supported by the low level of interest rates”. He said exports had risen strongly and non-mining business investment was climbing with most measures of business and consumer confidence at or above average.

He added conditions in the housing market varied around the country. “In some markets, conditions are strong and prices are rising briskly,” he said. “In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on-stream over the next couple of years.”

Most economists expect the RBA to keep rates on hold for at least the reminder of 2017. AMP Capital chief economist Shane Oliver is one that does. He also says Lowe’s reference in the statement to supervisory measures that have contributed to “some strengthening of lending standards” suggests the RBA may think a further tightening in lending standards may be required.

“It’s possibly a sign that more macroprudential measures to slow property market investment may be on the way,” Oliver says.



Housing costs are becoming increasingly out of reach, especially for first-time buyers and low-income families. Image courtesy of Veda Dante.


Where is the housing market heading?

So what’s ahead for the housing market? With interest rates staying low, it’s likely that prices will continue to rise as demand increases. Data from CoreLogic shows capital city dwellings rose another 1.4 per cent in February with Sydney continuing as the overall capital gains leader.

Canberra led the strong capital gain over February (+3.2 per cent), with Sydney (+2.6 per cent), Melbourne (+1.5 per cent) and Hobart (+1.0 per cent) also returning significant increases. In contrast, dwelling values were down over the month across Darwin (-4.3 per cent), Perth (-2.4 per cent) and Brisbane (-0.4 per cent).

CoreLogic head of research Tim Lawless says the strong growth conditions across Sydney have provided a substantial wealth boost for homeowners. “However, the flipside is that housing costs are becoming increasingly out of reach,” he said. “This is especially true for price-sensitive segments of the market such as first-time buyers and low-income families.”

While there may be lower expectations for house-price growth, it appears there are still plenty of buyers. The state of the market is continuing to look sound, especially with rates staying where they are and no planned changes to capital gains tax or negative gearing arrangements.

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Gayle Bryant

Gayle has been a financial and business journalist and sub-editor for almost 30 years. She has written for a wide range of newspapers, magazines, custom and trade press and websites. Gayle’s articles regularly appear in the Sydney Morning Herald’s small business section and the Australian Financial Review’s special reports section.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.