Fitch: Australian house prices to keep falling

By Leith van Onselen

Fitch Solutions has released a research note warning that Australian property prices will continue falling which, when combined with falling credit growth, will hit bank profitability:

We are maintaining our long-held view that the outlook for Australian banks will remain subdued over the coming quarters, which will be mainly driven by the ongoing downturn in the domestic housing market. We expect credit growth to be negatively impacted given that mortgages account for approximately 60% of the total loan portfolio of the banking sector. We forecast credit growth to slow to 4.0% in 2018 and 3.5% in 2019. Banks will also be negatively impacted by the low interest rate environment and heightened regulatory oversight as the authorities seek to improve the conduct of the sector…

Following years of rapid increases in residential property prices, the Australian housing market peaked in September 2017, and we expect the ongoing downturn to persist over the coming quarters… With overall house prices still 31% higher than they were five years ago, there is therefore still room for a further correction.

Other than poor affordability, regulators have been clamping down on the availability of credit for speculative housing investment. Given their desire to limit the growth in household debt (around 120% of GDP), it is likely that the tightening policies will remain in place over the coming quarters…

Other than weakening mortgage loan growth, we expect Australian interest rates will remain low over the coming quarters as the RBA is likely to remain on hold amid an uncertain global economic environment and still muted inflation, which will weigh on net interest income and return on equity…

In our view, oversight by regulators is likely to intensify, which will weigh on the business operations of banks…

The underperformance of banking equities of Australian banks (S&P/ASX Banks Index) relative to the broader stock market (S&P/ASX 200 index) has gathered steam since late-2017, and we continue to hold a bearish view on Australian banks. Banks are likely to remain under pressure as their equity prices increasingly reflect the profitability challenges that the financial institutions face from cooling credit growth, the low interest rate environment, and increased scrutiny from regulators. The dividend payout of Australian banks is also lower compared to the peak of 102.3% in Q316 at around 79% in Q218 as they seek to preserve cash to boost their capital position in light of downside pressure on profitability.

Mortgage credit growth has been weakening, as investors rush for the exits:

Whereas actual investor finance commitments have crashed which, given historical correlations, suggests housing prices will continue to fall:

On top of the factors mentioned by Fitch, you can also add:

  1. the massive interest-only (IO) mortgage reset due to take place over the next several years which, according to UBS, will see the potential expiry of IO loans in coming years (assuming a 5-year maturity and no rollover to another IO term) of up to $105 billion in FY18, $133 billion in FY19, and peak at $159 billion n in FY20, thereby increasing repayments by an average of 35%; and
  2. Labor’s planned reforms to negative gearing and the capital gains tax discount, in the event that it wins the upcoming federal election.

These are stiff headwinds building for Australian property and, by extension, Australia’s banks.

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  1. Very sad times ahead, unfortunately!!. Price correction >20%, I feel sorry for all the individuals who’s life will be demolished. All the lies which they believed along with all the brainwashing. Sad. Sorry Australia, you are NOT different! 🙁

  2. That’s right, let’s keep the OCR fixed for another 2 years. Then watch the capital flight from Australia to the US and the likes. You cannot run an economy on close to zero forever. The low rate has played right into the snake skin salesman’s hands to run endless property seminars, pumping up property as the never lose money asset. Just sign up here! Don’t worry about your loan application, we will do the paperwork for you! As a result, many took on crazy leveraged risks into the property market as an “investment” through a SMSF and the likes. Now it is all about to end and a lot of carnage will follow. The OCR should have been separated from mortgage rates. We could have still had prudent management… but as we are seeing with the RC – it was greed first, bonuses second and to hell with the customer third. The price is about to be paid in the months to follow. And after all this it will be back to: move along folks, nothing to see here, we have resolved this all per the Royal commission. Fines will be handed out such that the shareholders can pay for those fines and we will swan off into the sunset with your money… just gotta love the fact there is no personal accountability. How about we build some prisons for those in the financial services & property game and start prosecuting a few. We will have the prisons filled up in no time.

  3. Does anyone know what’s the true value of materials used for a typical 3bd house in Australia? I’ve seen those being built and it looks like 10 (recycled) wooden sticks in the ground and a bit of cement. I’d say $12.000? As just another FOB I’d need your approximate estimate to understand is it worth buying.

    • $12,000 for a few sticks and some cement sounds fair value. The problem is where to put the sticks and cement because the $1 million dollar eighth of an acre land price is maybe, possibly, a little bit too much.

    • Most of that horrid dribble being built out in say Donnybrook Victoria, will be made of the worst building materials imaginable. Compare that with say what a federation style home in Elsternwick would cost to build today and the Elsternwick homes are a bargain by comparison.

      To prove this is all a land value and nothing to do with actual building costs. Check out this Warehouse in Portland Victoria. Going for the price of a tiny block within 20km’s of Melbourne’s CBD.

      You could not build a warehouse like this today for double the asking price. Yet it’s worth nothing because it’s in Portland Victoria and not where all the developers and spivs have been buying.

    • Bricks are like $1 each and $1.50 to lay with the average house using around 10,000. Then concrete slab costs around $30k? I have heard and it appears that half a new build cost is Labor and half materials.

      • So, about $100k – $200k to erect a habitable structure on a $1million block, with said structure depreciating as soon as the owner gets the front door key?

  4. Further splendid improvement in the Australian housing market today, with the Sydney Corelogic index undergoing the largest one day fall since 18-Jan-18.

    • Don’t forget Melbourne! Now falling at an annualised rate of 8.4% after a similarly tasty one day fall.

      Meanwhile, here is some recent bear pr n from Cameron Kusher:

      “In previous downturns for Sydney and Melbourne, real value declines have been large and they have taken a long time to eclipse their previous peaks. After real dwelling values peaked in Sydney in December 2003 they fell by -18.4% to December 2008 and didn’t eclipse their previous peak until June 2014. In Melbourne, real dwelling values peaked in June 1989 and fell by -24.3% to December 1995 and didn’t eclipse their June 1989 peak until September 1999. “

  5. This might be of interest to MB readers…

    The conclusion:

    8. The ATO’s management of compliance with foreign investment obligations for residential real estate is becoming effective as it progressively implements more sophisticated approaches to encourage compliance and detect and address non-compliance.

    9. The ATO has developed processes for compiling a land register of residential real estate but faces considerable challenges in populating the register with reliable data in coming years, which it needs to overcome in order to be effective.

    10. The ATO has assessed and addressed compliance risks in relation to foreign investment obligations for residential real estate but has not yet compiled and implemented a compliance and enforcement strategy. To promote voluntary compliance with those obligations, the ATO has developed a series of communication strategies. The strategies, which have largely been implemented, incorporate a multi-platform communication approach targeting key audiences with priority messages.

    11. The ATO has undertaken a significant amount of work to develop processes and systems to support the detection and investigation of non-compliance with foreign investment obligations for residential real estate. There are a number of minor enhancements the ATO could make to improve its largely effective investigation processes, with more substantial work required in its development of processes to actively detect non-compliance.

    12. Monitoring and reporting on compliance activities for foreign investment in residential real estate has been expanded with the transfer of responsibilities from Treasury to the ATO. Many indicators have been developed to measure the success of compliance activities and external reporting established for compliance investigations, outcomes and penalties. The monitoring and reporting arrangements are largely effective, and could be strengthened by more broad coverage of effectiveness—of the ATO in managing the overall compliance risk and Treasury in meeting the policy intent for foreign investment in residential real estate.

  6. It’s not investors rushing for the exits at all! It’s investors banging on the teller window that says “IO loans” whilst the tellers desk sits empty with no immediate intention to fill it.

  7. When the 80+ yo Italian migrants who still speak pidgin English in the inner suburbs of Melbourne start discussing falling prices because banks aren’t giving people money ‘like they were’, you know the jig’s up. That’s media penetration for you.