Investor mortgage crash to drag house prices even lower

By Leith van Onselen

With the release yesterday of the ABS’ lending finance data for November, it’s an opportune time to once again chart how capital city house prices are tracking against both investor and total housing finance.

As MB readers know, housing finance has historically been strongly correlated with values. Therefore, it remains one of the best short-term predictors of price growth.

The below charts plot both CoreLogic’s monthly dwelling values index against the value of investor and total finance, as measured by the ABS.

First, here are the national charts:

Next, Sydney:

Next, Melbourne:

Next, Brisbane:

Next, Perth:

Finally, Adelaide:

As you can see, investor and housing finance growth as well as dwelling price growth has weakened across Sydney, Melbourne and Perth, but is stronger in Brisbane and Adelaide.

The decline is particularly sharp in the investor mecca of Sydney, where investors remain the marginal price setter.

We already know that investors face stiff headwinds in the period ahead due to:

  • 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 $133 billion in FY19 and then $159 billion in FY20, in the process increasing repayments by around 35% on average;
  • Tightening lending standards arising from the banking Royal Commission, which is due to release its final report early next month;
  • Rising bank funding costs, possibly leading to further out-of-cycle mortgage rate rises; and
  • Labor’s negative gearing and capital gains tax reforms in the likely event that it wins the next federal election, which is expected to be implemented on 1 July 2020.

These factors combined will continue to place downward pressure on housing values and make investing in property more risky and less desirable, especially in Sydney and to a lesser extent Melbourne, whose markets remain most over-valued and where investors are most dominant:

In short, until housing finance turns and begins to rise, Australian dwelling values will very likely continue to fall.

[email protected]

Leith van Onselen


  1. What can one say except : Prices are set at the margin
    If you constrain supply and pump demand (immigration) and create excess liquidity than prices must rise.
    However if you fix the supply side or constrain the credit side than the marginal buyer will modify his/her purchase decisions and suddenly prices will fall. Fundamentals determine supply of housing and demand for housing but prices are still set at the margin.assuming adequate capital is available,.and that’s all before you consider the positive feedback effect of growth, (aka asset speculation).

    • Ah, I see. So it’s the SubPrime Borrowers that set prices. Now, where have I heard that before…?

    • Not sure I understand, why does it matter who the marginal buyer is?
      suffice to say that at the margin there’s one less buyer and prices adjust to that reality.
      Anecdotally it would seem that the biggest falls have happened at the mid/top of the property ladder, this suggests that property ladder climbers are atm locked into their segment because they are probably not motivated to buy much the same as they already have.
      Small scale townhouse developers have completely deserted the market, this is evidenced by the extreme price falls in lower north shore and inner west knock down houses. on big lots. Prices were down 20% in Dec18 but now offers appear to be down closer to 30% so the market is locked up with vendors refusing to sell.
      these seem to be the biggest two groups that have retreated from the market at least in the parts of Sydney where I follow prices.

    • He invested in 2009 in the belief that property prices doubled every 10 years, which is a typical sales pitch used by real estate agents.

      Prices for properties in popular Sydney and Melbourne locations did more than double, fuelled by record low interest rates, strong population growth,

      The Thing about bubbles is that even well after they’re recognised they can keep going for a bloody long time. And it’s hard to know when they’re properly dead.

      I’m beginning to entertain the idea that perhaps we have reached exhaustion point. But wouldn’t be surprised if it did re-boom again through continued immigration pressure and government support (which surprisingly hasn’t been deployed yet).

      • Immigration is already record high and adding more while unemployment is on the way up maybe hard (they used this rates/immigration trick last time to prevent crash in 2013). In 2015 they used rates/IO loans trick.
        What is left now? Some rates cute but if not passed by banks they may do more damage if people see RBA hopeless.
        Maybe they can start giving money away to first time investors – First time investor grants

      • The government has plenty of tricks that it can pull.

        – deductible interest for FHB OOs
        – guaranteeing borrowings for FHBs
        – shared equity garbage
        – etc etc etc

        Interest rates can be forced lower, down into the low 3s.

      • Even StevenMEMBER

        The first two in your list are highly unlikely Peachy (massive distortions, massive incentives to declare FHB status, massive inequities (“But I bought one just two months ago… why aren’t MY interest payments deductible?”). The last one is quite plausible.

        I do expect the RBA to give the money printing presses a good crack.

      • @Peach None of those solve the over-indebtedness problem or prevent deleveraging from taking hold. Rate cuts is their only instrument… and they’re cornered on this front.

      • @Gavin: “A “meaningful” change APRA could make would be to lower the 7 per cent minimum interest rate at which banks are required to test all new customers, which is about 3 percentage points higher than interest rates banks actually charge.” oh yes, there are many levers, that is one of them. APRA would probably need to get a nod from the Treasurer to make sure they get immunity from future prosecution/RC caning if they want to do something like this.

        @EvenSteven: desperate times – desperate measures situation. Major distortions don’t matter if there is “the economy” to “save”.

        ATO audit activity can be dialled up or down as needed to either encourage or discourage FHB fraud and overaimkng – from FIRB levels (one guy, looking the other way) to Rio Tinto levels (dozens of specialists, looking through microscopes), as the situation dictates.

        @Brenton – the only “solution” to the overindebtedness, as far as anyone who matters is concerned, is more debt. Much more debt.

      • lol, solve a bad debt problem with moar debt. I’ve heard about this solution before, it has never worked out. Usually it all goes wrong when interest rates approach their lower extreme*

        *for CAD nations with no foreign currency reserve status, it’s not zero

      • Jumping jack flash

        Peachy is right though. More debt worked in the past and that’s all they know.

        To a bank, debt is awesome, its the asset that earns them money. These guys are all banksters.

        There’s still a lot of tricks left but the easiest way to know what’s likely to happen is to check out what they did in the US, short of QE which probably wouldn’t work very well for us.

      • No, Peachy is not right, because what they’ve always done in the past is to cut interest rates. Now they can’t, not with any meaningful effect and not without consequence.

      • Jumping jack flash

        More debt. Cutting interest rates was how they did it i agree.
        I also agree cutting (or raising) IR cannot happen.

        However keeping in mind that the banks want a slow melt, more debt may simply not happen.

        We may well get to the point, if not already, where the govt and our super intelligent leaders bay for more debt but the banks simply won’t dole it out

      • Exactly. So if their only lever for meaningfully stimulating credit, and for simultaneously alleviating debt burdens, is now effectively snapped off, what do they do?

        They’ve already stimulated FHB’s, who have proven incapable of offsetting the investors that drove prices beyond sustainability. FHB’s lack the incomes, capital and sheer numbers. Investors are already tapped and overextended via IO sub-prime style lending.

        They’ll use the last of their cuts, just in time for a global slowdown. Goodluck with that.

      • Government support hasn’t been deployed because it would be incredibly costly: Think about the hit to the budget of making interest tax deductible given household debt service ratio is 15%.of disposable income. Also it would be incredibly regressive given the vastly higher share of debt held by high income households.

      • They could do some of these desperate measures but only after they declare ecomonic cataclysm just before elections.
        Remember main goal of political elite is not to save economy but to stay in power.
        By June it’s going to be too late

  2. If you look into chart you may see that these are strongly correlated but there is no causation (they happen at the same time, sometimes prices fall before)
    It’s the fear and greed that drive both finance commitments and prices and at the moment investors are shitting themselves

    • Agree, the two might part company sometime this year the only auction will be due to legal requirements such as probate or for closure

    • kiwikarynMEMBER

      Sentiment is everything, and now the genie is out of the bottle and you cant put her back in. The illusion that house prices never go down has been shattered. And that’s all that it will take for buyers to withdraw from the market. They thought Australia was different, now they look to Ireland and the US for insight into what might happen if they buy now into a falling market. And as the answer is quite diabolical, they decide to sit tight where they are, save up their deposit money, and wait for the bottom.

      • karyn
        I dunno! Do we really believe that RE investors here are sufficiently savvy to be looking at Ireland and the US? Not yet I think. As someone, who I generally regard as having some perspicacity (not sure who) wrote the other day, most are now thinking it will be 2 or 3 rough years and then it’s off to the races again.

  3. Silly question, but total finance commitments – is it the amount of debt issued in dollars? The number of mortgages issued? Or something else?

  4. Looks like a double bottom for investor commitments (in Adelaide, as forming now) is the sign of a price growth bottom.

    /spruik 😉

  5. This makes it very clear you would be mad to buy now ahead of the negative gearing changes . It’s all investors driving this ponzi scheme .

    Prices will likely fall for years in real terms and that’s after this current cash has worked its way through .

    Ontop of the NG changes the banks just won’t be able to internally generate capital through rising asset values they way they have in the past .

    Don’t Buy Now !

    • Mad to buy ahead of a change in the CGT discount to lock in 50% vs 25%? Depends on your investment horizon I guess.

      • Bowen’s post desist seem till say CGT will be grandfathered to me.

        “Labor has a plan to fix that by limiting negative gearing to new housing and fully grandfathering arrangements for current homeowners. Labor will halve the capital gains tax discount and to restrict negative gearing to new homes only for future investors. Current investors would not be affected. This will allow first home buyers to get a foothold in the housing market dominated by investors without forcing a plummet in property prices, as Treasury analysis has confirmed. ”

        Do you have a link to the 2016 announcement at hand?

      • Zulu, what do you think “Current investors would not be affected.” (by the CGT/NG changes) means?

        The ALP link is the 2016 policy proposal.

        “Capital gains tax

        Labor will halve the capital gains discount for all assets purchased after a yet-to-be-determined date after the next election. This will reduce the capital gains tax discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent.

        All investments made before this date will not be affected by this change and will be fully grandfathered.”

      • Actually Chris’ point is very relevant and although a quip is, without doubt, true. Labor are planning spending on all the extra tax they are going to collect. There isn’t going to be any and that is a whole other discussion – I do mean financial discussion not political.

    • Mad to buy now? Maybe… but some of us just want a home to live in and if you’re in a position to buy 1 almost outright, why not? Unless you think you can wait and buy 2 later?

  6. The critical data to watch as Australia’s housing downturn unfolds
    [By David Scutt
    Australian home prices have now been falling for more than a year, led by increasingly steep falls in Sydney and Melbourne, Australia’s largest and most expensive housing markets.

    Many suspect the falls will continue for some time yet, with the only real area of debate being just how large the peak-to-trough falls will be.]

    • Stone the Crows

      Mr Plank also says the current situation is somewhat unique, noting that rather than being driven by higher mortgage rates, the downturn in the housing market has largely been caused by the introduction of tighter lending standards.

      Mr Plank is an absolute plonker.

      Unique as in the first time ever, never happened before in STRAYA ???

      Mr Plonker is onto something here, historically low interest rates and bottom of the barrel lending standards ?

      Time to plank the plonker or is the property market taking its final walk off the end of the plank ?

      So may unanswered questions…………