PIMCO: Aussie property prices to keep falling

Last year PIMCO was very bearish on Aussie property:

Mortgage availability has tightened due to property-cooling measures and closer bank scrutiny. Over the past few years, the Australian Prudential Regulation Authority (APRA), the country’s banking regulator, has introduced various macroprudential measures to cool down the housing market. Notably, in late 2014 APRA required that banks cap the annual growth rate of loans to individual real estate investors to 10% from close to 20%. In early 2017, it required that banks limit interest-only loans as a share of mortgage underwriting flow to 30%, down from about 40%.

In addition, last December the Australian government established the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to investigate financial sector misconduct. Under close regulatory scrutiny, banks have raised their underwriting standards. For example, they have incorporated more rigorous living-expense assumptions when assessing mortgage eligibility.

Weaker overseas investment demand is another important reason for the housing price declines. Foreign demand, mostly from China, grew rapidly between 2013 and 2016 and absorbed an estimated 15%-25% of new housing supply in Sydney and Melbourne, the country’s largest cities. To curb demand, governments in Victoria and New South Wales, the most populous states, raised their property stamp duty rate applicable to foreign investors. Victoria hiked its rate to 7% from 3% in 2016, while New South Wales raised its rate to 8% from 4%. Land tax surcharges for foreign and absentee homeowners also increased. Foreign investments in residential property plummeted by 66% during the fiscal year ended 30 June 2017, compared with the year before.

Not much has changed for PIMCO portfolio manager Aaditya Thakur, via AFR:

In fact, his team expect house prices in the major cities will fall by a further 5-10 per cent over the coming 12-18 months.

Thakur explains that “a major weight on the housing market comes from structural changes in mortgage underwriting standards”, which forced banks to tighten lending criteria.

These changes “will be virtually impossible to unwind”, he says.

Crucially, Thakur’s research suggests the fundamentals that have suppressed prices over the past couple of years are “still well and truly in place”, and that property supply and demand won’t be back into balance until 2021.

I would like to think so but I don’t. The RBA now has no other bullet to shoot to save the economy. With the Government’s wholehearted blessing it will keep cutting rates all the way to 50bps, along with further APRA easing, until there is some kind of new pulse in  property.  As UBS shows, this may not light up new borrowing capacity but it will rise from where it has been:

That said, the above table is the major reason that we don’t see property prices launching into some new boom. A slow grind higher is the base case, and one vulnerable to reversal in the event of any external shock.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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