A new report has warned that property investors could be hit by a severe housing downturn if credit growth moves into negative territory.
Investment management company Newgate Capital Partners’ May 2016 Analysis of the Australian Residential Market report found that all of the factors present in every historical housing crisis are currently in place in Australia.
“Are the ingredients in place for an Australian housing crash? The answer is unfortunately and unequivocally ‘yes’,” the report said.
These factors include high ratios of debt to household income, heavy and sustained house price growth, and a slowing economy.
However, the report noted that although these factors are necessary elements of a housing crash, they are not sufficient alone.
“A housing and banking crisis requires a catalyst to change behaviour. This catalyst must ultimately cause credit growth to move into negative territory.”
The two variables that are likely to be the catalysts, according to the report, are wage growth moving into negative territory and tightening credit conditions.
“If wages growth moves into negative territory it will signal falling household income, which may ultimately translate into house loan defaults.
“We have already seen banks being told by the regulator to crimp lending to investors. This is potentially the beginning of tightening credit conditions. Any further evidence of loan growth contraction by the banks will be very concerning.”
Exploring the history of housing crashes, the report clarified some misconceptions about how these catastrophes come to be, emphasising that housing markets do not ‘crash’ in the traditional sense of the word.
“It is a slow process; it takes, on average, six years for the price correction to occur,” the report said.
The report urged investors interested in the future of the Australian housing market to continue to be actively aware of movements in the economy.
“Watch the Australian Bureau of Statistics monthly wage growth figures. If this data series moves into negative territory, this will flag a reduction in the willingness to borrow,” it said.
“Monitor the anecdotal commentary and statements from participants in the financial system. Any evidence that loan approval processes will be tightened is a negative.”
The group also pointed investors to the Australian Prudential Regulation Authority website for data on credit growth to Australian housing.
“If credit growth moves into negative territory, the Australian housing market may begin its slow correction, with prices falling gradually over many years.”
The latest financial aggregates figures from the Reserve Bank, released last week, found that total housing credit grew by 7.0 per cent over the 12 months to April and by 0.4 per cent over the month of April.
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