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Going up: Is the credit downturn over?

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Charbel Kadib 9 minute read

Green shoots have emerged in the Australian housing market after a prolonged period of subdued activity. Charbel Kadib explores further

Over the past few years, mortgage industry professionals have borne the brunt of a prolonged downturn in the residential property market. Demand for housing withered as boom-time conditions in Sydney and Melbourne made way for the “correction we had to have”.

Residential property prices hit their peak in October 2017, when, according to data from CoreLogic, the national median home value sat at $543,251.

What followed was an 8.4 per cent slide in dwelling values, which bottomed out in August 2019 – taking the national median home value to $521,157.

The slump in national home values was primarily driven by sharp corrections in Sydney and Melbourne, with the major capitals recording peak-to-trough declines of 14.9 per cent and 11.1 per cent, respectively.

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According to REA Group director of economic research Cameron Kusher, the housing market downturn was primarily driven by restrictions on the supply of credit. 

“Housing became really unaffordable, particularly in the two largest capital cities, so that was certainly a contributor, but really it was the introduction of a range of macro-prudential policies, which weren’t aimed at reducing prices, but the effect of them being introduced to remove some of the risks in the housing market was that it pushed dwelling values lower,” Mr Kusher tells The Adviser.

“We had the serviceability floor introduced whereby no matter what interest rate you were offered, you were assessed on your ability to repay that mortgage on an interest rate at above 7 per cent.

“We also had the interest-only cap, the investor cap, and much more focus on responsible lending from the lenders, and that led to more conservatism around borrowing. You can add into the mix the banking royal commission, the move away from using the HEM index.”

However, Mr Kusher says the housing slump is all but over. 

“It certainly depends on where you are in the country, but if you look at it nationally, the index certainly points to the downturn being over, and I’d say it’s definitely over in Sydney and Melbourne,” he continues.

The first signs of a recovery in the housing market were home value increases in Sydney and Melbourne over the months of June and July, which eventually spurred a rise in national home values in August (0.8 per cent) – the first monthly increase since the downturn commenced.

The auction clearance rate also began to spike, soaring above 70 per cent.

Chief economist at REA Group Nerida Conisbee also observes: “There definitely has been a shift.

“What we can see with search activity is that there’s been a 25 per cent increase over the past 12 months.”

So, what triggered the turnaround?

Market analysts largely agree that the recovery was sparked by a trident of political, economic and regulatory development.

The first of the trident of factors cited by analysts as sparking the recovery was the outcome of the federal election.

In May, the Liberal-National Coalition defied odds, snatching electoral victory from the jaws of defeat, and earning the right to govern for the third consecutive term.

The Coalition’s victory signalled defeat of the Labor opposition’s proposed changes to negative gearing and the capital gains tax, which some had feared would further exacerbate the housing market downturn by disincentivising investment.

In the following month, just a few weeks after the federal election, the RBA announced its first cut to the cash rate in almost three years. But it didn’t end there.

The RBA’s reduction to the cash rate in June was followed by two additional cuts in July and October – taking the official cash rate to a historic low of 0.75 per cent, down by a cumulative 75 bps from 1.5 per cent.

The RBA’s cuts sparked a wave of mortgage rate reductions from Australia’s lenders, which passed on the savings either partly or in full to their home loan customers.

With interest rates hitting new lows, the Australian Prudential Regulation Authority (APRA) had no choice but to scrap its 7 per cent interest rate floor for mortgage serviceability assessments, with chair Wayne Byres conceding that the floor was “higher than necessary for ADIs to maintain sound lending standards”.

Lenders responded to APRA’s changes by lowering their interest rate floors to as low as 5.25 per cent.

“All of those things have driven the turnaround,” Mr Kusher adds.

“Historically, lower interest rates have led to higher property prices, but them alone, if that 7 per cent serviceability cap was still in place, would not have had much of an impact on the market.

“The fact that the cap was removed, and people could now borrow again – not just new borrowers but people that already have a loan could borrow more – that certainly led to a recovery in the market.”

The trident of positive market developments revived the home lending market. According to the Australian Bureau of Statistics’ (ABS) Lending to Households and Businesses data, the value of home loan approvals increased by 5.1 per cent (seasonally adjusted terms) in July – the largest monthly increase since March 2015.

Susan Mitchell, chief executive of broking franchise group Mortgage Choice, attests to the pick-up in home lending activity.

“We have seen our loan applications rise significantly since June 30. I think everyone has seen that,” she says.

“The feedback I’ve gotten from the banks is that they are as busy as they’ve ever been.” 

Looking ahead

Market observers are expecting burgeoning demand for housing to place upward pressure on property prices over the coming years.

In its Australian Housing Outlook 2019-2022 report, insurance group QBE noted that it expects home values to rise in every capital city over the years to 2022.

According to QBE, Brisbane is set to experience the sharpest rise in house prices (20.3 per cent) over the three years to 2022, followed by Adelaide (12.7 per cent), Darwin (7 per cent), Canberra (6.4 per cent), Perth (6 per cent), Sydney (5.8 per cent), Melbourne (5.1 per cent) and Hobart (4.1 per cent).

Unit price growth has also been projected in all capital cities except Sydney, where unit prices are expected to drop 0.3 per cent over the same period.

Unit values are projected to rise sharpest in Darwin (9.2 per cent), followed by Canberra (6.7 per cent), Perth (5.3 per cent), Adelaide (4.7 per cent), Melbourne (3.8 per cent), Brisbane (3.2 per cent) and Hobart (2.8 per cent).

QBE Lenders’ Mortgage Insurance (LMI) CEO Phil White says the growth would come in response to a supply and demand “imbalance”.

“As well as lower interest rates, and expectations that these will remain low for some time, government incentives and an easing of lending restrictions, our report suggests that a drop-off in construction completions is likely to drive prices higher over the next few years,” he says.

“Building approvals fell by 19 per cent in 2018-19, and completions are forecast to fall to 163,500 dwellings by 2020-21 (down 22 per cent from the average over the past five years).

“With population growth expected to remain strong, that’s well below underlying demand. This could mean some previously oversupplied markets will tip back into undersupply by 2021-22.”

Some analysts have also revised their initial housing market projections. According to CoreLogic’s head of research, Tim Lawless, what was initially expected to be a modest turnaround could turn into a V-shaped recovery.

“From my perspective, the rebound we’re seeing in Sydney and Melbourne now is much faster than I would have expected it to be in April or May this year,” he says.

“We’re expecting Sydney values and Melbourne values to be up about another 1.5 per cent in September following a similar result in August.

“We’ve already seen the market recover nearly 4 per cent since it bottomed out around May.”

He adds: “It does look like there’s maybe a bit of a V-shaped recovery, which is something that I previously didn’t think would happen.”

Mr Lawless adds that he’s also been surprised by the rate of home loan approval growth, stating that he had expected tighter lending standards to weigh on demand for finance.

“I thought it’d be much more gradual, mostly because I thought credit would have remained tighter than what it actually has been,” he says.

Further tailwinds could be on the way, with the RBA expected to cut the official cash rate for a fourth time this year.

AMP chief economist Shane Oliver is expecting at least one additional cut to the cash rate, which would take it to a new record low of 0.5 per cent.

As with previous monetary policy adjustments, an additional cut would trigger mortgage rate reductions from Australia’s credit providers, luring more borrowers into the property market.

Regulators are also currently undergoing work to reform current lending practices, which could simplify the home loan application process and ease access to finance.

In February, the Australian Securities and Investments Commission (ASIC) launched a review to update its responsible lending guidance (RG 209), which has been in place since 2010.

The regulator stated that it considered an update “timely” in light of its regulatory and enforcement work since 2011, changes in technology, and the release of the banking royal commission’s final report.

The regulator has concluded two phases of consultation with industry stakeholders, which included public hearings held in Sydney and Melbourne, and is expected to publish its new guidance before the end of the calendar year.

All these factors combined suggest that the tide has turned, signalling the dawn of a new phase of growth in the Australian housing market.

Mortgage brokers are poised to reap the benefits of what’s increasingly resembling a full-fledged recovery.

Glenn Haslam, Suncorp’s executive general manager, lending, highlights the opportunities available to mortgage brokers.

“Interest rates are now at a historical low, creating a great window of opportunity for people wanting to get into the property market or upgrade,” he says.

“We’re starting to see a stronger demand for brokers as people regain confidence about the property market and explore their options, particularly as housing prices stabilise in some of the southern states, which is now offering greater affordability. 

“We also know that brokers who focus on sustainable practices and processes will continue to reap the benefits of this improving environment.”

Mr Haslam adds that Suncorp will be working with the broker channel to deliver good outcomes for consumers in a complex marketplace.

“As always, we encourage brokers to understand their obligations around responsible lending,” he says.

“While there’s more rigour involved today, we are working closely with brokers to manage this well for our customers.

“Now more than ever, we must continue to deliver the outstanding outcomes for customers the broker industry is known for.”

Going up: Is the credit downturn over?
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Charbel Kadib

Charbel Kadib

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

Before joining Momentum Media as a journalist in 2017, Charbel held roles with public relations agency Fifty Acres, and the Department of Communications and the Arts. 

Email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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