• 23/06/2024

Why this House Price Slump is Different from the Last One

Clancy Yeates| Sydney Morning Herald| 19 June 2018


Amid all the gloom engulfing the housing market, here’s a sliver of more positive news you may have missed.

The Westpac Melbourne Institute index of consumer sentiment recently suggested home buyer demand is gradually recovering from its recent low, with the number of consumers who think now is a good time to buy a home lifting substantially in the past year.

Over the decades this survey has been running, a change like this would normally suggest prices might stabilise within about six months.

But as more experts are realising, the current slump in property prices is different from previous dips in an important way: it is being driven by banks’ home loan decisions.

Why does that matter? Because it suggests the downturn may be less predictable than dips of the past, and it could continue for a while yet.

Sydney house prices have now fallen 4.2 per cent in annual terms, CoreLogic says, while Melbourne prices have also dipped in recent months, but are up still up 2.2 per cent compared with a year ago.

Against this backdrop, it’s notable that the Westpac index of whether consumers think now is a “good time to buy a dwelling” has recovered from its low point of 90 in May last year to 105.7 this month, where a reading of 100 means pessimists balance optimists.

This index is still below long-term averages, but it is now clearly ahead of last year’s lows. And the sharpest increase in sentiment has been in NSW, the least affordable market.

Why does all this matter?

Because it is a handy reminder that markets tend to move in cycles, not straight lines. When prices fall because of weaker demand or excess supply, they tend to reach a point at which demand starts to bounce back, because the goods are more affordable, propping up the price.

“It’s telling you that demand should be less weak. Under ordinary circumstances the market should be stabilising in the second half of this year – maybe not picking up, but it should be broadly stabilising,” Westpac economist Matthew Hassan says of the lift in the “time to buy a dwelling” index.

He hastens to add, however, that these are not ordinary circumstances in the housing market. Why? Because there is extra uncertainty around access to credit.

ANZ Bank economist Daniel Gradwell says the last couple of dips in prices – such as around 2011 – were triggered by rising or already “elevated” interest rates. That’s not the case this time. The cost of debt is still extremely low – many home loan rates are less than 4 per cent.

Instead, the main reason for the slump in prices appears to be the availability of credit. Mortgage brokers say banks are simply not willing to lend as much as they were a few years ago. Banks are more closely scrutinising how much money borrowers need to live on, and taking longer to approve loans.

This matters, because how much people are willing to bid at an auction will often be heavily influenced by how much they can borrow.

The big question is how much further this clampdown has to run.

It is impossible to know the answer, but analysts have sketched out some potential scenarios.

Paul Dales from Capital Economics estimates that in order for house prices to fall by 15 per cent or so, new home lending commitments would have to drop by about 40 per cent – which is more than the contraction that occurred during the global financial crisis.

UBS analyst Jonathan Mott has estimated that if banks assumed more realistic living expenses, the maximum amount they would lend customers would be about 30 to  40 per cent less than today. He says that would cause housing credit growth to come to a near standstill – which would be a dramatic change from today’s 6 per cent growth rate.

Both analysts don’t view these sharp contractions as the most likely scenario, because regulators would probably try to avoid such a financial shock.

We do know, however, that the royal commission into misconduct has put banks on high alert over their compliance with responsible lending laws. So it’s fair to assume the banks will want take extra precautions for a while yet, which is likely to keep the housing market subdued.

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