The rocky road for housing

The Reserve Bank kept the official cash rate on hold for a record 27th month on Tuesday, effectively keeping a floor under housing demand with retail mortgage rates also likely to remain relatively low.

That's despite recent rises of up to 50 basis points by some lenders on loans to property investors, which together with tighter lending conditions more broadly has taken much of the heat out of the national housing market. 

We spoke to CoreLogic's research director Tim Lawless, one of Australia's most experienced commentators on the property market, to get his views on the outlook for the housing market.

As prices soften further in 2018, he doesn't see much upside for property, although low mortgage rates should aid demand in the year ahead.

Listen to the podcast, or read the full interview transcript below.

Tony Kaye: Hello Tim. The latest data shows housing credit is drying up across the board. What's your take on that?

Tim Lawless: Some areas are worse than others, of course, and some markets like Perth and Darwin are quite entrenched in the downturn. But, of course, for a lot of reasons, all the focus is on Sydney and Melbourne and part of that focus is very well placed. These two cities comprise 55 per cent of Australia's overall housing value. Just two cities. So they do tend to push the ball around. When the market's going up, you get very strong headlines and when those markets are going down, as they are now, it does tend to obviously pull the broader headlines down as well.

So, when we look back at the data, Sydney's down 7.4 per cent over the past four months. That's the weakest rate of annual change we've seen since February 1990, to put it in some context. So, we haven't seen a downturn like this in Sydney for quite some time.

Tony Kaye: Yeah, it's pretty severe and I've sort of sensed that it's getting more severe over time as we go forward.

Tim Lawless: I wouldn't say that ... we're not seeing the rate of decline accelerating. I suppose it is becoming a little bit more broad-based, because early on in the downturn we were seeing the lower quartile of the market, the most affordable quartile is quite resilient to falls. But, we're now seeing that lower quartile, the more affordable centre of the market's, also in decline. We're also seeing the unit market showing up some resilience as well. That's the supply coming into the market. But once again we are now seeing unit values across Sydney down nearly 5 per cent over the past 12 months. So, even though we're not seeing an overall acceleration in the rate of decline, it does look like more areas across the Sydney metro are starting to show some cracks.

Tony Kaye: I guess one of the interesting things is that we are seeing this squeeze in terms of housing credit. Unemployment here is very low and wages are holding up, they're not sort of growing, but they're holding up, so it's really I guess coming back to the lenders and their willingness to lend money out.

Tim Lawless: Yeah, that's probably the biggest factor in this market downturn and it's the big difference in previous downturns. Normally housing cycles in Australia are dictated by a change in interest rates or by economic conditions, so worsening in terms of a downturn. This downturn's very much been caused by tighter finance regulation and availability. You can see it very clearly, particularly when you look at some of the segments in the marketplaces. Sydney and Melbourne, for example, were much more concentrated with investment activity back in 2015 and that's just comprised about 65 per cent of mortgage demand across the state of New South Wales. That's now down to about 48 per cent, which is still quite elevated, but well below what it used to be. It's also a factor, when you look at some of the statements coming out from APRA encouraging lenders to distance themselves from high debt to income borrowers, that's inherently going to impact on really expensive markets like Sydney and Melbourne as well where the dwelling price to income ratio is already elevated up around at nine times in Sydney and eight times in Melbourne. We're progressively seeing lenders trying to reduce their exposure to debt to income ratios of not more than six times.

So that's going to have issues in the middle to lower end of the market, particularly in the most expensive areas.

Tony Kaye: Yeah. This time of year always slows down in Melbourne , but this time is normally a pretty buoyant time of year. Given we're not getting that at the moment, probably 2018 is fairly much sort of wiped off for most people.

Tim Lawless: It's an interesting concept. Spring isn't always a really strong period in the housing market. It's always a really seasonally strong period when more properties come in market. So you do absolutely every spring you see a lot more properties being added to the listing pool. But it doesn't necessarily line up with stronger value growth for example, through the Spring season or stronger transaction numbers.

Spring is really, they call it the selling season, but it's really the Spring listing season. Absolutely, we are seeing listing numbers ramping up, as we always do, but at a time when demand is quite low, and falling, that higher supply is probably one of the other factors that's placing some downward pressure on the market. Buyers have a lot of choice, they can negotiate very hard, and if they don't get the price they think reflects market value they can move onto the next property without really too many concerns that someone's going to buy that property out from under them. Like say, a couple of years ago in Sydney, when FOMO [fear of missing out] was such a big thing and people thought they had to race to the market. 

Tony Kaye: Yeah, so I presume properties are probably on average sticking around on the market longer than what they have been. Has that been extending out?

Tim Lawless: It has, yeah, absolutely. As we see stock levels rise, we are seeing average selling times extending and we're also seeing negotiation rates or discounting rates rising. The other vendor metric, of course, is clearance rates have been falling. Each one of those measures that sort of measures the balance between buyers and sellers has been weakening as the market softens. 

Tony Kaye: Yeah. Obviously, that's not going to change for the foreseeable future.

Tim Lawless: No, I wouldn't think so. I think more we should expect that values will continue to drift lower, probably at least through the first half of next year, if not longer than that. The factors that will help to turn the market around would be relaxation in credit policies, we're not going to see that happening too soon, or an improvement in housing affordability and that will gradually filter through to owner occupiers coming back on the market. I think there's a bit of a tailwind there as we see affordability improving and also wage growth. As you mentioned before, unemployment is tracking low and job growth is still reasonably healthy, so we might start seeing wages grow, just trending up a little bit from where it is at the moment. But, yeah, I think everybody agrees wages growth isn't going to pick up very quickly.

Tony Kaye: The safest bet, of course, is that the Reserve Bank isn't going to do anything with interest rates anytime soon, I imagine?

Tim Lawless: You wouldn't think so. I'm not an interest rate forecaster, so I just take a look at what most of the economic communities say and there seems to be a consensus that interest rates will stay on hold at least until the middle of 2020, if not longer than that. Mortgage rates may be a little bit different, but it looks like some of that funding pressure we've been seeing that pushed mortgage rates up a bit a couple months ago is starting to ease off. So, yeah, hopefully we see mortgage rates staying lower than what they are, and once again that will help to support demand in the market.