Last month’s housing market results showed an easing in the rate of decline relative to the previous two months, however our national home value index was down a further 0.7% in February, taking the total decline in national dwelling values to 6.8% since the market peaked in October 2017.  National dwelling values have returned to levels last seen in September 2016, and values have fallen over 14 of the last 16 months. 

Although home values have been falling for almost a year and a half, nationally dwelling values remain 18% higher than they were five years ago, highlighting that most home owners remain in a strong equity position despite the persistently weak conditions.

Despite the reduced rate of decline, the February results remain overall weak, with the geographic scope of negative conditions becoming more widespread over recent months.

Hobart was the only capital city to record a rise in values over the past three months, while Canberra values were flat and the remaining capital cities recorded lower values over the rolling quarter.

The fact that we are seeing weakening housing market conditions across regions where home values were previously tracking at a sustainable pace and economic conditions are relatively healthy is a sign that tighter credit conditions are having a broad dampening effect on buyer activity.

Credit aggregates from the Reserve Bank and housing finance data from the Australian Bureau of Statistics have continued to show a consistent reduction in credit flows and mortgage activity, with a more pronounced downturn in owner occupier credit flows visible through the second half of 2018 and now into 2019. 

While a slowdown in investment was a key driver of slowing housing markets since 2015, the recent decline in owner occupier lending is far more significant considering owner occupier lending is more than twice the value of investment lending.

Of course, this slowdown isn’t completely attributable to the tighter lending environment.  Other factors are at play such as relatively neutral levels of consumer confidence, higher supply in some markets and a reduction of demand from foreign buyers as well as domestic investors. These factors vary considerably from city to city. 

Overall, the February housing market results marked a subtle improvement in the rate of decline, however, the housing market downturn is now more widespread geographically and we aren’t seeing any indicators pointing to the market bottoming out just yet.

The long-running reduction in investment lending has understandably impacted the Sydney and Melbourne housing markets more than others, considering investment activity was heavily concentrated in these cities, however the reduction in owner occupier credit explains a lot about the broader softening in housing market conditions more recently.

Stricter lending standards are a logical outcome following the Royal Commission and we are likely in the early phases of a ‘new normal’ for mortgage lending where borrowers will face closer scrutiny around their expenses and ability to service a loan and conversion rates on loan applications are likely to remain lower than they have been over prior years. 

While credit availability seems to be the key driver of slowing conditions, other factors are also at play.

Supply levels are elevated in some areas, especially in the high rise unit sector.  Although construction activity has recently moved through unprecedented peaks, concerns remain around specific high-density precincts, and to a lesser extent, some greenfield detached housing markets.

Advertised stock levels are also elevated in many cities.  The number of properties advertised for sale has been consistently rising due to fewer buyers and longer selling times. Despite the surge in inventory, ‘fresh’ stock being added to the market was down 19% relative to last year, highlighting that vendor confidence is low. Buyers are firmly in the driver’s seat and in a good position to take advantage of the strong buying position. 

From a demand perspective, foreign buyers are a much smaller component of housing activity.  FIRB data shows residential dwelling approvals for foreign buyers are down more than 70% since moving through the highs of 2015/16.  The reduction in foreign buying activity is likely to have a greater impact within the high-rise apartment sector where activity was previously most concentrated.  Not to mention the fact that new developments can now only sell 50% of units offshore whereas previously 100% could be sold offshore

Another factor working to dampen housing market conditions is the consumer mindset.  The consumer sentiment survey from Westpac and the Melbourne Institute has consistently highlighted a pessimistic view from consumers around their expectations for house prices, which is likely to be another factor reducing market demand. The federal election and the potential for changes to taxation policy is probably also weighing on consumer attitudes.

Helping to offset these headwinds are mortgage rates, which are still tracking around the lowest level since the 1960’s.  Further cuts to the cash rate are looking like a growing possibility, however its uncertain how much stimulus lower rates may provide to the housing sector considering the tight servicing criteria and higher funding costs from lenders which would likely prevent any cuts being passed on in full.

With dwelling values expected to fall further, the attention now turns to what impact this could have on future household consumption, which accounts for around 60% of the economy.  If households reduce their spending as the wealth effect moves into to reverse, then interest rate cuts or other policy intervention could become more likely.