CoreLogic & Moody’s Analytics predict slower Australian housing market conditions for 2016

CoreLogic & Moody’s Analytics predict slower Australian housing market conditions for 2016

 

After two years of exceptional house price appreciation, CoreLogic-Moody’s Analytics Australian Forecast Home Value Index shows a slowdown in house-price growth across the country underpinned by expectations of slower income growth. In today’s show we talk with Tim Lawless from CoreLogic RP Data.

 

Transcript:

Kevin:  After two years of exceptional house price appreciation, CoreLogic-Moody’s Analytics Australian Forecast Home Value Index shows a slowdown in house-price growth across the country underpinned by expectations of slower income growth. Joining me now to discuss the report and some of the findings is Tim Lawless from CoreLogic RP Data.

Tim, thanks for your time.

Tim:  Thanks, Kevin, for having me on the show.

Kevin:  It’s a pleasure, mate. While there might be a bit of a short-term slowing, the report shows stability in the medium term. Is that correct?

Tim:  That’s right, and stability in the sense that as we see the housing market slow down in its pace with capital gains, we aren’t likely to see any sustained declines across any of the capital cities. In fact, if we look at even the cities where growth has been the highest, in Sydney and Melbourne, by 2017, for example, those cities are likely to start seeing their annual growth rates more around the rate of inflation, around 1.5% to 2.5%.

Kevin:  So, a bit more stability, you think, as opposed to those big increases?

Tim:  That’s right, and there are no surprises there after such strong capital gains. Look at Sydney. We’ve seen values rise by nearly 75% since the beginning of 2009 at a time when household incomes aren’t growing all that much, so it shouldn’t come as any surprise to see the rate of growth moderating back to a more moderate or sustainable level.

Kevin:  Yes, just talking about those phenomenal growths in the Sydney market, there has been talk recently that if it does slow a bit in Sydney – which you’re saying it’s likely to – the regional outlook might look a little bit better. Would you go along with that?

Tim:  Yes, absolutely. The regional markets, of course, are really diverse, so we’re still seeing softness in the regional area associated with the mining and the resources sectors. We see the big wind down in infrastructure projects and spending in those markets.

But the lifestyle markets in the secondary cities, like Newcastle and so forth, look at somewhere like Byron Bay or the Gold Coast, any of those markets are really showing quite a positive trend now. We wouldn’t expect the same slowdown to be occurring in those markets partly because growth previously hasn’t been anywhere near as strong as what it’s been in Sydney, but also because we are seeing some improvement in the underlying fundamentals of demand.

Kevin:  I’ll ask you to give us an overview in just a moment about some of the cap cities and what the outlook is for those going forward, but just before we do, you mentioned mining regions. What does the report say about how they’re faring?

Tim:  Well, the forecast themselves don’t drill down specifically the mining areas, but there’s plenty of other indicators that show the mining regions have certainly softened substantially. This is after a backdrop of leading up to 2012, 2013, some very significant capital gains largely driven by investment, so of course, areas like Moranbah and Mackay, urban WA areas like Pilbara, Karratha, and Port Hedland have all seen value falls of upwards of 20% to 30%, so steep declines.

But there are some signs showing that these markets might be starting to level in their declines. No signs of any capital gains coming just yet, but potentially, the worst of conditions may have passed in those markets.

Kevin:  Tim, let’s talk about borrowing just for a moment because I know the report deals with that. Are we borrowing more for our properties, or are we getting better at saving for higher deposits?

Tim:  Well, it’s a bit of both. We are seeing households devoting more of their incomes towards housing, and that’s a symptom of the strong capital gains we’ve seen in the higher prices. There are some affordability challenges particularly in a market like Sydney, where even between say Sydney and Melbourne, there’s a 33% difference, so a one-third difference in typical pricing. Between Sydney and Brisbane, it’s more like two-thirds, despite the not much difference between household incomes.

But in the same sense, we are seeing households also focusing on savings. We’re still seeing the household savings ratio relatively high compared to where it used to be pre-GFC. Households are still saving roughly around 8% of their incomes. That’s down from nearly 11% around 2009.

Kevin:  Of course, we heard recently about the banks tightening their regulations on borrowings from investors. Has that had any impact that you can see?

Tim:  It has had an impact. I think it’s been quite a profound impact. You remember, APRA introduced their speed limits on the pace of investment growth back in December 2014. They aimed to limit the pace of an investment portfolio credit growth to 10% per annum.

It took a long time for that to get down below 10%, even though, it wasn’t substantially above 10%. But based on the latest data, up to January, we’ve seen the pace of investment lending slow down to just below 8% now, so potentially, we might start to see the banks loosening the purse strings just a little bit for investor lending thanks to the fact that they’re down now well below that APRA speed limit.

Kevin:  Let’s stay with investors just for a moment. What do you think the outlook is for property investors as opposed to owner-occupiers?

Tim:  Well, I wouldn’t be surprised if we do continue to see a further moderation in the number of investors or the value of investor loans that are being committed to in the market. But keep in mind that we saw investments as a proportion of all new mortgages peak at about 55% in May last year, and that’s since drifted down to about 45%.

The long-run average, you generally expect investors to comprise about a third of all market activities, so it’s still relatively elevated. I wouldn’t be surprised if we do see the proportion of investors in the market drift a little bit lower – not just because of the premium on investor loans based on the higher capital requirements but also because the serviceability standards really are getting tighter from the lending sector.

But another factor, of course, is just the natural cyclical effect of the market. We’ve seen rental yields compress to record lows in Sydney and Melbourne, and of course, affordability barriers, particularly in Sydney also acting as some disincentive in that city.

Kevin:  Tim, if we could just have a quick look around Australia at some of the cap city markets, what does the report say about how they’ve been faring and what’s ahead for them?

Tim:  Well, we just touched on Sydney. Our forecast for Sydney by the end of 2016 is a growth rate probably around 2%, 2.5% average over the year.

Whereas, Melbourne is forecast to be much more resilient. It’s currently tracking at about 11% growth per annum, and by the end of the year, we would expect that to drop down to around 7%, so still a relatively strong level of growth. But of course, by 2017, we’re going to start to see the effect of higher supply levels and a lower level of jobs creation starting to pull that rate of growth back to the mid 1% mark, about 1.3% in our forecasts.

There are some markets that we are forecasting to actually accelerate in their growth rates, though. Brisbane, for example, is likely to see growth by 2016 pick up to the mid 4%, and by 2017 by nearly 8% growth.

Hobart, which has been a real underperformer, is now starting to show some really positive signs. We’re expecting a growth rate of about 6.6% this year, and then lifting to about 7.5% by 2017. Hobart values are still roughly level with where they were back in 2009, so that’s a turnaround that’s been a long time coming.

But of course, markets like Perth and Darwin that are well into their down phase, we’re expecting values to fall further this year before starting to bottom out late this year, and then showing some rises through 2017. But of course, that’s provisional on seeing commodity prices bottom out and then starting to rise in 2017, as well.

Kevin:  Tim, a great outlook there for a number of those cap city markets. I want to thank you for giving us your time today to talk about that report. My guest has been Tim Lawless from CoreLogic RP Data.

Tim, thanks for your time.

Tim:  Thanks again, Kevin.

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Kevin Turner
kevin@realestatetalk.com.au
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