Since our last blog on Australian housing in December last year prices have continued to fall, but the pace of declines has eased somewhat, and cautious optimism has begun to emerge. Certainly, auction clearance rates have recovered somewhat from very low levels (led by Sydney), fixed mortgage rates have come back a little, and there are anecdotal reports of new life in investor lending. Also, while Labour continues to lead in the polls ahead of a general election on 18 May, the rhetoric around cutting CGT discounts and removing negative gearing has markedly softened of late.
No doubt these signs are encouraging. However, it is worth keeping in mind that sales volumes are still depressed (at around half peak levels), while residential construction activity is only now starting to come off the boil resulting in weakening employment lead indicators (including SEEK job ads and recruitment company volumes). Increased unemployment could, of course, result in further cuts to the Reserve Bank’s cash rate, the majority of which would likely be passed on to borrowers. But the 7.25% reference rate used in serviceability assessments would be unchanged at 7.25%, meaning borrowing limits also wouldn’t change and muting the degree to which lending could rise.
On top of this, the roll out of Comprehensive Credit Reporting and enforcement of Responsible Lending standards continues to weigh on credit availability. Mortgage approvals are still falling, and from September 1 the Big Four banks will be required to provide full visibility on consumer lending for the first time. This should improve the accuracy of loan applications and make it harder to ‘forget’ loans secured from other lenders, but again it would incrementally limit credit availability.
All in all, this may already be the worst housing downturn Australia has seen in 40 years (Corelogic now has Sydney prices just over 14% below mid 2017 highs, with Melbourne closing in on an 11% fall and national prices down over 7%), and perhaps the slope will be less steep from here. But it may be premature to call a bottom. Meaning Australian (and New Zealand) banks aren’t out of the woods just yet.