Returning from a trip across the ditch to Australia and in discussion with our Sydney investment office, we noted several signs of a tougher period ahead for the Australian housing market:

 

These factors include:

 

  • Tighter financing conditions from Australian banks. Westpac has recently restricted the provision of mortgage loans to foreigners, a policy which may be replicated at other banks. In addition, in July the Australian regulator APRA will begin applying higher risk weights to mortgage loans. This makes it more expensive for the banks to provide these loans, which will reduce how easy it is to get one, in our view;
  • High levels of new supply of houses and apartments being built. In 2015 a total of 234,000 houses and apartments were consented[1], the highest ever;
  • Softening prices already evident in certain specific markets, such as Western Sydney and Melbourne apartments. As one would expect, this is already generating a lot of media attention, which has the potential to impact overall buyer confidence in property;
  • Existing high valuations for property

 

However, there is one very strong factor that is set to provide a further boost to housing market conditions, and that is interest rates. The Reserve Bank of Australia yesterday announced a further 0.25% cut to the Official Cash Rate, pushing it to a new record low of 1.75%. We expect it will cut again over coming months.

 

Importantly for the housing market, it appears likely that the major banks will pass on all of yesterday’s 0.25% reduction to the rates charged on standard variable mortgages – the National Australia Bank announced as much yesterday, and typically the other major banks follow suit.

 

Which of these forces will dominate over the months and quarters ahead?

 

The fact that we do have offsetting forces – on the one hand, a reasonably long list of headwinds, but on the other, a very powerful support from interest rates, suggests to us that a large move in house prices in either direction this year is unlikely.

 

However, with investor animal spirits – so critical in any market – on the wane, we conclude that a modest fall in Australian house prices still seems to be a likely outcome over the rest of 2016.

 

David Lewis

Portfolio Manager

Source: [1] Australian Bureau of Statistics

Disclosure of interest: Milford Funds Ltd. holds shares in National Australia Bank and Westpac on behalf of clients. 

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.