During the election campaign, the LNP promised to guarantee the deposits of some first home buyers, effectively allowing them to purchase houses with a 5% deposit without incurring expensive Lenders Mortgage Insurance (LMI) which is normally applied when the deposits are less than 20%.
Shortly following the election, APRA announced an effective relaxation of credit standards releasing a consultation paper proposing to remove the condition ADI’s must test all applicants’ serviceability criteria against a minimum interest rate of 7.0%. APRA also removed the expectation ADI’s would use a “buffer” above this minimum amount, meaning mortgages were being assessed against an ability to repay if interest rates went to 7.25%. APRA did however increase the threshold that mortgage holders must be able to withstand (an increase of 2.5% above current levels but this is obviously much lower than the 7.25% restriction). The old restriction was out-dated and increasingly harsh as interest rates have fallen and are expected to fall further. Commentators correctly viewed this as a loosening of credit standards and predicted it would allow borrowers to access increased amounts of credit.
These two measures combined with the LNP’s more investor friendly policies with respect to negative gearing and capital gains, plus the expectation interest rates will fall further are expected to provide a significant boost to the housing market.
Few commentators are expecting the housing market to bottom and rebound immediately, but nearly all have revised forward the dates when they believe the bottom of the housing market will be reached and the extent of the future price falls. Specifically, RBC and AMP have revised their peak to trough forecasts down from 15% to 12% and HSBC has revised its forecast down to a 10% peak to trough fall. The market has already fallen 8% so these forecasts are for small additional falls before the market bottoms in late 2019 or early 2020.
Citi is the most optimistic bank predicting the market will bottom almost immediately. This latter forecast is also closest to that of Macquarie Bank who cite data that says in previous house price downturns the market has started to show house price appreciation 6 or 7 months after the point of lowest annual growth. Macquarie calculates the point of lowest growth occurred in January 2019 as per the charts below which means the bottom of the market could be in July or August 2019. However, Macquarie puts an important caveat on their analysis pointing out in prior house price declines this has been caused by high interest rates, whereas the current downturn was caused by the banks restricting credit so responses may not be the same as experienced previously.
In support of an early housing market bottoming, auction clearance rates rose significantly following the Queens Birthday long weekend, however there are also many news articles on large supply overhangs from those who wish to sell, but have not yet put their properties on the market and developers who are offering “incentives” to sell new apartments as alternatives to price reductions (payment of stamp duty, payment of mortgage for the first year, free furniture and free holidays).
In addition, recent headlines regarding building defects at the Mascot Towers following the discovery of structural problems in the Opal Tower at Homebush in Sydney earlier in the year have raised concerns about the quality of apartment building during the recent property boom. This has caused persons such as Phil Gall, Chairman of the Owners Corporation Network, to advise anyone “if you are tempted to buy a new apartment over three levels, don’t” because of the high (80%) chance of defects coming to light in the first ten years of a building’s life and the few protections afforded to buyers. If this creates a “crisis of confidence” in new apartments, the housing downturn may persist longer than initially expected.