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Jan 14, 2014

Only a matter of time before housing prices fall

Increased lending among owner-occupiers and investors is of little surprise given historically low rates. But this growth is unsustainable so long as first home buyers are priced out of the market.

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Loan approvals for both owner-occupiers and investors rose in November, but buying a property remains unobtainable for most prospective first-home buyers. The current situation is largely unsustainable, and it is only a matter of time before house prices begin to fall.

The value of loan approvals for owner-occupiers excluding refinancing activity rose by 1.5% in November, beating expectations, to be 18.5% higher over the year. For investors, loan approvals also rose by 1.5% in November, following two consecutive months of 7% growth, to be 35% higher over the year.

housing loans chart

By comparison, the value of loan approvals for first-home buyers continues to trend downwards. So far the benefits associated with historically low lending rates have avoided first-home buyers. A mixture of high investor activity, rising prices and labour market uncertainty has left few prospective first-home buyers willing to take on big risks.

It is difficult to see that situation changing in the near term, and two things must change before first-home buyer activity picks up: better labour market prospects and lower prices.

Greater first-home buyer activity will require a pick-up in labour market conditions. Younger workers will need to feel greater certainty surrounding their job prospects, as well as career mobility, before they are willing to take on big risks.

But in all likelihood, the labour market will continue to deteriorate in 2014 before improving next year. I certainly don’t expect widespread job losses, but the declining participation rate masks the fact that Australia’s labour market hasn’t been this weak in over a decade.

In addition, prices are simply too high right now for many young people looking to enter the market. Young buyers would have to have rocks in their head to leverage up in the current climate, particularly given the limits on fixed lending and eventual exposure to variable rates.

I’m firmly of the belief that a lack of first-home buyer activity will ensure that price growth will slow sometime soon and possibly in 2014. So conditions could improve for first-home buyers, but for now it has never been more difficult for first-home buyers to purchase a property.

On a trend basis, growth in the number of loan approvals to owner-occupiers appears to be slowing in some states. Approvals in Western Australia and South Australia have practically stalled over the past six months.

House prices growth in Adelaide has been anaemic at best throughout 2013 and based on this data growth should be fairly soft for some time yet. Price growth has been much stronger in Perth, but owner-occupier activity suggests that growth there may slow fairly soon.

owner occupier lending

Owner-occupier activity has picked up significantly in New South Wales, but as a market that state continues to be driven by investor activity. Today’s ABS release does not have a breakdown on investor activity for each state, but that data will be publicly released on Wednesday.

Lending activity has picked up significantly over 2013, but many lenders continue to deleverage, taking advantage of low variable interest rates to pay down more of their loan than required. Loans outstanding to owner-occupiers have increased by 4.4% over the year to November; for investors, growth is at 6.7%. Clearly new activity is running at a much hotter pace.

Loan balances outstanding will continue to rise in 2014, particularly if new activity remains strong. But at least for now, the level of deleveraging and conservative behaviour from many households provides some insight into why the Reserve Bank does not appear particularly concerned about lending activity at the minute.

The pick-up in lending activity is exactly what you would expect to see given the historically low lending rates offered to buyers and investors. But how sustainable will this be?

Eventually owner-occupier activity will slow, as there are only so many people interested in upgrading or downgrading their existing property and the market will be left with investors speculating among themselves.

Unless first-home buyers begin to enter the market, then this latest housing boom will prove to be fairly short lived. It is hardly the panacea that many are hoping for as the mining sector slows — not that the housing market was ever going to solve the economy’s problems. For the housing market, something will break. I’d put my money on investors losing their nerve before first-home buyers lose their patience.

*This article was originally published at Business Spectator

Callam Pickering —

Callam Pickering

Former RBA economist and Business Spectator economics editor

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13 comments

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13 thoughts on “Only a matter of time before housing prices fall

  1. Roy Inglis

    Conservative governments constant refrain is that Australian wages are globally uncompetitive; read high. We can bet that they will put downward pressure on them. Government is withdrawing support from some high employment sectors and enterprises, eg manufacturing while keeping it in place for others eg mining, even when the ‘others’ hardly needs it.

    Business (BCA) wants the government to import more skilled migrants rather than train up Australians, read train relatively younger Australians. We can expect the current Federal government to be receptive to business.

    The tax regime which is now increasingly including self managed super, keeps house prices artificially high and out of reach of significant numbers of first home buyers by massively subsidising the cost of homes for investors. A practice that also denies much needed funds to more productive / employment rich areas of our economy.

    New housing is often miles away from employment in ‘burb’s with little of no public transport meaning residents there have to rely on cars when fuel prices are high and getting higher, using arterial roads that are at or over capacity. The current conservative federal and state govt’s response is more cars, roads and car parks.

    Conservative governments and most private housing investors who are on average more conservative voting and a much older age group than 1st home buyers, are willfully blind to the combined effects of all this. Labor has proved to be all but blind to this too, except for the public transport aspect and there their responses are between weak and rhetorical.

    However, first home buyers and younger people generally are not blind. They are voting with their wallets.

    The inter-generational injustice is palpable to all but the willfully deaf and blind. There are so many Australians in that state that many people and institutions share a form of socioeconomic denialism.

    Until the major political parties look objectively at the sacred cow of residential housing investment, nothing much will change. Given Australian society and politics the likelihood of anything happening soon and I expect in my lifetime (I’m mid 50’s)is vanishingly small.

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