Market comment: Chicken Little meets the RBA and prices fall

Fri, 14 Dec 2018

Market comment: Chicken Little meets the RBA and prices fallChicken Little might have been right – the sky is indeed falling.

We’ve seen Sydney home prices go up, and up and further up, until they reached levels that can only be described as ‘sky high’. Now, for several reasons we’ll discuss in more detail later, they’ve plummeted. Will house prices ever recover? Eventually, yes, but probably not in the near future.

CoreLogic figures show that cumulative losses since the peak of the property boom in July 2017 are on track to exceed the previous record 9.6 percent drop in values that happened between 1989 and 1991.

For property owners it sounds like a disaster, and worse may be yet to come. According to comparison website, a 15 per cent fall from the peak of the market would wipe $145,500 off the median value of a Sydney freestanding house and $108,000 off the value of a median Sydney unit.

Yet we should keep in mind that dwelling values in Sydney today remain 41 per cent higher than they were five years ago, when we reported in this column on 13 December 2013: “John Edwards of Residex remarked there were a number of milestones achieved during 2013, including that the median value of houses in Sydney is now approaching the $750,000 mark.”
Since then, after years of continued growth, the market’s finally come off the boil. In times like these it’s never hard to find doomsayers - those who forecast housing prices falling by some huge percentage, or at least those who expect the misery to continue indefinitely.

But as the ABC’s Michael Janda points out, this downturn is different from the previous ‘big one’ in 1989: “The last time Sydney property prices fell this much, mortgage rates were around 17 per cent, unemployment was six per cent (on its way to 11) and Australia was heading into the recession we had to have.

“What a contrast to the current real estate downturn, where new borrowers can get mortgage rates under four per cent, unemployment is at five per cent and has been falling for the past few years, and the latest official figures out this week are expected to show the economy growing above average at 3.3 per cent,” Mr Janda said.

Mr Janda points out the biggest difference this time around: buyers are finding it harder to get the money to buy property. Credit availability for housing purchases has declined alarmingly. Housing credit is still growing, but at the slowest monthly pace since 1984 and the weakest annual pace since 2013, and the rate of growth is still decelerating.

However, there was a rare bit of year’s end good news when data from the Australian Bureau of Statistics (ABS) showed an increase in both the number and total value of mortgages issued in October when 52,654 loans were approved, up 2.2 per cent on September.

$30 billion in mortgages was written in October which was a 2.6 per cent month-on-month increase. Owner-occupier loans accounted for $20.1 billion, up 3.5 per cent while loans to investors rose 0.6 per cent to $9.8 billion in October.

The economic ripples

We know that falling property values impact other sectors of the economy, as the Sydney Morning Herald’s Matt Wade points out: “As prices fall, and fewer properties change hands, home builders and property developers may respond by scaling back their construction plans. That, in turn, can reduce activity and employment in the construction industry.

“Sydney’s last big housing boom, which peaked around 2003, was followed by a protracted downturn in home building activity which contributed to a long phase of below par growth for the NSW economy,” he added.

The Paris-based Organisation for Economic Co-operation and Development (OECD) believes that if price falls continue at their current rate consumers will reduce their spending, putting pressure on the whole economy. The OECD has warned the Australian Coalition that a house price crash could be so economically damaging that the government would have no choice but to reinforce the nation’s biggest banks as happened in the GFC.  

"A direct hit to the financial sector from a wave of mortgage defaults is unlikely. However, if house prices collapse, consumer spending could suffer, via negative impact on wealth including from exposures to bank shares, which would encourage deleveraging," the OECD warned.

Economists say the reversal of the ‘wealth effect’ that has been created by rising house prices is the cause of reduced consumer spending. When house prices and share prices fall at the same time, households pull back on their spending and are more inclined to spend out of their savings.  The current slow growth in wages is a further reason to be less financially adventurous.

CoreLogic head of research Cameron Kusher said that there’s been a big slowdown in retail trade as housing price weakness grows: "I wouldn't be surprised, particularly over the Christmas/New Year period, if we do see much weaker retail conditions than what we've seen over recent years, due to the fact that property prices are falling fairly rapidly in Sydney and Melbourne."

Citi economists Paul Brennan and Josh Williamson said that the weakness of consumer spending reflected poor income growth in a recent research note: "Although nominal GDP is growing strongly, up one per cent in Q3 and by 5.2 per cent over the past 12 months, the share going to employees has declined," they wrote.

"Additionally, household income available for consumption has been further squeezed by payments growing faster than income [5.8 per cent vs 3.5 per cent over the past 12 months]."

Stephen Letts of ABC News reported that figures from the Reserve Bank show that Australia’s ratio of income-to-savings has fallen to a new post-GFC low: “There are only three ways household consumption can increase: wages increase, savings rate decreases, and borrowing or credit increases.

“Wages are clearly going nowhere. Household savings are shrinking — sadly, they are not some sort of magic pudding that can always be consumed without the need to be replenished. And credit availability is turning from a squeeze to a crunch,” he said.

Banks crucial to recovery

If there’s one reason for the collapse in housing prices that stands out above all the others it’s the tightening of credit by Australia’s major banks. Reserve Bank of Australia deputy governor Guy Debelle warned in a speech to the Australian Business Economists annual dinner in Sydney that the Australian banking industry's habit of ‘acting as a pack’ could make the housing slowdown even worse, adding that both monetary policy and fiscal policy had assisted Australia in the Global Financial Crisis (GFC) and there was scope for both to be deployed in the event of another crisis.

"[The banks’] similar behaviour and similar reaction to events such as falling house prices run the risk of amplifying the downturn in the housing market. That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy," he said.

Dr Debelle said a mixture of well-delivered policy and good luck delivered Australia through the GFC better than other countries: “Monetary policy was eased rapidly. The Australian banking system was much less affected by the problems bedevilling banking systems in other countries (partly through good luck).

"Fiscal stimulus in Australia, in my view, was absolutely necessary and was a critical factor behind Australia’s good economic outcomes," he said. "While one can argue about the exact nature of the implementation, the fact that it was designed to take effect quickly was vital in the circumstances."

The new ‘normal’

Once rising into the 80 and even 90 per cent range, Sydney Auction clearance rates are now mired in the mid- to low 40 per cent range. SQM Research managing director Louis Christopher told Property Observer there were only three previous times that has happened: “That was in October/November 2008 during the GFC, May 2004 after the NSW vendor stamp duty was introduced and July 1989 when the cash rate hit 17 per cent.”

However, one Sydney estate agent gave a somewhat positive analysis of the present situation by describing the market as ‘normal’: “People are buying, people are selling,” he said. “The only difference is the price point in some areas – and that is not everywhere at all – and the length of time it takes to sell.”

He said that we have neither an oversupply of properties for a handful of buyers, nor a multitude of buyers for a handful of properties: “What people have to get their head around is where the price point is for the transaction to take place. Then they have to understand that buying and selling in the same market is critical.”

And there are a few signs that a recovery, or at least a period of stabilization, has already begun. Domain Group data confirms that across the greater Sydney area prices are still trending lower, but over 100 suburbs are still recording price gains.

Domain figures show that as 2018 comes to a close the city and eastern suburbs and the lower north shore have been the best auction price performers, but no region has been immune to price weakness: “All regions of Sydney had their clearance rates affected by the current market conditions,” said Eliza Owen, Domain research analyst.

“On average, Sydney regions saw a 15-percentage point decline in the auction clearance rate.”

Buyer’s agent Peter Kelaher, of PK Property Search & Negotiators, said that the constant commentary about falling prices isn’t affecting everybody in the property market: “In general, a lot of property is selling, and it is selling for okay prices, but in the worst cases it has come off by 20 per cent. Out west and down south is a nightmare, and that’s what is bringing the median price down.”

The combination of falling housing prices, ongoing low interest rates and reduced levels of buyer competition have made this ‘the time to buy’ for those who can access the capital needed to acquire property.

Buyer’s Agent Nick Viner from Buyers Domain Australia told’s Shannon Molloy: “This environment is the absolute perfect time to buy because you’ve got more time to consider your options and there’s more choice in terms of available homes. You also have the ability to focus on really blue-chip properties in your budget. You can bag a more superior property that you can really only get for cheaper in markets like this.”

Mortgage Choice CEO Susan Mitchell said she thinks house price slumps could generate a new legion of buyers that will eventually drive renewed growth in a sluggish market: “The decline in dwelling values, particularly in the nation’s capitals, could open the door to those looking to get their foot in the property market,” she said.

Off-the-plan regrets

There’s little doubt that those who bought off-the-plan apartments at the peak of the property boom are now feeling the pain of having the valuations of their properties reduced by the banks, meaning they have to borrow more money to settle on their purchases. Angie Zigomanis, head of residential research for BIS Oxford Economics, said: “It’s going to be challenging to have a valuation above your purchase price if you bought in 2017.”

Figures from CoreLogic show that more than 14 per cent of Sydney apartment owners’ resales were made at a loss, a rise from 11 per cent in the past 18 months. Meanwhile, the number of off-the-plan apartments valued at a lower price jumped from 11 per cent in April last year to 30 per cent in September 2018.

According to JLL national director and head of residential research Leigh Warner, it’s the larger projects that were targeted at investors that will be the hardest hit by falling prices: “Better quality, smaller developments that appeal a little more to owner occupiers and astute investors will perform much better,” he told Domain.

Two words have become the ‘scare words’ of the property market in recent times: negative equity. In simple terms, borrowers in negative equity are in the position of paying off mortgages for more than their properties are worth. If they sell, they have an outstanding debt to the bank, and if they don’t sell, they have to finance more debt at higher interest rates than applied to their original loan.

Frank Chung of came up with some interesting statistics. In November 2018, a Roy Morgan survey of 10,000 borrowers found 8.9 per cent were slipping into negative equity — up from 8 per cent 12 months earlier — which equates to around 386,000 Australians.

And the founder of Digital Finance Analytics, Martin North confirms that there are around 400,000 households across the country in negative equity, both owner-occupiers and investors: “There are about 3.25 million owner-occupier borrowers and 1.25 million investors, so around 10 per cent of properties are currently underwater.”

Colliers International said that the proportion of buyers unable to settle has almost doubled [since the market’s peak] due to tighter lending restrictions. The company also said that the settlement risk for projects was now between three and five per cent, but it’s three to four times higher for development projects relying on sales to international buyers through third-party agents.

Dennis Vertzayias, national director for residential at Colliers International, said those affected, mostly foreign buyers, would lose their deposit and, in some rare cases, be liable to cover any price differential if the property resold at a loss. “These buyers are not [as] emotionally invested … they’re prepared to walk away and lose their 10 per cent deposit [if they can’t get finance],” said Mr Vertzayias, adding that multiple external factors had seen settlement defaults climb to 20 per cent.

Very interesting

Interest rates have been kept steady for the past two-and-a-half years. The RBA reduced the cash rate to a record low of 1.5 per cent in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an RBA cash rate increase since November 2010.

Most bets in the financial world are still on a rate hike being the next move, but not all economists agree. Market Economics director, Stephen Koukoulas has forecast a rate cut to 0.75 per cent by the end of 2019.

"Based on the scenario where house prices fall around 7 to 10 per cent in annual terms over each of two years, real retail sales per capita will fall by about 1 per cent in each of those two years. Retail figures have not been that weak since the global financial crisis and the early 1990s recession."

And there are others in the economists’ fraternity who also sense there’s a chance for a cash rate cut rather than an increase due to the continuing weaknesses in the economy. One of these is the AMP’s Shane Oliver who has gone from thinking rates would stay on hold for years to anticipating a cut in 2019.

"With the RBA still seeing the next move as being up it will take them a while to change their thinking, so we don't see rates being cut until second half next year," Dr Oliver told the ABC. "When it does start cutting, the RBA will likely stick to 0.25 per cent increments — and since rate moves are a bit like cockroaches there is likely to be more than one."

Other dissenters include UBS's George Tharenou, who said he couldn't rule out a rate cut if weak data continues in 2019, and the NAB economics team who recently published a note saying its "monetary policy forecasts are currently under review".

The Guardian’s columnist Greg Jericho supported those who don’t foresee a hike in rates: “It is unlikely a rate rise will occur while housing finance continues to fall, and with no real signs of inflation or wages growth getting back to levels that the Reserve Bank would even consider to be neutral, let alone needing to be slowed, it is unlikely the RBA will do anything that would increase the likelihood of a hard landing.

“As such the era of low-interest rates looks set to continue for some years yet, and so too does the hope for a soft landing.”


‘Shock property market data released today bucks the recent trend of dire predictions,’ Shannon Molloy,, 12 December 2018
‘With the housing market off the boil, could it end in doom and gloom?’ Greg Jericho, The Guardian, 11 December 2018
‘Banks' pack behaviour could drive housing lower: RBA,’ Mathew Dunckley, Sydney Morning Herald, 7 December 2018
‘Why now could be the time to buy property, with some tipping an imminent market recovery,’ Shannon Molloy,, 7 December 2018
‘Aussies 'squeezed' as spending grows and savings evaporate,’ Stephen Letts, ABC News Online, 7 December 2018
'Prepare contingency plans': OECD warns Coalition government on falling house prices,’ Shane Wright, Sydney Morning Herald, 10 December 2018
‘Property market falls tipped to dwarf 90s recession,’ Jessica Irvine, Sydney Morning Herald, 4 December 2018
‘Sydney auction clearance rate steadies as buyers hold out for discounts,’ Chris Tolhurst, Domain, 9 December 2018
‘Eye of the storm’: Sydney off-the-plan apartment buyers caught out by lower valuations,’ Tawar Razaghi, Domain, 9 December 2018
‘Perth's four-year housing bust is nothing like what Sydney and Melbourne's property markets face,’ Emily Piesse, ABC News Online, 9 December 2018
‘Sydney House Prices Edging Towards Cliff,’ Molly Wilson, The Australian Tribune, 6 December 2018
‘This property downturn is a different beast from the big one in 1989,’ Michael Janda, ABC News Online, 6 December 2018
‘One million Aussies could become ‘prisoners’ in their own home as falling prices put them in negative equity,’ Frank Chung,, 5 December 2018
‘Housing slump 'the biggest threat to the Australian economy,’ Matt Wade, Sydney Morning Herald, 5 December 2018
‘Off a cliff: House prices alarmingly close to record-hitting territory,’ Elizabeth Knight, Sydney Morning Herald, 3 December 2018
‘Sydney housing downturn to eclipse 1989 recession,’ Frank Chung,, 3 December 2018