The Australian property market is in for a tough couple of years if the government doesn’t intervene to boost demand for dwellings, says RiskWise Property Research CEO Doron Peleg.
Major risks associated with the residential property market have significantly increased since the second half of 2017 and will continue to do so into 2019.
According to Peleg, tighter lending standards, the Royal Commission findings, the fear of potential changes to negative gearing and capital gains tax, political uncertainty, and unit oversupply in conjunction with a sharp drop in dwelling commencements could shape the entire landscape of the residential property market well into 2020 and beyond.
RiskWise’s latest Quarterly Risks & Opportunity Report is based on major assumptions about the coming months including credit standards and restrictions being either tightened further or remaining at current levels; changes introduced by Labor to negative gearing and capital gains tax in the 2020 Budget after winning the upcoming Federal election; and no increase in interest rates by RBA at least until the second half of 2020.
Peleg says, “We have entered unchartered territory as all these factors, the frequency that they are changing and the very sudden impact they are having on the property market are incredible.
“And it is very possible that during the first half of 2019 there will be more dramatic developments and volatile changes that might further impact the market including an unexpected win by the Coalition in the Federal elections, major measures to boost demand and an interest rate cut by the RBA.”
Credit restrictions, which had seen a reduction in the volume of loans of around 10 percent and borrowing capacity of around 20 percent, have had a direct impact on dwelling prices, due to the smaller number of qualified buyers as well as those buyers having a smaller budget.
APRA’s recent removal of the 30 percent interest-only lending cap is unlikely to have a material impact on the housing market as banks are likely to continue to tighten credit standards both due to the Royal Commission’s findings as well as to mitigate the risks associated with interest-only loans in a market where the majority of the properties that are purchased or re-financed are depreciating assets.
Residential property, particularly in Sydney and Melbourne was seen as a depreciating asset, further impacting buyer sentiment.
"Another contributing factor is the fact that many major lenders are no longer approving lending for residential properties against SMSFs and this will have a direct impact particularly on new properties as a large proportion of investments are made through advisors and accountants and concentrated in new dwellings, meaning there should be fewer off-the-plan investors, and thus a lower volume of pre-sales and sales,” says Peleg.
Other factors impacting the property market include restrictions on foreign investor activity and fund transfers, crackdowns by the Chinese government, and fears of proposed changes by the Labor government including limiting negative gearing to new rental dwellings and halving the CGT tax discount.
With the ALP likely to win the Federal election this year and implement the changes in the 2020 Budget, the impact on the housing market may last well into 2021.
While Sydney is likely to experience continued price reductions with an estimated annual reduction of 4-6 percent in 2019 and 2020, the Melbourne housing market will also see similar price reductions in the order of 4-7 percent.
Houses in the ACT present a relatively low level of risk for price reductions and are projected to deliver modest capital growth in the next couple of years.
The modest growth pace in the Queensland housing market will continue but will greatly vary across the state. Though Southeast Queensland enjoys good population growth and healthy demand for houses, areas such as Central QLD are still experiencing poor demand for dwellings, very high vacancy rates and a very soft property market. In South-East QLD, only modest capital growth for houses is expected in the short term.
While the South Australian economy has improved, a high-effective unemployment rate has led to a very low population growth and soft housing demand. The modest demand level is expected to result in only modest capital growth for houses. However, houses in popular areas, such as Adelaide Central and Hills carry a low level of risk and are projected to deliver solid long-term returns.
The Western Australia property market remains weak with negative capital growth for both houses and units. A very high level of risk is associated with units due to the combination of oversupply, lending restrictions and low demand, particularly in central Perth.
Tasmania leads the country in investment serviceability with its high median rental returns and low average dwelling price. However, its outstanding growth rate is already showing signs of price growth deceleration and is projected to significantly decelerate in 2019 and further into 2020.
Poor population growth in the Northern Territory has resulted in negative dwelling growth and a very soft property market. Combined with a relatively high median household income, this has resulted in the lowest price-to-income ratio in the country.
Though the NT still carries a high level of risk given its low population growth and below average economic indicators, improved housing affordability slightly reduces the risk associated with houses from medium-high to medium.