The annual report produced by BIS Oxford Economics for QBE Lenders’ Mortgage Insurance says that the outlook for house and unit prices is likely to become more subdued over the next year or two. Many markets are now building too much stock, particularly units, after new dwelling starts peaked at a record 233,600 dwellings in 2015/16.
Restrictions on bank lending to investors are expected to be an increasingly prominent feature of the outlook for the market over 2017/18. This will most likely reduce investor purchaser activity and slow price growth. Owner occupier demand is also expected to weaken, as the emerging downturn in new dwelling commencements translates into lower building activity over 2017/18 and 2018/19 and negatively affects the economy.
Low affordability in Sydney and Melbourne should begin to impact on the potential for purchasers to take on a larger mortgages.
Demand and supply
Population growth has been strong. Net overseas migration inflows rose from 178,600 in 2014/15, to an estimated 215,000 in 2016/17. Slowing economic growth is expected to cause net overseas migration to ease to 175,000 by 2019/20. While lower than recent cycles, this figure is up compared to the long-term, 20-year trend of 171,100 per annum and is higher than most years through the 1990s and early 2000s. This will continue to fuel underlying demand for dwellings. New dwelling commencements rose to record levels in 2014/15 and 2015/16, and are still well above underlying demand. Only New South Wales, Victoria and Tasmania are expected to be in dwelling deficiency over the next three years. However, the excess stock in markets is more likely to be for units, which have accounted for the larger share of the upturn in new dwelling supply.
Lending environment
Low interest rates have helped drive up prices and investors have been a key source of demand. Successive initiatives by the financial regulators to dampen speculative investment has resulted in banks lowering loan-to-value ratios to investors, as well as charging higher interest rates to investors and for interest only lending. The latest restrictions on interest only loans are expected to cause a slowdown in investor lending over 2017/18. This is likely to have a negative effect on dwelling prices, with price falls expected in some cities.
Median prices
Median house price growth in Sydney and Melbourne is expected to weaken in 2017/18 due to lower investor activity in the market. This is expected to have a greater affect in Sydney, given its greater recent influence from investors. The emerging momentum in house price growth in Canberra and Hobart is forecast to continue in 2017/18. Modest house price rises are expected in Brisbane and Adelaide; with these markets being dampened by weak local economic conditions. The downturns
in Perth and Darwin are forecast to bottom out in 2017/18 although any recovery is likely to be drawn out. Unit price growth is forecast to underperform house price growth. A disproportionately higher number of units being built in most markets will result in an excess supply in units. Restrictions on investor lending will also have a negative effect, given units are more favoured by investors.Affordability
While the demand and supply balance is important in determining pressure on prices and whether rents rise or fall, there is an upper limit on how much of a household’s income can be spent on mortgage repayments. As it becomes more difficult to service a mortgage on a property, further price growth becomes less possible unless incomes rise or interest rates reduce by a sufficient enough margin to make purchasing more affordable.
Affordability has deteriorated considerably in Sydney and Melbourne since 2012/13 due to strong house price growth. The ratio of mortgage repayments on a median priced house to average household disposable income is 39.7% in Sydney and 36.2% in Melbourne at June 2017. This is close to each city’s previous highs, indicating limited scope for continuing solid price growth.
Affordability has also become more difficult in Adelaide, Hobart and Canberra over the past 12 months, again due to rising prices.
Nevertheless, affordability is at levels similar to that seen in the early 2000s. In contrast, price reductions in Perth and Darwin have made purchasing a dwelling more affordable. Brisbane has remained at around the mid‑point of its historical range.
Low affordability in Sydney and Melbourne should begin to impact on the potential for purchasers to take on a larger mortgage and bid up prices too much further. Moreover, it makes these markets vulnerable to rises in interest rates, as the most recent purchasers may have stretched themselves to buy their dwelling.
Notably, the better affordability in other cities is having a limited impact on prices. Weaker economic conditions and little growth in household incomes has made buyers more reluctant to overcommit on a loan. The better relative affordability should mitigate some of the downward pressure on prices in oversupplied markets and in resource‑sector exposed markets such as Perth, Darwin and to a lesser extent Brisbane.
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