What does the property prices slump mean?

Ross Greenwood speaks to ANZ (ASX:ANZ) Senior Economist Daniel Gradwell about why he thinks we haven’t seen the end of the property price slump yet.

What does the property prices slump mean?

Ross Greenwood: Great to have your company here on Money News going right around Australia. Well, people are nervous about property prices, particularly in the big capital cities. There’s concerns today about apartment valuations in Brisbane, of course with a lot of stock duty that market over the next few months. Then there’s also falls in Melbourne and Sydney property prices both apartments and also in houses.

Now, as you’ve seen already, depending on where you live it’s more or less, in some areas of Sydney, say for example, prices have already fallen between 10 and 13%, particularly around some of those inner cities to the south and to the west in those inner suburban regions. In Melbourne, for example, some the prices are down between 4 and 6%, but on average what you’re seeing is in Melbourne, for example, the prices are down, probably about 3%, 3.5% maybe.

In Sydney, they’re down a little bit more, about 4.5% on average, across the board, but as I say, it’s different depending on where you are. Well, today there’s been a warning, which has come from two sources, one is Macquarie but the other one is the ANZ, and this is suggesting, that really that the house prices are going to continue to fall. In other words, if you’re worried now about the valuations well, get set because we’re really, perhaps, even only halfway, maybe not even quite halfway through the falls in these markets.

Now, the thing is there’s no, if you like, sudden fall off a cliff, this has been a little more orderly. It’s been a little more subdued as they fallen as distinct from a crash. Now, one of those people who’s done some of this work on the housing market around Australia is Daniel Gradwell, who’s a senior economist at the ANZ, and one who believes that we are really about only halfway through this cycle down.

Many thanks for your time, Daniel.

Interview with: Daniel Gradwell, Senior Economist, ANZ Bank

Daniel Gradwell: Thanks for having me, Ross.

Ross Greenwood: Just in regards to the way in which you work at the timing of all of this. I know each suburban area, each city, they’re all fundamentally working by different dynamics, but how do you try and assess this yourself?

Daniel Gradwell: Exactly, that’s one of the key points that there isn’t just one Australian housing market. Every state, every city, and then within that every suburb has its own set of unique drivers as well. So, for us, we’re looking the headline levels across each of the capital cities. What we are seeing recently is that the cycle’s quite different to previous episodes where prices have fallen.

In previous periods in Australia we’ve seen falling prices has been result of either rise in interest rates or interest rates sitting at very high level. Clearly, that’s not the case this time round. Interest rates have been sitting at these very low levels for an extended period of time now.

Instead we think that the current slowdown is being driven by the tightening availability of credit. That comes back to some of the macroprudential policy changes implemented by the regulator over the last couple of years. We’ve seen a number of banks and other lending institutions have tightened up their credit policies. It’s making it harder for people to access the funding and for people that can borrow, it’s limiting the amount that they can afford to repay as well.

Ross Greenwood: In other words, people just can’t go out there with their ears pinned back and go and bid up very heavily at an auction, because if they do, they can be a little fearful maybe that their bank or the financier is not necessarily going to be as willing to take on that loan as they once might have been.

Daniel Gradwell: Exactly, and it’s important to know that this isn’t just a new one off shock. If we’re thinking about ANZ’s point of view, for example, we’ve been making incremental changes to our lending policies for the best part of three years now. The point is that those incremental changes add up and I think that’s what we’re seeing now with the markets across Sydney and Melbourne more recently have seen some of that demand retreat and that’s putting some downward pressure on prices.

Ross Greenwood: Given the fact you’ve said that the Melbourne prices on average from their peaks are down about 3.5% and across Sydney around 4.5%, so that’s from the peaks, and as I said, there are different suburbs in different areas where the valuations might have fallen even more heavily. What you’re saying is you expect these markets to continue to fall, because of those economic drives you have spoken about, because of the tightening of credit, out into next year.

How do you work out just where it might all end, because ultimately, if there’s nothing or not enough being built, there’s got to be the supply shortage that we’ve seen before, which squeezes up prices eventually.

Daniel Gradwell: Exactly, there’s a lot of stories here. I might start with the negatives, and there is two factors that we are looking at. Over the near term we think this tightening in credit is going to continue mostly through to the end of this year. We’ve got another six months likely. We will see some further changes that will make it harder and harder for people to access funds.

Then the story for 2019, we think, is going to be around rising interest rates. If we look past the housing sector at the moment, the Australian economy looks like it’s actually in pretty good shape. We’re still creating jobs at a good pace, wages are improving, and we think that better inflationary story is going to lead to the RBA hiking interest rates in the second half of 2019.

So, in turn, that’s going to put some downward pressure on house prices again, because that’s going to worsen the affordability story for a lot of people, especially across the Sydney and Melbourne markets.

Ross Greenwood: I was going to say, one thing about this observation you’ve made, is you don’t see the markets falling off a cliff as such, you see this ongoing retraction prices, which you indicate says, in both Sydney and Melbourne, you see the prices fall around 10% from peak to trough. Sydney fairing slightly worse than its southern peer, and that’s an interesting point, you’re not really seeing a dramatic collapse in the prices or the evaluations you’re seeing them come off.

Daniel Gradwell: That’s right and I think that comes back to what you opened with, we see it, it’s more of subdued correction this time around. So even that we’re talking about 10% fall, peak to trough, in Sydney and Melbourne, even if that plays out by the end of next year, the prices in Sydney, for example, are still going to be about 50% higher than they were in 2012.

So it is unwinding some of the recent growth, but certainly we’re not seeing a much sharper collapse, which is probably the outcome that we would have arrived at if we’d continued to say that double digit price growth for another couple of years.

Ross Greenwood: Okay, and then opportunities for first home buyers appear to be opening up. Now, Victoria and New South Wales have also given concessions in regards stamp duty to first home buyers, which seems to have picked up a bit of demand there. There’s even some signs that even that is starting to come off as people might be sitting on their hands and waiting to see whether there might even be cheaper options for them down the track.

Daniel Gradwell: Exactly, we have seen first time buyers really coming back into the market as you say in Sydney and Melbourne, in response to those stamp duty changes, that has started to roll over a little bit now and I think that consistence with the view that we’ve had right since the start of that announcement. Where we’ve said that your essentially just injecting more money into the housing market. It’s not a long-term solution to improve affordability for those first home buyers.

Having said that, the good news from the slow down in prices that we are seeing at the moment, is that actually does make your affordability story for first time buyers look a little bit better.

Ross Greenwood: It’s going to be interesting to say exactly also what takes place with the rental markets, particularly places such as Brisbane, when much of that new stock does hit the market over the next 12 months or so.

Daniel Gradwell, is as a senior economist at the ANZ. That is really the heartbeat of Australia’s economy over the past five years. Other parts of the economy, of course, now doing much much better and that’s why the ANZ is indicating it still believes interest rate could rise. It’s now suggesting by August next year.

Daniel Gradwell, we appreciate your time in the program this evening.

Daniel Gradwell: Thanks, Ross, always a pleasure.

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