19 April 2021
1300 794 893
The next 12 months will look very different to previous years.

2018 outlook: No lifeline for the property market

Tim Lawless
29 January 2018

Australia’s housing market performance is likely to deliver quite a different result in 2018 relative to previous years as we see lower to negative growth rates across previously strong markets, more cautious buyers, and regulator vigilance around credit standards and investor-generated activity. 

While a gradual transition, the weaker housing market conditions are to continue throughout 2018.  From a macro perspective, in late 2016 we saw a noticeable peak in the pace of capital gains across Australia with national dwelling values rising at the rolling quarterly pace of 3.7%.  2017 then saw growth rates and transactional activity gradually lose steam, with national month-on-month capital gains slowing to 0% in October and November while Sydney values started to edge lower from September.

An examination of the history of previous housing cycles gives us some clues about what we can expect. 

Namely, the most recent national housing downturn occurred for a brief period between September 2015 and March 2016 when dwelling values nationally fell 1%.  This temporary fall was due largely to tighter credit conditions as a result of the first round of macro prudential changes announced by APRA in December 2014. However, the market rebounded on the back of a 50 basis point reduction in interest rates and renewed availability of investment credit once lenders had comprehensively achieved the APRA mandate of less than 10% growth in investment lending. 

The previous downturn in 2010 was much more organic. National dwelling values fell by 6.5% between mid-2010 and February 2012, ranging from a 10.6% fall in Brisbane to a 3.7% decline in Sydney.  This downturn was due to a removal of first home buyer stimulus coupled with the RBA lifting interest rates from generational lows following the financial crisis.  Recent downturns were also recorded in 2008 when national dwelling values fell 7.9% and in 2004 when values edged 2.6% lower nationally.

While conditions were very different across each of these periods of a falling dwelling values environment, the lesson here is that the housing market is cyclical, with its cycles generally heavily influenced by either monetary policy (rising/falling interest rates), policy changes (for example the latest rounds of macroprudential changes or shifts in taxation policy) or by economic shocks such as the global financial crisis.

The primary driver for a new phase in the current housing cycle is tighter credit policies.  The first round of macroprudential measures introduced by APRA in December 2014 resulted in a temporary slowdown in the market, however a loosening of credit availability and lower mortgage rates threw a lifeline to the housing market.  We don’t expect to see a lifeline thrown to the residential property market in 2018. 

Credit policies are likely to remain tight, with regulators keeping a watchful eye out for a rebound in investment credit growth or a reversal in the trend towards fewer mortgages with a loan to valuation ratio of more than 80%.

Interest rates will stay on hold in 2018.  If higher interest took effect, rates would stifle household consumption and business investment and could cause financial distress amongst a highly indebted household sector, however rates aren’t likely to fall due to concerns of refueling the controlled slowdown in the housing market.

National dwelling values will fall further in 2018, driven lower by falls across Sydney and to a lesser extent, Melbourne.  After values surged 75% higher over Sydney’s growth cycle and 59% higher across Melbourne, it’s rational to expect some slippage in dwelling values across these cities.  The remaining capital cities are likely to see more positive conditions. 

The pace of capital gains has been sustainable across Brisbane and considering the improving labour market and rising migration rates, we could potentially see Brisbane record a higher rate of growth in 2018 compared with 2017.  New investment-grade unit developments around key inner city precincts are likely to be the weak link across the Brisbane housing market.

Adelaide’s housing market has also recorded a sustainable pace of capital gains over the past five years, however economic conditions and demographic trends aren’t as strong as Brisbane’s.  The second half of 2017 saw the pace of capital gains easing across Adelaide which may continue into 2018, although we would be surprised if values trended lower over the year.

The Perth housing market is moving through the bottom of its cycle, with dwelling values edging slightly higher towards the end of 2017 after falling 11% since values peaked in 2014.  The recovery phase is likely to be a gradual one for Perth, with a large amount of detached housing supply around the outer fringes of the metro area likely to weigh down the headline figures.    

Hobart’s housing market is experiencing dramatic growth that is unlikely to be sustained.  Dwelling values were up approximately 11% in 2017 which came after a long period of sedate housing market conditions.  The trend rate of growth had shown signs of slowing over the final quarter of 2017 and dwelling values are likely to continue rising but probably not at a double digit annual pace. 

The Darwin housing market is continuing to move through a material correction, with dwelling values down 21% since peaking in early 2014.  Migration rates are yet to see a turnaround while simultaneously, annual jobs growth is negative which suggests the market will remain weak until we see a turnaround in the local economy.  The final quarter of 2017 showed no indication that the downwards trend in housing values was turning around, however transactional volumes have started to edge higher and rental yields are amongst the highest of any capital city which may be attractive to investors and owner occupiers.

Canberra’s housing market has shown reasonably strong growth conditions, however there were signs in late 2017 that growth rates were starting to ease as credit conditions tightened.  Despite relatively high housing prices, the Canberra housing market remains affordable compared with larger capital cities, thanks to higher household incomes.  Rental yields remain well above the national average suggesting rents and dwelling values are reasonably balanced.

Australia’s regional housing markets can loosely be divided amongst satellite cities adjacent to the major capitals, mining intensive areas, regional lifestyle markets and rural/agricultural markets. 

While agricultural areas are more dependent on weather events and global demand for farming products, mining regions have generally shown an improving trend as values bottom out after a long and substantial decline.  Many of the worst hit mining areas are now seeing inventory levels reduce and transaction numbers rise which is supporting a gradual improvement in dwelling values.  The road to recovery is likely to be a long one for many of these regions however, high commodity prices, a lower Australian dollar and improving levels of investment should support a strengthening trend in these areas. 

On the other hand, lifestyle markets have benefitted from the improved wealth positions of property owners in Sydney and Melbourne; this has been the catalyst for healthier tourism trends.  After dwelling values across most lifestyle markets trended lower after 2008, these regions are generally recording strong demand and rising values which is likely to continue in 2018.

Satellite cities such as Newcastle, Geelong and Wollongong have started to outperform their capital city counterparts thanks to better affordability, improved transport linkages and a spillover of demand from the metro areas of the capital cities.  While growth probably won’t be as strong in 2018, there is a likelihood that these regional markets will continue to show a higher rate of capital gain relative to the adjacent capital cities thanks to the diverse buyer demand and better affordability.  Similarly in Queensland, the Gold and Sunshine Coasts have both recorded stronger rates of annual growth than Brisbane.  The growth in these markets is not being driven by a spillover from Brisbane but rather growing demand from interstate buyers for properties to both live and invest in.

Overall, 2018 is set to be a quieter year for the property market.  Previous downturns have seen the annual number of sales fall by around 20-25% from peak to trough; considering the cyclical peak in transactional activity occurred over the twelve months ending August 2015, year on year transactional activity is already 13.2% lower than the most recent peak. 

Industries reliant on housing turnover, such as real estate agencies, valuers, brokers and peripheral services such as pest and building inspectors and conveyancers could be in for a leaner year in some markets.  Businesses seeking to maintain their revenue uplift will need to work smarter and look for new ways to improve their overall market share.

With sales transactions are already down nationally, some markets are bucking the trend.  Year on year sales activity increased across four of the eight capital cities in 2017, including Perth, Darwin, Adelaide and Hobart where demand is generally rising from a lower base. 

While our outlook for next year may not be all that uplifting, relative to 2017, there are plenty of factors that will work to keep a floor under housing demand.

Although credit polices are likely to remain tight, mortgage rates will remain low in 2018, providing a positive lending environment for those who are able to secure credit. 

Regulators and policy makers will be encouraging households who hold high levels of debt to reduce their exposure while rates remain low.  Household debt levels are at record highs, a factor which has been called out by the Reserve Bank repeatedly, as well as international institutions such as the OECD, BIS and IMF.  With interest rates remaining low, the opportunity for households to pay down debt could come at the expense of broader spending on retail and discretionary items.

Prospective borrowers, particularly investors, may find securing a mortgage won’t get any easier in 2018, with APRA restrictions on both investment related credit growth and interest only loan settlements remaining in place.  Additionally, lenders are likely to be more cautious around lending in higher risk areas such as inner city apartment markets where current and pending supply pipelines are substantial.

Labour markets have tightened, with a new trend towards more full-time jobs rather than part-time.  Jobs growth is becoming broader based, ramping up in the previously weak states of Queensland, Western Australia and South Australia.  A firmer labour market will help to support consumer confidence and mortgage serviceability and potentially place some upwards pressure on the near-to record low levels of wages growth. 

Migration rates have been trending higher which may continue into 2018, providing a driver for housing demand.   Overseas migration into Victoria and New South Wales reached record highs in 2018 and interstate migration has been on a clear upwards trajectory across Victoria, Queensland, Tasmania and the ACT. 

In summary, CoreLogic is expecting softer housing market conditions through 2018, driven by a continuation of the slowdown that is clearly evident across Sydney and to a lesser extent, Melbourne.  While the headline figures are set to weaken, below the surface the individual cities and regions of Australia will continue to operate under their own distinct cycles which are subject to more localised forces of demand and supply. 

Click here to subscribe to the Switzer TV channel on YouTube and keep up to date with all of our shows.

Subscribe to our Switzer Daily newsletter and get our latest articles, videos and podcasts straight to your inbox!

Get the latest financial, business, and political expert commentary delivered to your inbox.

When you sign up, we will never give away or sell or barter or trade your email address.

And you can unsubscribe at any time!
1300 794 893
© 2006-2021 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
homeshopping-cartphoneenvelopedollargraduation-cap linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram