Since the second half of 2017, the major risks associated with the residential property market have significantly increased and will continue to do so into 2019.
This is according to RiskWise Property Research CEO Doron Peleg who said tighter lending standards, the results of the Royal Commission, the fear of the 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 residential property not only next year but into 2020.
Mr Peleg said unless demand for dwellings was boosted via intervention from the regulator or state and federal governments to expect ‘a tough couple of years for most, but not all, of the property market in Australia’.
RiskWise recently released its Quarterly Risks & Opportunity Report which based its findings on major assumptions about the months to come, being that credit standards and restrictions would be either tightened further or remain at the current level, Labor would introduce changes to negative gearing and capital gains tax in the 2020 Budget after winning the upcoming Federal election and the RBA would not increase interest rates at least until the second half of 2020, but more likely 2021.
“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,” he said.
“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.”
He said credit restrictions had seen a reduction in the volume of loans of around 10 per cent and borrowing capacity of around 20 per cent and this had a direct impact on dwelling prices, due to the smaller number of qualified buyers as well as those buyers having a smaller budget.
While, APRA has recently removed the 30 per cent interest-only lending cap, this 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.
In addition, buyer sentiment had been hit as residential property, particularly in Sydney and Melbourne, was seen as a depreciating asset. While reports regarding the impact focus mainly on Sydney and Melbourne, many areas in Western Australian and the Northern Territory had been particularly impacted due to already weakened housing markets following the end of the mining boom.
"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," he said.
"In addition, restrictions on foreign investor activity and fund transfers, and crackdowns by the Chinese government means they are less prevalent in the property market.
"Meanwhile, RiskWise has already demonstrated that fears of the proposed changes by the Labor government (to limit negative gearing to new rental dwellings and to halve the CGT tax discount from the current 50 per cent to 25 per cent) have already impacted the market.
"Price reductions accelerated over the last quarter following the day of the Liberal leadership spill of Malcom Turnbull by Scott Morrison on August 24. In addition, auction clearance rates have dropped below 50 per cent in both Sydney and Melbourne."
He said with the next Federal election likely to take place in May 2019 and the probability that the ALP will win and implement the changes in the 2020 Budget, the impact on the housing market was likely to last well into 2021.
"The risk of price reductions should remain very high at least until the second half of 2020. This adds uncertainty and impacts buyer sentiment. Further, strong reductions in investor activity and sentiment indicates that investors are now ‘timing the market’ – they only have to wait for the election results and the implementation of the taxation policy, and once a new low equilibrium point is reached can act.
"Investors now have a very clear notification well in advance regarding potential increases to out-of-pocket expenses due to the taxation changes, the equivalent to a significant and sudden interest rate increase of 1.15 per cent in the Sydney unit market."
Mr Peleg said there were a number of high-risk areas experiencing unit oversupply, while many unit building approvals were also suffering poor and often negative capital growth with Brisbane CBD and Perth prime examples. This has also significantly increased the settlement risk for off-the-plan units, particularly in large unit blocks.
"More conservative risk-management practices by both construction lenders and developers are likely to result in a significant reduction of new units, at least until the end of 2019," he said.
"It is very likely that dwelling commencements will continue trending lower until there is clarity regarding the actual implementation of the taxation changes as well as absorption of the large stock of units. These are major factors in the industry, particularly in relation to presales and sales as well as construction loans. With a large number of development approvals not proceeding to construction commencement, this area should be closely monitored.
"Although there is a reduction in dwelling commencements, the reduction in the current stock will take time, particularly in areas with very high levels of supply of rental properties that only target investors."
Overall, Sydney is likely to experience continued price reductions with an estimated annual reduction of 4-6 per cent in each of the years 2019 and 2020. Some regional areas, however, are likely to hold well.
The prospects for the Melbourne housing market are negative with price reductions in the order of 4-7 per cent for each of the years 2019 and 2020. However, a number of regional areas, in particular Geelong, present only a low level of risk and are projected to deliver solid capital growth both in the short and long term.
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. Houses are still enjoying, and likely to continue to do so, healthy capital growth while the unit market remains reasonable, although these do carry a higher degree of risk to deliver negative growth in the short term, particularly due to their reliance on investor activity.
The modest growth pace in the Queensland housing market will continue although greatly vary across the state. Southeast Queensland enjoys good population growth and healthy demand for houses. Other areas, such as Central QLD, are still experiencing poor demand for dwellings, very high vacancy rates and a very soft property market. Under normal conditions, it is expected that houses in South-East QLD will enjoy strong capital growth. However, a combination of credit restrictions and potential taxation changes take a lot of energy from this market. Therefore, in South-East QLD, only modest capital growth for houses is expected in the short term. A large number of areas, particularly inner Brisbane, are experiencing a very weak unit market often accompanied by oversupply and are likely to continue to do so for the foreseeable future.
The South Australian economy has shown some improvement however it still has a high-effective unemployment rate which leads to a very low population growth and soft housing demand. Therefore, due to the modest demand level, only modest capital growth is forecast 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 return. Many areas are experiencing weakness in the unit market and significant oversupply, Adelaide CBD in particular, and this is projected to continue.
In Western Australia, the property market remains weak with negative capital growth for both houses and units. Units carry a very high level of risk 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.
The Northern Territory experienced poor population growth resulting in negative dwelling growth and a very soft property market. This, combined with a relatively high median household income, have resulted in the lowest price-to-income ratio in the country. With low population growth and below average economic indicators, the NT still carries a high level of risk. However, improved housing affordability slightly reduces the risk associated with houses from medium-high to medium. It is likely that houses in the NT will deliver poor or negative capital growth in the short term although the risk is somewhat mitigated by the fact that more than 68 per cent are owner-occupied. The current supply of units, while not considered high in relation to population growth, still exceeds the low demand for them, particularly in areas with a high concentration of off-the-plan units.