Signs of life emerging
in Victoria’s housing market
Associate Director, Property at ANZ
A lot has changed in the residential property market over the last few months. Daniel Gradwell, Associate Director, Property, at ANZ outlined the key economic and lending drivers underpinning the market in an article in our recent Q2 Residential Market Review.
RPM: How would you describe the state of Victoria’s residential property market and what factors have played into this?
DG: There are definitely signs of life emerging. We’ve had falling prices for 18 months and building approvals have followed suit. We are getting close to the turning point in the cycle, the bottom is in sight.
Some key economic and political factors have played into this. There’s been 2 interest rate cuts over the last couple of months. The federal election outcome has provided certainty regarding capital gains tax and negative gearing, and APRA’s reduction of the loan serviceability calculation has really turned sentiment around quite quickly.
Victoria’s population story remains very important. Fundamentally population growth is still incredibly strong – well above national growth rates and pretty much every other developed economy in the world.
That said, one of the biggest economic challenges in Australia currently is very weak wages growth. Because wages are weak, people are not spending as much money or simply don’t have it. Hence overall inflation remains weak. So with both of these measures being fairly weak, the RBA cut interest rates to stimulate activity and encourage investment which should absorb some of that spare wages capacity.
RPM: How much of an effect will regulatory easing have on demand?
DG: To briefly explain the changes, in 2014 APRA set a 7.25% serviceability buffer which means if you went to a bank for a loan it assumed you might one day have to pay 7.25% interest on that loan. It made sense at the time but now most people are paying a mortgage with an interest rate starting with a 3 (and if you’re not go and talk to your bank).
So it doesn’t make sense to have it fixed at 7.25%. Rather, it’s now set at the rate of interest plus a 2.5% buffer. For most borrowers it will bring you to about 5.75% up to 6% – which is a pretty material difference from 7.25%. For most borrowers this means their maximum borrowing capacity is about 10-15% higher.
However, it’s not all one way traffic for the borrower. As featured in your last report, the Comprehensive Credit Reporting (CCR) regime and changes to the Household Expenditure Measure (HEMs) gives banks have much better visibility around potential borrowers. Banks now have the ability to see an applicant’s loan situation at other financial institutions, for example.
While overall credit availability will increase due to APRA’s changes, some of it will be offset by these 2 measures. I think we’ve got pretty close to our ‘new normal’. There may be some tweaks but not the throwback to a couple of years ago.
RPM: To what extent has housing affordability improved?
DG: While prices have declined, one thing that gets lost in the discussion is housing affordability is still really stretched. While prices have come off about 11% from the peak, the challenge for first home buyers is still significant. While rate cuts are positive from a cash flow perspective for existing mortgage holders, it doesn’t really help people saving for a house right now. In fact, it hinders them as it impacts their current savings base.
Our report shows that for people on an average income, it now takes about 10 years to save for a 20% deposit, which is a material increase from the early 2000s. So that deposit hurdle has really worsened and lower interest rates are not helping.
RPM: What’s the outlook?
DG: We are at or very close to the bottom but there won’t be sharp rebound or V-shaped recovery, which is a good outcome.
Over the next couple of years we’ll see some stabilisation and moderate growth. Prices should rise in line with incomes which will help affordability. Stabilisation is much better than going through peaks and troughs.
ANZ’s half year results pack showed that on average, our mortgage borrowers can take out 30% less debt compared to 2015. It’s a big change and suggests that credit availability won’t go back to where it was.
On the construction side, it’s important to again highlight population growth. Last year 140,000 people came to Victoria and we need to be building about 60,000 dwellings each year to house them.
While there is still a lot of dwellings under construction, there will be a gap unless approvals start to pick up. If it does that now, there will be a more seamless transition when they are completed.