"Dad still can’t work out how he got it so cheap. It’s worth almost as much today as when we bought it".
- Dale Kerrigan, from cult Australian Film, The Castle
With the median Melbourne house price down 10% from its peak, many Victorians will be envious of the value held by Darryl Kerrigan’s Strathmore home. And even more envious Sydneysiders with house prices down 15% in the largest city (according to Core Logic).
In our assessment, the probability of an extended collapse in Australian residential markets has been reduced, owing to three key recent events:
- The re-election of the Australian Liberal Party (ALP) and therefore the continuation of tax concessions for investors;
- The bank regulator easing serviceability requirements;
- An easier policy stance taken by the Reserve Bank of Australia (RBA).
Australian house prices have been falling for almost two years driven by a narrative of lower migration, reduced affordability, the threat of less favourable tax policy, pockets of oversupply, particularly in several apartment markets, and, most prominently, reduced credit availability following the Australian Royal Commission’s probe into bank lending practices.
The surprise re-election of the Liberal-National coalition is supportive for property investors in eliminating the threat of a capital gains tax and the removal of negative gearing policy. Last week bank regulator, APRA, proposed easing the tests banks must conduct when testing most borrowers’ ability to service their mortgages. Our base case is this proposal will increase the maximum amount the average borrower can access by at least 5%. Finally, in a range of recent speeches, the RBA has taken an appreciably easier tone which should flow through to lower mortgage rates.
Indeed, we are already seeing evidence of a recovery in auction clearance rates, a barometer of sentiment which has historically provided a good steer on pricing. While likely to be revised, a 62.6% success rate was recorded at auctions over the most recent weekend (not pictured).
NZ presents a foggy mirror image. A capital gains tax is now confined to the policy dustbin and mortgage rates have dipped lower. The Reserve Bank of New Zealand (RBNZ)’s bank capital proposal is expected to have an impact on mortgage pricing and potentially availability. An article in last weekend’s AFR under the headline RBNZ offers banks an olive branch on capital plans has led to commentary that the RBNZ may be softening its stance. We think this is true at the margin, but the commentary may be somewhat wishful as, in the most part, the RBNZ is simply reiterating its desire to engage with stakeholders.
Housing markets are drivers of consumption via the wealth effect, they impact bank profitability via loan growth and asset quality and are also a key driver for construction activity. The key point of this note is to say that we think the risk of a protracted decline in activity has lessened. However, as investors directly into the property sector, retirement villages, the banking sector and, indeed, the wider economy, we keep a watching brief.
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