By business reporter Michael Janda
Updated 19 Jun 2018, 9:09pm
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There are few topics more contentious amongst economists, and at barbeques, than the direction of Australian home prices.
But 2018 has marked a dramatic shift in that discussion, at least amongst the economists and likely at the barbeques as well.
In the years between 2012 and 2017, most of the conversation centred on how high home prices could rise.
Late last year discussion heated up on whether they might fall.
Now that all the major indices are showing falling prices, with leading indicators like housing finance and auction clearance rates showing no signs of a bounce, 2018 has moved on to a discussion of how far house prices will fall.
The latest official Bureau of Statistics figures show residential property prices fell 0.7 per cent in the March quarter, led by the first quarterly price decline in Melbourne for five-and-a-half years and the first annual slide in Sydney in six years.
Nationally, property prices are still up 2 per cent on the March quarter last year but, judging by more current CoreLogic figures, this is likely to tip into declines within the next quarter or two.
Housing outlook for 2018
Australia's once booming east coast markets started weakening in the second half of 2017, and most analysts tip more of the same.
Economists and property analysts are scrambling to adjust their forecasts to catch up with the reality around them.
SQM's Louis Christopher threw in the towel on his more optimistic forecasts last month, although the revised 4 per cent 2018 slide for Sydney and up to 3 per cent for Melbourne still look on the rosier side given recent data.
ANZ was another institution that expected price falls, if any, to be very modest and short-lived.
That has changed with an updated forecast released on Tuesday that predicts Sydney and Melbourne prices may decline about 10 per cent from peak to trough, with smaller falls expected in most other cities except Canberra and Adelaide, both tipped to outperform.
Former ANZ economist, now at Macquarie, Justin Fabo, on Monday released his own note on home prices, also forecasting a peak-to-trough fall in Sydney of about 10 per cent, leading national falls of between 4-6 per cent over the next couple of years.
The note, co-authored with Ric Deverell, pointed out that, despite falling 4.5 per cent since the peak last year, Sydney home prices are still up 66 per cent on their last trough in 2012.
It also noted that Australia is no stranger to moderate home price falls after previous booms, with half a dozen other such corrections since 1980.
Macquarie's economists noted that the biggest of these was an 8 per cent slide and most of the corrections had followed a rise in interest rates, something that is unlikely "anytime soon".
Have we passed peak 'credit crunch'?
However, not all analysts remain as sanguine about the fall in home prices.
The economists and banking analysts at UBS have been forecasting similar moderate falls in Australian home prices to Macquarie and ANZ.
New home buyers' credit crunch
Home buyers could see their borrowing capacity cut by as much as 40pc due to reforms likely to be driven by the Hayne Royal Commission
But they see the potential for much more severe falls due to the home loan restrictions being imposed by the banking regulator APRA, and amid the fallout from the financial services royal commission, which effectively accused the major banks of breaching responsible lending laws by lax testing of borrowers' ability to repay their home loans.
On Monday, those UBS analysts put out a note warning that limits on debt-to-income ratios (DTIs) would further constrain mortgage lending and, therefore, home prices.
UBS said APRA is looking at limiting the proportion of loans going to borrowers who have more than six times their annual income in debts.
Given that the typical Sydney home is currently nine times the median income, while Melbourne is at eight, UBS argued such a limit would almost inevitably put further downward pressure on home prices as many potential buyers would not be eligible for a loan that was large enough.
ANZ's analysts agree that it is tighter loan restrictions that are pushing home prices down.
"We believe the current cycle is being driven by tightening credit availability, rather than rising interest rates, which have shaped previous cycles," they wrote.
"Investors in particular are finding it harder to access credit, given ongoing policy changes across the lenders.
"We find that if changes to lending policies cause a 10-15 per cent decline in new loan sizes, this implies a 5-10 per cent year-on-year fall in prices."
However, the bank argues that prices would actually be rising if it was not for the lending crackdown, due to strong employment and economic growth and continued low interest rates.
Why housing should worry us
It's misguided to be certain that the Australian housing market will crash, but folly to be sure it won't, writes Michael Janda.
Macquarie's analysts argue that most of the credit tightening that is likely to occur already did between 2015-17.
"We don't see strong incentives for banks to noticeably restrict housing credit against a relatively positive macro [economic] backdrop and given that a large share of their profits (and balance sheets) rely on housing lending," they observed.
In fact, given that home prices have been declining at a moderate 3 per cent annualised rate nationally and 4 per cent in Sydney, Macquarie believes this is a healthy correction.
"While market corrections are always worrisome for some, we think the regulators would be largely delighted with the orderly cooling of housing markets so far," they noted.
Gotta have faith
But Macquarie's analysts do still see one major risk that could transform a moderate correction into a more severe price fall.
Economics of a housing bubble
Bubbles are a confidence game that relies on a powerful narrative capturing people's imagination and persuading them their turn will be different, writes Timo Henckel from ANU.
"If households were to lose faith in housing markets, given current elevated prices (particularly in Sydney), the demand for credit (particularly by investors) could fall more than we currently expect," they warned.
"The main thing to fear for Australian housing is fear itself."
For those who have been warning of an Australian housing bubble (myself included) this is a clear sign we are in one.
If the market was not irrationally overvalued, there would be plenty of cashed-up value investors, not to mention would-be owner-occupiers, to step in and buy as prices fell.
But if the main thing holding up demand and prices for expensive homes in Sydney and Melbourne is a belief that a large price fall is not possible, then you are firmly in bubble territory.
Topics: housing-industry, economic-trends, australia