Housing closer to the bottom, but the boom's not back

A three-pronged boost to the mortgage market over the last 10 days has sparked predictions the housing downturn in Sydney and Melbourne could reach its low point later this year.

If that ends up being the case, many home owners would not doubt breathe a sigh of relief. For prospective buyers, however, the message remains one of caution. After the sharp fall in prices recently, don't expect a return to the old days of quickly rising prices, even if things do start to stabilise soon.

To recap: last week we learnt that interest rates will almost certainly fall next month; banks will likely allow customers to borrow larger amounts; and negative gearing and capital gains tax concessions will remain untouched due to the election result.

Some experts believe this triple whammy should put a floor under house prices over the coming months, by encouraging more demand from buyers. The government's plan to guarantee some first home buyers' mortgages from early next year should also help.


CoreLogic research analyst Cameron Kusher had previously been forecasting prices would fall by about 20 per cent from peak to trough, but he now says the falls could end up being a bit smaller than this

"Potentially, we could see the market bottom now by the end of this year," Kusher says.

He says the peak-to-trough fall in prices may instead end up being 17 to 18 per cent in Sydney, and 15 to 16 per cent in Melbourne, which are still substantial declines.

Time will tell if these forecasts are right, but there are indeed reasons to think the market could be closer to stabilising in the second half of 2019 (the rate of price decline has already slowed in recent months, and auction clearance rates are edging higher).

First, the election result increased optimism towards housing. How much Labor's policies would have really affected housing was hotly contested, but the result removed the uncertainty around negative gearing and capital gains tax, which was hanging over the market.

Second, it's now clear interest rates are likely to fall even lower, after the Reserve Bank last week all but confirmed it will cut rates next month. History suggests cheaper debt tends to push house prices higher.



And finally, the Australian Prudential Regulation Authority (APRA) last week flagged a change that will have the impact of boosting a customer's borrowing capacity.

Previously, APRA had a rule requiring banks assess all prospective customers at an interest rate of whatever was higher of 7 per cent, or their current rate plus a 2 per cent "buffer". Most banks assess customers at 7.25 per cent, to be safe.

APRA now plans to let banks test their customers at their current rate plus a 2.5 per cent "buffer," which is equal to about 6.3 per cent for a competitively-priced mortgage. The regulator will consult on the idea over the next month or so, but it's hard to see much resistance from the banks.


The bottom line is that an average family in a capital city may see their borrowing capacity rise by about $100,000 to $1.2 million, Citi analysts predict. If the RBA does cut rates, the maximum amount of credit at this family's disposal would lift even further.

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This should support the mortgage market, but there are convincing reasons to think we're not heading back to the old days of easy credit, or booming house prices.

For one, banks will continue to pore over borrowers' expenses more carefully than they did in the past. Moreover, they will not roll back a bunch of other conservative policies, such as caps on how much overall debt a customer can have, relative to their income.

CoreLogic's Kusher says it will still be harder to get a mortgage than it was five years ago.

AMP Capital Investors chief economist Shane Oliver has also revised his forecasts and now believes house prices may now stabilise later this year, but he also says they won't take off.

"Given still high house price to income ratios and poor affordability, still very high debt levels, tighter lending standards and rising unemployment a quick return to boom time conditions is most unlikely," Oliver says.

The housing cycle may be getting closer to its bottom. But it is by no means a case of back to the races.