House prices set to fall in major markets as ‘Bank of Mum & Dad’ goes top 10
Latest research suggests the price of houses in Sydney and Melbourne will fall over the course of 2018. Expectations from SQM Research are that Sydney prices will decline by an average of as much as 4% and in Melbourne as much as 3%. However, despite the pressure on prices, data suggests that parents are making a much larger contribution to housing finance over the last year, entering the ‘top 10’ lender group fore the first time.
Based on falling auction clearance rates, actual prices achieved at auction and sale and a range of other data, SQM Research has revised its price expectations down sharply. For Sydney in particular, it records that:
“…on a nominal aggregate incomes to dwelling prices measure, the Sydney property market is approximately 45 per cent over-valued.”
Meanwhile, Fidelity Investments has weighed into the debate suggesting there are some key measures that demonstrate the Australian housing market is over-valued right now. The first is the extent of over-valuation of the Australian market and the second is how that over-valuation could be exposed, in order to create a reaction in the market. On the latter point, the Australian Financial Review reported Fidelity’s Australian Equity Fund head Paul Taylor as saying:
“…It’s hard to see a trigger that’s going to cause significant changes. In Australia we typically see prices rise, then the market goes nowhere for seven years.”
Importantly, as we have discussed in Statistics Count on previous occasions, there is only a limited relationship between the prices of existing dwellings and the rate of approvals of new dwellings. They are actually different things, but they come together around housing finance. If, as expected, housing finance becomes tighter over coming years, we may see the funds available for any housing activity decline, whether it be a new build, a purchase of an existing residence or a renovation.
The prospect of the negative impact of credit tightening appears to be on the RBA radar, as it must be for one of the major drivers of the Australian economy. Tightening is already occurring, despite the continuation of record low interest rates.
In part this can be observed in the apparent 25% increase in lending from the ‘Bank of Mum and Dad’. The Australian Financial Review reported in early May that loans from parents for the purpose of forming house deposits and meeting tougher lending standards rose sharply over the last year, approximating AUD20 billion of lending and representing the tenth largest pool of housing finance in the country, and larger than some of the well known lenders like ME Bank and AMP Bank.
The ‘Bank of Mum and Dad’ research, conducted by Digital Finance Analytics indicates that greater than 55% of first-home buyers receive some assistance from their families, with the average cash contribution being around AUD89,000.
Faltering house prices will make lending criteria tighter again, as will the behavior of major banks being exposed at the Banking Royal Commission, according to the RBA Governor Philip Lowe and the ANZ’s CEO Shayne Elliott.
Despite all of the pressures, such is the inertia of the housing market and its general weight in the Australian economy, firms such as SQM Research do not expect to see dramatic declines in the price of houses, because of low unemployment and population growth.