Australia’s property crunch bad but far from a disaster – so far

Now that a couple of banks have reported their half year results and real estate research firm CoreLogic has released its property price numbers, it is possible to get a better overall view of how Australia’s property price correction is going.

The good news is, that although annual price falls have been the worst since the Global Financial Crisis, the pace of falls is slowing and the worst of the downturn may be behind us.

Overall, Australian dwelling prices fell by 0.5% to -7.2% in the year to April, but the rate of decline has eased since December when values fell by 1.1%.

Of course, this could be a lull before further falls but CoreLogic head of research, Tim Lawless, doesn’t think so.

Worst could be behind us

He points to several indicators such as mortgage activity, auction clearance rates and improvements in the big markets of Sydney and Melbourne which to him imply that “housing market conditions may have moved through the worst of the downturn”.

“The improvement in the rate of decline is attributable to an easing in the market downturn across Sydney and Melbourne where values were previously falling much faster,” said Mr Lawless.

“In December last year, Sydney dwelling values were down -1.8%, with the pace of month-on-month falls progressively moderating back to -0.7% in April. Similarly, Melbourne values were down -1.5% in December, with the rate of decline improving to -0.6% in April.”

If we look at the capital cities, Sydney (-10.9%) and Melbourne (-10%) are now recording double-digit annual declines, followed by Perth (-8.3%) and Darwin (-7.1%).

Adding to the national figures are rises in Hobart (3.8%) and Canberra (2.5%).

RBA set to cut interest rates?

The really big question arising from this is will the combination of zero quarterly inflation and the continuing housing downturn be enough to push the Reserve Bank into cutting official interest rates on Tuesday?

Investors are having a bet each way with roughly half plumping for an interest rate cut after credit to buy Australian housing grew at the slowest annual pace on record in March.

Credit to owner-occupiers expanded at the slowest annual rate since August 2015 while at just 0.7%, the annual increase for investors was the weakest on record.

The RBA data showed that housing credit grew by just 0.25% in March after adjusting for seasonal patterns, leaving growth over the year at 3.99%, the lowest level since records began in August 1977.

There are many reasons for this downturn – not all of them indicating that the market is terrible – more that it has returned to a more normal state in which lenders are more careful and some investors are looking elsewhere for profits.

The big and forced switch away from interest-only to principal and interest loans by investors is another factor, as is the current Federal Election, in which Labor is proposing big changes to the property market including the removal of negative gearing for established housing and a reduction in capital gains tax deductions.

Also to blame is a sharp reduction in housing turnover as more people decide to stay where they are and resist the lure of multiple investment properties or frequent flipping of their residential home.

Bank results hold some clues

Some other interesting figures were buried in the detail of the ANZ and NAB bank profits.

Both reflected the weak demand for credit in their figures but broadly their profits and return on equity remained strong – if lower than before.

ANZ chief executive Shayne Elliott talked about home loan demand “slowing significantly” and there was some rise in mortgage loans in difficulty, although from a very low base.

“A lot of our customers are finding things a little bit tougher than they were a year ago or two years ago — more people are getting into hardship, more people are getting behind on their loans,” said Mr Elliott.

There is also a problem with negative equity – where the fall in property prices has effectively erased the deposit paid and left some property holders with a loan even after they have sold their property.

That situation applies to about five per cent of ANZ’s loan book and is mainly in states such as Western Australia and Queensland where the end of the mining boom has led to some savage price falls.

It is important to realise that not all of these loans are in trouble – it is not in the bank’s or the customer’s interest to sell out at a time of negative equity and nothing will happen if payments are made when due.

However, negative equity is an uncomfortable situation and could certainly be playing a part in weaker consumer spending due to a reduction in the wealth effect.

The ANZ situation was far from bad though – actual impaired assets for ANZ dropped 8% and the group’s loss rate dropped marginally.

Looking into the future, ANZ’s total provision charge against potential bad and doubtful debts also dropped, by 4%.

For NAB, the cost of impaired loans rose 20% to $449 million, but again that is from a very tiny base and doesn’t suggest much of a tsunami on the horizon.

Future is the big question

The big question for both the bank results and for property prices more generally is what happens in the future.

It is certainly possible that – like the CoreLogic figures suggest – the worst of the property downturn is behind us.

It is also possible that a WA / Queensland situation of negative equity and further property price falls awaits the other states, although without falling employment it is hard to see a catalyst at this stage.

Either way, the Reserve Bank board faces a tough choice at this Tuesday’s meeting – to cut rates by 0.25% to 1.25% and hope that some of that stimulus makes its way through to consumers in the form of lower bank interest rates or to hang on and wait.

I think they will wait but this board meeting is certainly “live’’ and the language of the decision either way will make for interesting reading.