Are falling house prices a sign the property boom is over?

It has taken a while but after the mother of all property booms, Australians are finally getting used to falling prices.

Housing prices have slipped for many Australian capital cities in the past quarter, as tighter lending conditions and falling investment levels continue to affect the market.

The biggest markets of Sydney (-0.9 per cent) and Melbourne (-1.4 per cent) fell the most in the last quarter.

On a national level, home prices fell 0.2 per cent in June, which marks the ninth consecutive month-on-month drop, according to the latest report from property industry analysts CoreLogic.

National property prices peaked in September last year and have since fallen 1.3 per cent to a median of A$556,384.

It is important not to exaggerate the falls though – national property prices are still 32.4 per cent higher compared to five years ago.

Investors must adjust to new landscape

So what does the slipping property market mean to individual investors, for both property and shares?

Well, for recent home buyers – either investors or owner occupiers – they may well be in a situation of negative equity.

That means their property is worth less than when they bought it – considerably less if you include stamp duty and other purchase and loan costs that are front-end loaded and often entail still more debt.

That is fine if it is a long term investment but not so flash for “flippers’’ who want to ride a rising market and flip the property for a quick profit.

Worsening the pressure, several lenders have been raising their home loan interest rates despite no upwards movement in official interest rates due to higher offshore funding costs.

The negative equity effect has been stronger in the big cities of Sydney and Melbourne and also whether it was in the “most expensive” or “least expensive” end of the capital city market.

Nationally prices at the high-end fell 3.6 per cent, but prices rose 1.4 per cent at the lower-end as a flood of frustrated first home buyers finally started to buy in.

Those differences were much more pronounced in Sydney and Melbourne – with their priciest homes falling 7.3 per cent and the cheapest rising 2.5 per cent.

Mortgage stress on the rise

Unsurprisingly, mortgage stress is on the rise, with new research from Digital Finance Analytics finding it has reached a record high of almost a third of home loan customers.

There are now 977,000 households, or 30.3 per cent of borrowers, earning too little to keep up with repayments and meet living costs, the research house said.

“Household debt continues to climb to new record levels — mortgage lending is still growing at an unsustainable two-to-three times income,” said Digital Finance Analytics principal Martin North.

Loan defaults increasing

For share market investors, those numbers are a bit of a warning that the old days of banks enjoying ever falling loan defaults may well be over.

Indeed, Mr North said banks could be facing bad loan write-offs of A$927 million in Victoria from potential owner occupier defaults or forced sales in the next year, and A$1.3 billion in New South Wales.

For share investors the usual rules of buying the banks that are most aggressive about growing their loan books has now been stood on its head.

Loan quality more important than loan growth

UBS analyst Jon Mott says that, with the property market cooling, stock market investors are no longer attracted to lenders that are increasing their exposure to investment property.

Mr Mott said that ANZ, the Commonwealth Bank and National Australia Bank have pulled back from the investment property market but Westpac and Macquarie are being “aggressive” in the sector.

“For many years, the market reacted positively to banks that grew their lending books above (the average growth rate across the industry), driving stronger revenue and earnings,” said Mr Mott.

“However, as the housing correction continues, and with the banks under pressure to comply with responsible lending and tighten ‘lax’ underwriting standards, we believe this is no longer the case.”

Growing population still driving the property market

If there is one positive that is still driving fundamentals in the property market, it is a population that is rising faster than expected.

Australia’s population is growing faster than ever before and is now set to hit 25 million in early August this year – a full 33 years earlier than estimates made in 1999 when the population was just 19 million.

That population pace is still rising with the last million being added in just two and a half years.