State of the Market 2018 – CoreLogic report Dec 2018

Over the 12 months to November 2018, national dwelling values have fallen by -4.1% which is their largest annual fall since December 2011. As the year progressed, the rate of value decline got more rapid, particularly within Sydney and Melbourne. Across the capital cities, dwelling values fell over the past year in Sydney, Melbourne, Perth and Darwin while they rose everywhere else. It is important to note that the annual change in dwelling values to November 2018 was lower than the annual change a year earlier in all capital cities except for Darwin highlighting broad weakness across the market. Over the past year the annual changes in dwelling values across the individual capital cities were recorded at: -8.1% in Sydney (its largest annual fall since May 1983), -5.8% in Melbourne (its largest annual fall since March 2009). +0.3% in Brisbane, +1.4% in Adelaide, -4.2% in Perth, +9.3% in Hobart, -0.8% in Darwin and +4.0% in Canberra. Unlike previous housing market slowdowns which have typically been driven by an economic slowdown (such as the last recession or the GFC) or higher mortgage rates, this slowdown has been manufactured via tighter credit conditions while the economy continues to grow and mortgage rates sit at near record low levels. Since financial deregulation began in the mid 1980s access to credit has incrementally become easier, since macroprudential policies began to be implemented from the beginning of 2015, accessing credit has become incrementally more difficult. Investors and interest-only borrowers are having to pay higher mortgage rates, borrowers with small deposits are finding it more difficult to obtain finance as are those with high levels of overall debt while all borrowers are having their expenses more forensically scrutinised before being given mortgages.

The outlook for 2019 is, at this stage, for more of the same. The expectation is that there will be further value falls nationally with these declines largely being driven by Sydney and Melbourne however, value growth is expected to slow or remain stable in most other regions of the country on the back of the tighter credit conditions. At least initially in 2019 credit conditions are expected to remain tight which will continue to dampen housing market conditions.

At the beginning of February the findings and recommendations from the Banking Royal Commission are expected to be handed down and that has the potential to significantly change the mortgage landscape. To-date the Reserve Bank has not been overly concerned with falling dwelling values largely because it has mostly been contained to Sydney and Melbourne, and both cities have seen a substantial run-up in values over recent years. While that may be the case, if the slowing housing market impacts on consumer consumption then we could see a change of tact. Were this to happen, we could see some of the temporary macroprudential measures eased back throughout 2019. Nevertheless the overall expectation is that dwelling values will fall further during 2019 with Sydney and Melbourne experiencing the greatest declines.

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