Australian house price growth has been slowing significantly in recent months and the experts believe this is just the start of a very difficult period. Commonwealth Bank has been particularly vocal with regards to Australian house price weakness even though the performance of individual capital cities has been very mixed to say the least. Weakness in Sydney and Darwin has been partly offset by a strong market in Melbourne but it is difficult to see this continuing for much longer.
Weak wage growth
If you look at the Australian economy and Australian house price growth it is instantly apparent that there is a significant variation in performance across the country. However, on the whole many experts believe that wage growth will be flat in the short term with expectations of more “casual employment” likely to put pressure on demand for houses.
If wage growth does flatline then in real terms the value of the Australian dollar in consumer and investor pockets will fall when taking inflation into account. This will likely have a gradual impact upon demand for houses especially if the employment market was to soften further. So, there is no doubt that weak wage growth expectations in the short to medium term will do nothing to assist the property market.
Tightening mortgage regulations
As in many other countries around the world, the Australian banking regulator has introduced much tighter lending criteria in recent times. If you take a step back and look at the situation from a distance, this makes perfect sense because the eventual increase in Australian base rates could place many people in significant financial distress. However, capping interest only lending to just 30% of new mortgage arrangements will further reduce funds flowing into Australian property.
The very fact that Australian base rates are likely to move higher in the short to medium term, although not necessarily significantly higher, will gradually increase the pressure for those who have perhaps overstretched their finances to buy that dream home. In some ways you could describe this as the perfect storm, prompting a short to medium term fall in Australian house prices but time will tell as we have been here on many occasions in the past.
It is impossible for property developers to predict future demand for homes with any great confidence. As a consequence, this has led to a significant oversupply of apartments across Australia’s main cities which will hold back price rises in the short to medium term. In many ways we are now entering a game of poker, with property investors looking to buy lower down yet property developers looking to protect their margins. Who will blink first?
The Australian property market has been one of the best performers in the world in recent times. It is also easy to forget that Australia was one of just a handful of countries that did not enter a recession in light of the 2007/8 US mortgage market collapse. So-called “experts” have been predicting a correction in Australian house price growth for many years and perhaps they are about to get their moment in the spotlight?
Even under this growing cloud of concern do not underestimate the power of the Australian economy and the potential for a fairly swift recovery in house price growth. Such is the geography of Australia that the main employment markets are relatively few and far between, dominating Australia’s capital cities, where demand for property prices rarely wavers. Yes, property price growth has slowed in the short term and there are signs that the employment market may be softening. However, do not write off Australia as this is a country which has a far stronger economy than many people appreciate.