Home lending slump risks negative ‘feedback loop’ as buyers step back
Residential housing in Gladstone went from pulling $1,000 rents to a few hundred. (AAP Image: Dave Hunt – file photo)
Data from the Australia Bureau of Statistics confirms that demand for housing loans is dwindling — and some analysts are warning a broader lending slump is creating a “feedback loop that drives prices significantly lower”.
Loan applications from property investors are down 42 per cent since the market peaked in 2017, to a seven-year low.
Credit to owner-occupiers is also down, dropping 6.4 per cent month over the month to a three-and-a-half-year low, a 15 per cent collapse over the year.
Many people who bought properties in Sydney or Melbourne a year ago on 10 per cent deposits are facing the fact that their life savings have, for the moment at least, disappeared in falling home values, while crashing markets have devastated investors in regional towns where booms have turned to busts.
How bad is the housing downturn?
Robert Mellor from industry forecaster BIS Oxford Economics said, from a price perspective, the current downturn is one of the worst he has seen in 35 years analysing the residential property market.
“We’re now talking about house prices in Sydney down about 11.5 per cent from the peak 18 months ago, and with the risk of another 4-5 per cent through calendar 2019,” he told PM.
However, he said, the falls are still dwarfed by the scale of the price boom over the preceding five years.
“We need to remember that it’s off the back of one of the biggest booms in terms of demand from investors,” he said.
Mr Mellor said tighter lending standards brought in by the big banks during the royal commission, and limits from regulators on how much banks can lend investors, did not cause the downturn but they have definitely worsened it.
“It’s not surprising now that investors are particularly retreating, and because of the magnitude of the decline, owner-occupiers are also very cautious,” he said.
Melbourne man David was in high spirits seven years ago when he invested in two properties in the thriving regional Queensland city of Gladstone, when the pubs were full and “everybody was loaded with cash.”
FOMO has given way to FONGO (fear of not getting out) in Australia’s housing market, analysts say (ABC News: Liz Pickering)
His father and uncle also bought a couple of investment properties each.
“They kind of got all excited about it and we all fed off each other’s excitement,” he told PM.
Then Gladstone’s boom ended when energy companies finished building several giant LNG export terminals, and most of the workers employed in the construction phase left town.
David’s investment homes are now worth half the price he paid for them, the rent on them does not cover his bank loans, and nobody wants to buy them off him.
The investment properties were getting rents over $1,000 per house during the boom, but now they would be lucky to get a few hundred.
David said tightening lending standards have definitely contributed to his plight, with one potential purchaser pulling out after he could not get credit.
He was forced to sell off the rest of his property portfolio and move into a share house as a result of the Gladstone crash.
The danger of the ‘feedback loop’
Chris Brycki — the founder of financial services company Stockspot, which specialises in providing investment advice to younger Australians — said his clients are increasingly investing their money in shares and cash.
“It’s a snowball effect — when people see prices fall in a market, they’re less inclined to buy,” he told RN Breakfast.
“People fear falling prices, and they move out of the way.”
At the moment, he said, property prices are still falling faster than they have in most people’s lifetimes, especially in the two biggest cities.
Martin North from Digital Finance Analytics said the drop-off in credit is coming from both sides of the fence.
Banks remain cautious on lending, despite what may be their official line, he said, and the declining residential property market is putting would-be borrowers off buying.
“The net result is stagnation in terms of activity — more properties on listings, but not necessarily being sold, and deeper home price falls,” he said.
“It becomes the feedback loop that drives prices significantly lower.”
It is not just property that borrowers are shying away from, Mr North said the credit squeeze extends to smaller personal loans too.
His surveys show credit card debt usually rises in December, but in 2018 it barely budged.
“Households are debted-out and, amongst those households that are borrowing, they are really at the point now where they can’t afford to borrow any more,” he said.
He said wage stagnation is also contributing to the lending decline, as household cash flows are squeezed by costs of living that are growing substantially faster than the official measure of inflation.
“More people are raiding savings in order to make their budgets work, and you can’t go on doing that forever,” he said.
‘Nobody calls the bottom’
Martin North’s warning throws up another, more far-reaching negative feedback loop that’s threatening the health of the economy.
ANZ-Roy Morgan’s latest weekly survey of shoppers shows confidence slumping to its lowest level in three months.
Consumers are worrying about falling house prices, holding onto their job, and more generally about the economy.
Senior economist Felicity Emmett said those worries will only grow if house prices fall further — in turn, putting more pressure on the economy.
“I think that the house price story has put a little bit of a dint in confidence because people are just feeling like they don’t have as much wealth stored up,” she told RN Breakfast.
She said the negative economic outlook means people are concerned about keeping their jobs and maintaining financial security.
However, the monthly Westpac-Melbourne Institute survey of consumers showed precisely the opposite, with confidence bouncing back in February and consumers the most optimistic about their job prospects in more than seven years.
Back at Stockspot, Chris Brycki is advising his millennial clients to be patient with their first home purchase because, he believes, prices will continue to fall.
“That FOMO disappears, and it becomes a FONGO — people worried that they need to get out.”
He told RN Breakfast new buyers have no desperation to buy, so they just wait on the sidelines — and that is actually probably what will make price declines accelerate.
Veteran forecaster Robert Mellor, from the other end of the generational spectrum, agreed that it is hard to see the bottom of the current downturn.
“Nobody calls the bottom of the market,” he said, “there’s no bell that rings to tell you it’s there.”