My prediction on when the market will turn… and the biggest swing factor on the result.
What market signals have I got my eye on right now? How will I know that the market has turned?
This is actually a pretty unusual cycle in the scheme of things.
Let’s remember how we got here.
Basically Australia was running pretty hot. And by Australia, I mean Sydney and Melbourne, because those two cities alone make up about half of Australia’s real estate market by dollar value.
So where Sydney and Melbourne go, the nation follows.
So in 2014, 15 and 16, those cities were booming, even though the property markets in Perth, Darwin and to a lesser extent, Brisbane, had already turned with the unwinding of the mining boom.
But things started getting a little hot, and regulators started to worry, especially about lending to investors and interest only lending.
From the second half of 2016 onwards regulators started putting in place certain restrictions to stop the market getting away from itself.
At first it was a speed limit on investor lending growth. The banks’ investor mortgage books were not allowed to grow at more than 10% a year.
Then it was about the share of interest-only lending relative to Principal and Interest lending. That was soft-capped at 30%.
Then regulators started looking at the documentation that was supporting loan applications. It needed to be tighter, with stricter income and expense calculations, and greater interest rate buffers.
This wasn’t ever about restricting credit per se. It was about ensuring that the credit moving through the system was of higher quality. It was about ensuring that we weren’t giving vulnerable borrowers more credit than they could carry, and putting the system at risk.
That’s the official version anyway.
But in effect, it did clamp down on the credit taps, as banks tried to get their heads around the new restrictions and what they meant.
Credit started to slow. The slow down was most pronounced in Sydney and Melbourne.
And with credit slowing, prices predictably followed. Since a peak in late 2017, prices in Sydney and Melbourne are down about 10%, and still nudging lower.
These falls are in line with past cycles – nothing really unusual there. But as I was saying, this is not a normal cycle. Market cycles tend to move with their own momentum, or with interest rates.
However, before the restrictions came in momentum was taking the market higher, and interest rates were low and still falling. (I still think rate cuts are more likely than rate hikes right now). That is, they were both positive for house prices.
And so in that sense this has been an artificial slow-down. It’s been caused by government intervention.
So that means the key thing I’ll be looking for in 2019 what’s happening in government circles. Is the government going to push harder, or start letting up on the market?
That’s the key question for 2019.
On that front, it’s not quite clear which way it will go.
The Hayne Royal Commission was embarrassing, both for the banks but also for the regulators who seem to have been asleep at the wheel.
I think the regulators (especially APRA) have already started taking a tougher stance with the banks. They don’t have a choice. If people don’t have faith in the regulators, they don’t have faith in the market. That faith needs to be restored.
Expect to see APRA come down harder in the first half of 2019.
I also expect the government will get tough with the banks when the Royal Commission hands down its final results in February.
I particularly expect the Coalition to go hard. They spent a bit of political capital fighting against a Royal Commission, so they’ll need to go hard or risk getting painted as too “pro-bank” (a woeful branding in today’s political climate).
And so I expect the first half of 2019 will see the regulatory pressure we’ve seen maintained, if not increased.
In that sense, I’m not expecting a quick rebound in the first half of 2019.
But political memories are short. Once the next Federal election is out the way, and if house prices are weighing on the economy, then the government will want to get the credit taps flowing again.
We might even see some market support in the way of incentives for first home buyers or something like that.
And if the economy continues to go from strength to strength (apart from house prices, pretty much every indicator of the economy is tracking nicely), then the economy’s natural momentum should reassert itself.
And so I’d expect house prices to turn around quickly.
At this stage, I’m pegging that turn around for mid-2019. Like July or August.
But as I said, a lot depends on what the government decides to do.
And government’s are notoriously hard to predict.