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Despite remaining bullish on Australia’s housing outlook, a big four bank has tipped that affordability pressures and prudential measures will cool the market in the months ahead.
The first quarter of 2021 has seen buyers battle it out over a shrinking pool of properties pushing prices north by as much as 5.6 per cent across the major capital cities, and while Westpac does expect the growth trend to continue, it has forecast a slow in pace.
According to the bank’s data, March alone posted the biggest gain in 32 years, as Sydney’s dwelling prices gained a staggering 3.7 per cent. And while Westpac has been pushed to rethink its price forecast for 2021, from 10 per cent to 15 per cent, it does not expect the “red-hot” growth pace to continue.
Its forecast is based on four main reasons: the expected return of sellers, an affordability crisis, the tightening of macro-prudential policies in 2022, and potential oversupply down the line.
“The first is that we will see some near-term rebalancing around supply and demand,” Westpac said in a recent market update.
The bank tipped that the surge in demand caught markets on the hop last year, with many sellers having decided to hold off listing new properties until the next year.
“They are now coming back strongly and while new listings are still playing catch-up to rampant demand, the balance is shifting.”
Westpac also expects the sharp run-up in prices could start to discourage buyers, noting that signs are already emerging of a pullback, with the ‘time to buy a dwelling’ index in its consumer sentiment survey down nearly 20 per cent from its November high.
“Note that there are some in-built mechanisms to affordability constraints as well.
“Borrowing capacity and loan serviceability assessments become harder to meet as prices rise, with both still largely determined by incomes and variable mortgage rates (rather than the lower-fixed rates),” Westpac said.
The bank noted that APRA’s moves in 2015 to 2017 to tighten up the way lenders conduct these assessments also mean they should work more effectively as a constraint.
Macro-prudential tightening is becoming the talk of the town, and while it is unlikely for cooling measures to be enacted until there is a marked lift in investor activity, Westpac believes investors could return to the market sooner rather than later, as affordability starts to curtail owner-occupier demand.
“That in turn will make regulators increasingly uneasy,” the big four bank said.
“APRA and the RBA may be comfortable with the way things sit now, but their tolerance will be tested in a year’s time when prices have put on another 10 per cent, credit growth is around the pace seen when they last intervened in 2015-2017, household leverage measures are high and rising, and investors are much more active,” the bank noted.
And while Westpac believes the precise response of the authorities will depend on exactly how things evolve, it tipped these to include caps on particular loan types viewed as riskier; limits on aggregate lending growth for investors, and even ‘micro-prudential’ changes to guidelines for individual loan assessments.
Westpac’s fourth reason is not expected to become a problem until 2022, particularly if our external borders stay closed for some or all of next year.
With Australia’s population growth slowing, new building, which is currently being boosted substantially by the HomeBuilder scheme, will run well ahead of population-driven requirements, Westpac said.
“We are likely to see over 180,000 dwelling completions this year while ‘underlying demand’ over 2020-22 tracking around 80,000 a year at best.”
And while this may not be a major issue for now, “the longer the combination of stalled population growth and strong building goes on, the more susceptible we are to more widespread imbalances and oversupply problems”.