Many Australian property investors, first home buyers and home owners are wondering how the property market conditions in 2018 will be like.
In 2017, some of the country’s hottest property markets have changed gears after a five-year streak that saw the median house price in Sydney add more than $530,000 and in Melbourne pile on over $352,000. House price growth has slowed down in Melbourne and has declined in Sydney due to the implementation of new policies designed to safeguard debt levels and property prices.
Property prices may continue to cool down in 2018. House values in Sydney have started to slip after years of significant gains while Melbourne’s growth has slowed down and this trend is expected to continue this year. After several years of strong house price growth in Sydney and Melbourne, the market now starts to cool in both cities with prices falling 1% in Sydney and increasing only 7% in Melbourne annually. Other capital cities have experienced only single-digit house price growth in 2017 but that is exactly what banking regulators want to see.
APRA’s tightening policies have weakened the property sector but declines will likely remain localised. Higher interest rates for investor and interest-only borrowers resulted to lowered housing demand and weaker auction results may continue to slow down. The RBA may increase interest rates for lower price growth. If the RBA does not tighten, house prices will likely fall less than predicted. There are still no signs that suggest prices will experience widespread declines.
Foreign demand has also pulled back because of restrictions on Chinese capital outflows, lending constraints and increased local taxes. It is predicted that national housing price growth will slow down to 3-6% in 2018. There is still a large pipeline of apartment construction underway and it could be a modest drag on GDP growth into 2019.
Australia likely has a housing boom and not a bubble because there appears to be no misallocation of lending or an oversupply of houses. There are no signs of national oversupply yet but the supply and demand gap could be closing. New building approvals have dropped back from their 2016 peak levels.
The estimates are arguably dependent on the number of unoccupied dwellings, demolition rates and household formation rates but it is still hard to see significant oversupply, given the strong population growth and the accumulated undersupply in NSW. At most, there could be an oversupply in the Brisbane and Perth apartment markets.
The economy needs to grow further and household income growth should pick up. The GDP growth is expected to increase from 2.4% in 2017 to 3.2% in 2018 while mining investment may stabilise and non-mining investments may continue to rise because of better infrastructure, improved business conditions, strong jobs growth and inward migration.
The Reserve Bank is expected to lift the official cash rate off the 1.5% level late this year. Higher RBA rates could mean an increase in repayments typically with $50 for every 25 basis point rise on a $400,000 loan. Otherwise, borrowers could expect higher mortgage rates.
Major banks have not passed the cuts onto borrowers despite rate cuts several years ago and the cash rate has remained the same in 15 months but mortgage rates have still increased. This means whether interest rates will increase in 2018 or not, mortgage rates won’t likely decrease anytime soon.
Investors are now stepping back and this means first home buyers will have more opportunities this year. They will benefit from competitive interest rates, adequate supply and new concessions. Unfortunately, deposit burden continues to rise and more people need assistance but they only need to enter the market because once there, repayments are affordable and interest rates are low. However, they should only buy investment grade properties.
Stamp duty taxes on property transfers hover at about $50,000 so Australians are expected to hold on to their current homes and renovate instead of move. There has been a substantial increase in renovation loan applications last year and it will likely continue into 2018.
Those who want to upgrade may want to avoid costly moving expenses. People might take advantage of low interest rates and use the extra equity to finance renovations instead. HIA economists forecast a strong growth in the renovations market into the 2020s.
Meanwhile, competitive lending rates may benefit owner occupiers. Fewer investors go to banks now for loan applications because of mortgage repricing last year so banks compete over a small share of the lending pie and offer some great deals for owner-occupiers. Owner-occupier principal and interest loans have increased 10-15 point basis while investor loans have repriced 90 basis points.
What do these trends mean to you?
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