property tax accounting

Slow and riskier global, Australian house prices increase in 2018

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According to ratings agency Fitch, national house prices are expected to increase in 19 out of 22 markets around the world this year. However, growth is forecast to slow in most markets and risks are rising because of potentially increasing mortgage rates in 2018.

Combined capital city home prices grew 6.6% in November 2017, a drop from 10.9% in 2016. Hobart home prices increased by +12.7%, Melbourne by +11.0% and Sydney by +7.7%. While Sydney and Melbourne saw slower growth, Hobart has experienced over 10% of value growth. Rental yields have dropped by 3.6% but continued low interest rates have supported the price growth despite tighter lending standards and foreign ownership restrictions.

Sydney and Melbourne HPI are expected to stabilise this year because of increasing supply, low interest rates, growing dwelling completions, falling rental yields and limited investment alternatives offset partially by high population growth.

Thankfully first home buyers are back in the market with 17.4% owner-occupied lending in 2017, an increase from 13.1% in 2016 after First Time Buyer grants were introduced in NSW and Victoria, which also abolished stamp duty for properties worth $650,000 or less, reduced stamp duty for properties worth $800,000 or less, and grants $20,000 for the building of new houses. However, affordability remains an issue as wage growth still falls behind HPI, underwriting continues to tighten and living costs to rise. Any increase in mortgage rates will affect mortgage affordability and serviceability.

The good news is that mortgage arrears remained stable in spite of increasing rates for interest-only and investment loans. 30+ days arrears for many home loans even dropped 1.02% in 2017.

However, underemployment has stabilised at 9.1% of employed persons and it could reduce the servicing capacity and disposable income for some borrowers. Mortgage performance may also remain stable this year because of low interest rates. But APRA’s prescribed serviceability practices have impacted on borrower serviceability and slow wage growth may increase pressure to those with little disposable income.

Fitch also noted that new mortgage lending growth slowed last year because of a modest economic growth and reduced investment lending. Home sale transactions nationally, regionally and in combined capital cities decreased in 2017 due to lower investor demand, higher capital requirements for banks, tighter lending policies, increasing transaction costs and stricter serviceability parameters. Mortgage lending growth is expected to slow to about 4% this year because of low interest rates and stable unemployment being offset by underemployment, tougher lending practices and reduced investor demand.

The Australian Prudential Regulation Authority (APRA) requires ADI to limit new interest-only lending growth to 30% and limit investment lending growth to 10% per year. And it wants serviceability metrics set at “appropriate levels for current conditions” and aims to restrain lending growth in high risk segments including high loan-to-income loans, high LVR loans and long tenure loans. Interest-only and investment loans have increased its prices.

And ownership restrictions were also applied in NSW and Victoria with a 50% cap on non-resident, foreign ownership in new developments.

Australia and the US have had nominal home price growth rates since 2010, which have been higher than rental growth rates. However, Australia’s rental growth rate has remained flat since 2016 while the rental growth in the US has accelerated since then.

Australia’s mortgage market and macro outlooks are expected to be stable but are increasingly dependent on a strong economy.

What are you planning to do in 2018?

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