Predicting the movements of property prices is as much fun as a rollercoaster - one minute analysts are screaming 'prices are going up', the next they are telling Australians 'to hold on tight, because prices are going down'.
Predicting the movements of property prices is as much fun as a rollercoaster - one minute analysts are screaming 'prices are going up', the next they are telling Australians 'to hold on tight, because prices are going down'.
JP Morgan suggested in early June that Australian house prices would drop another 14% - to be 18% below the peak - by the end of 2010. Rising unemployment, according to JP Morgan, would be the anchor that sinks the property market in the short term.
However by mid-June, media outlets had new research to trumpet. BIS Shrapnel forecasted average house prices in most capital cities would grow by between 11% and 19% in the next three years. The group's Residential Property Prospects report, based on data from the Real Estate Institute of Australia (REIA), reported that first-home buyer activity in the lower end of the market was generating "green shoots" of recovery. In the short-term, BIS Shrapnel predicted prices would remain relatively stagnant until the rising tide of unemployment levelled peaked around June 2010.
But unemployment is only one of three factors affecting house prices. Fujitsu Consulting's managing director Martin North said credit rationing and credit policy tightening are the other two drivers of property market prices.
Are banks short of credit? North said no.
"My view is banks are not having difficulty writing loans. They've raised a lot of funds through the government-backed guarantee scheme."
But credit policy tightening, he said, has definitely sharpened in the last eight months. ANZ was the first major bank to tighten credit policy, reducing its maximum LVR from 95% to 90% in November 2008. ING Direct followed ANZ's lead dropping its LVRs to 90% in March, while CBA and NAB lowered their LVRs to 95% in the same month. RAMS also pulled its 100% product from the broker channel resetting its maximum to 95% in late March.
Challenger's Steve Weston pointed to the US market as an example of the effect credit policy tightening has on property prices.
"In the US, for example, a number of buyers who traditionally would have been able to get finance now can't. So you have the supply of housing that is increasing all the time, but you simply don't have enough buyers coming in to reduce that supply. People will become more anxious to sell and will keep forcing prices down."
Australia faces a similar situation, he said.
"We've had more and more first-home buyers coming in to buy homes in that affordable price range under the 500K mark. We've seen the supply of those homes fall and prices have remained fairly stable - probably even increased very slightly - but you compare that to the prestige part of the market - houses more than $1m - and people there have had to sell because the share market went down, unemployment and those sorts of things, and you haven't had enough buyers. So prices have really fallen there.
"Now we have seen credit criteria tighten for new loans, which means that a number of the potential buyers won't have enough of a deposit to buy a home for the price bracket that they are in for the area they want to buy.
"And what it means is a number of people who would have been buyers in that affordable sector - they are now going to be squeezed out the market until they can save a sufficient deposit. And as we know now, rents are in many cases higher than mortgage repayments so you're not going to save that deposit quickly. And it means you're out of the market."
Credit policy tightening combined with the tampering of first-home owners grants will soften the property market, but Weston said investors could be instrumental in propping prices up in the coming months.
While Weston agrees reducing LVRs is prudent given the level of unemployment, he adds: "You are going to see losses in the future, but I hope we don't sit around and say it was a masterstroke we reduced LVRs when we did, when in fact, as an industry, by reducing LVRs all at once, we actually were the driver of some of the downward pressure on property prices."
