Let's take a step back from the monthly housing data and ask ourselves: What's happening in the market and are we seeing a bottom in prices - or are there further falls to come?
Chart 1: Interest Only borrowers more than HALVED
In this first table, which comes from APRA, you can see that way back in March, 2017, the banks were writing about 33 billion dollars' worth of mortgages in a quarter. Fast forward to the September quarter of 2018, and you can see that that number had dropped to 14.4 billion dollars.
(If the script is too small, click here to access these tables and charts in full size).
That's a decline of almost 56%, and this is for interest-only loans which is the type of loan that investors take out, so it shows that a large portion of domestic buyers have been removed from the buying pool for property in Australia.
Chart 2: Foreign buyers have mostly disappeared
Now, if we turn to foreign buyers and look at this second chart, you can see that Foreign Investment Review Board approved investment in housing has declined precipitously as well. In fact, back in '15-'16, about 72 billion dollars' worth of investment in housing was approved by FIRB, and in '16-'17 that had fallen to 25 billion dollars, but last year, the number was just 12 billion dollars.
So that means that the foreign buyer has also exited from the Australian market, and by the way, that's not unique to Australia. We're seeing that everywhere in the world at the moment.
Chart 3: First home buyers evaporated
Turning back to another section of the domestic buying pool, first-home buyers. First-home buyers often buy project homes, not always, but often, and we can see from this data here, new home sales have declined precipitously as well. In fact, we're now at 17-year lows. We haven't seen such a low level of new houses in Australia sold on a monthly basis since 2001.
So a large portion of the domestic buyer has completely evaporated and the foreign buyer has evaporated.
It suggests that we haven't seen a bottom in house prices. That means that it's likely house prices will fall further, that properties will remain listed for longer, and unless someone is forced to sell, we might find people deferring the sale of their property until a better time, whenever that is.
Chart 4: Decline in building activity is yet to come
But now we turn to something perhaps more pressing, and that is whether or not there's going to be forced sellers and what the impact might be on the retail sector. This chart here from Macquarie Research shows the correlation between building approvals and dwelling starts.
Obviously, you can't build something until it's been approved, so you see approval first followed by construction commencing, and you can see that in the next few months, we're going to see a substantial drop in dwelling starts. Now, a large part of this drop is due to high-rise dwellings, and I think we're going to see, there's probably maybe a 10-month lag between approvals and construction commencing for high-rise development or high-density development.
What does this mean? Well, it means that income for tradies, income for the building industry is going to go down over the course of the next 12 months, and about 37% of the construction industry is in the residential building sector, and that means less income for tradies.
What are they going to be spending money on? Well, presumably they're going to focus on their mortgages. Remember, we've got record high levels of household debt to income and household debt to GDP in Australia. In fact, retail sales are already turning down, even though we haven't seen the worst of the falls in construction activity yet.
Chart 5: Retail sales rolling over already
On this final table, if we concentrate on the furniture and electrical goods part of the retail sales numbers for January, you can see that as early as October last year they were still growing, but fast forward now to January, and you can see they've turned lower and it is accelerating to the downside.
I don't think we've seen the worst in retail sales yet. I think there's more to come for the reasons I've just described. House price falls simply mean people will focus on their mortgages rather than spending money externally, and with less building activity, it's going to put pressure on the budgets and balance sheets of some employees. It may even put pressure on jobs.
One of the reasons in decline in Interest only loans is because ARPA forced banks not to write them. Thus lot of investors were pushed into principle and interest loans for all new loans
Interesting that the exit of foreign buyers is common in other county's housing markets too. As Roger Montgomery says, "We're seeing that everywhere in the world at the moment." So if housing prices have turned gloomy in other developed countries, are the widely discussed local factors (APRA crackdown on interest only loans, Royal Commission into banks, Labor's proposals to halve capital gains tax and curb negative gearing) really causing the property slowdown or are they simply coincidental? My guess is that Australians have made a global chill worse for themselves with miserable political timing.
Thanks for your comment Shaishav. The peak in interest only was June quarter 2015. APRA’s changes followed David Murray’s financial system inquiry in 2014. The changes shown in the table are between 2017 and 2018.
@Shaishav - the first chart (table) also have figures showing owner-occupied loans and investment loans. Although there was an increase in owner-occupied loans it was proportionally only half of the decrease in investment loans.
@Ronen in same graph there is no change in total new residential home loan figures for period covered infact it increased in middle quarter to $100 billion
@Shaishav - this is fine but it still contradicts your first comment - investor loans are consistently in decline, unless you meant to say that some of the owner-occupied is actually investment in disguise?
@Ronan yes that what i meant some of the investment loans are disguised as owner occupied. Or alternatively you can say disguised in interest and principal loan figures. I think bigger picture should be total figure of loans approved
@Shaishav - I think you are confusing things here. Owner-occupied means that it is occupied by the owner, and investment is for investment (i.e. not occupying the house yourself). Interest only can apply to both, you can buy a house to live in and still have an interest only investment. This is why the drop in interest-only is much larger than the drop in investment, it's not coupled. In any case I see a different picture to yours. To me it looks like investment has consistently fallen over that period, ending with a 14% drop, while owner-occupied has increased because buyers genuinely saw an opportunity, but this has reversed as buyers are hesitant again.
Talking with Sydney investors, some are selling properties with capital gains because of Labor Policy on Negative gearing which will remove most property investors and leave only first home buyers in the market. If they hold onto properties their gains may disappear! Anyway negative gearing will disappear when the income tax rate drops to 32.5cents in dollar for incomes between $20k and $200k (most of us)
Thanks for sharing. I am not sure I agree with the conclusion of what the impacts will be on the market make-up from the proposed NG changes by Labor. Given NG will still be available to property investors in new or off-the-plan purchases, there are other dynamics at play.