It’s official: House prices have begun falling

Property values have dropped across Sydney and Melbourne, according to the latest results from CoreLogic RP Data.

In the month of November, the median house price of Australia’s combined capital cities fell 1.5%, with Melbourne median prices down 3.5% and Sydney down 1.4%. Hobart also saw median house prices fall 2.4% as did Darwin – down 1.3%.

Corelogic RP Data median house values

Source: CoreLogic RP Data

CoreLogic Rp Data head of research Tim Lawless had this to say,

“The fact that mortgage rates have risen independently of the cash rate has, in all likelihood, become a contributor to the slowdown in housing market conditions, as well as tighter lending practices evidenced by a recent reduction in lender risk appetite for investment loans and high loan to valuation ratio mortgages. Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.” 

Australia’s big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all clamped down on investor lending after it threatened to get out of control earlier this year, with higher deposit requirements for investors and higher interest rates for all borrowers.

Falling house prices also give the Reserve Bank of Australia room to cut interest rates should they need to. The central bank meets today, but the market suggests the official cash rate will be left on hold for the eighth month in a row. The RBA last cut rates by 0.25% in May this year.

But there is a big risk for both off-the-plan property buyers and lenders. According to Mr Lawless, the housing market is moving past its peak at the same time as a large number of houses and apartments are commencing construction. That could lead to heightened levels of settlement risk for off the plan purchases, he says.

Buyers could face the prospect of having to pay for the property at settlement where the valuation is lower than the price they paid, resulting in higher loan-to-valuation (LVR) ratios. That could see some borrowers struggle to find the finance.

Mr Lawless also warns that property developers could face fewer presales or lose confidence of delivering a profitable project to market, resulting in approved dwelling construction postponed or even withdrawn.

Foolish takeaway

ANZ expects house prices to fall no more than 10% in the absence of an economic downturn – which is unlikely as we wrote earlier today. But it’s something to watch closely, as big falls in home values could trigger a recession in Australia.

Our top dividend stock for 2015-2016

If you're after fat, fully franked dividends, you won't want to miss this. The Motley Fool has just issued a brand-new report, complete with all the details on our expert analysts' #1 dividend stock for 2015-2016.

Click here now for your FREE copy, including the name and code! No credit card required.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.