I'm sure that everyone has seen that house prices are slowly declining, in Sydney and Melbourne in-particular.
Many participants in the housing market will be hoping prices don't drop far. Homeowners, property developers. big banks like Commonwealth Bank of Australia (ASX: CBA), the Federal government, the state government and local councils all benefit from house prices not falling over.
However, Tim Hannon from Newgate Capital Partners, wrote for Livewire that house prices could keep falling due to slowing credit growth. He said that the heavy indebtedness of Australians alone is not enough to topple the housing market, it also takes tightening credit conditions.
Here are five reasons why credit could become harder to access:
More rigorous assessment of borrower expenses
Banks had been previously using the household expenditure measure (HEM) to assess basic living expenses. However, this measure is now seen as optimistically conservative and once banks factor in higher living expenses the borrowing capacity could drop by 10% to 20% if banks properly look at household expenditure.
Setting maximum borrowing levels versus income
The Australian Prudential Regulation Authority (APRA), which is the bank regulator, has sought to reduce the amount of loans that are lent at debt-to-income levels of more than six times.
The current Sydney house market has an average of nine times debt-to-income and Melbourne is eight times.
Around a third of loans have been given out at more than six times debt-to-income. People simply won't be able to buy homes above a certain price if this ratio is mostly adhered to by banks.
Including all household liabilities
New credit reporting will now mean banks get the full picture of household debt profiles. Previously banks were reliant on borrowers to disclose their debt.
Not only may mortgages become harder to get, but all other forms of debt could be harder too. This may stop a lot of people who borrow to fund the deposit.
Interest only cap & the ability to service current loans
Almost 40% of loans were interest only, however this is now dropping after APRA limited new interest-only loans to 30% of flow since September 2017. Perhaps unsurprisingly, this is when the housing market stagnation occurred.
Many current interest-only loans will turn into principal and interest payments, which will increase the monthly repayments by 30% to 50%.
Falling foreign demand
Foreign buyers used to represent around 20% of new housing purchases, the Chinese were a big percentage of this.
It is now harder for Chinese nationals to get money out of China and Australia has increased stamp duty and bank lending restrictions are stricter to foreign residents.
Foolish takeaway
The mortgage repayment will be one of the last things that a household doesn't pay for, but forced sales could increase.
Mr Hannon thinks that construction companies, residential developers and retailers will be hit first.
Remember, all of the above reasons for more price falls aren't hypothetical – each reason is a fact where something has changed. I don't think we'll see a 20% fall in prices in one year, but the next two or three years could see numerous months where prices fall in Sydney and Melbourne by more than 0.5%. I wouldn't be surprised to see prices another 10% lower in two years compared to today.
Management of Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) will be hoping the RBA doesn't increase interest rates any time soon.
