Ratings agency Fitch has warned that Australian house prices could be the worst in the world this year.
That may not be surprising considering that in 2018 Sydney house prices fell by 8.9% and Melbourne house prices dropped 7% according to CoreLogic. The two major cities were the leading contributors for national house prices to fall by 4.8% last year.
In December 2018 Sydney prices fell 1.8% and Melbourne prices dropped 1.5%, so they dropped at an annualised rate of 21.6% and 18% respectively last month.
Fitch Ratings has predicted that house prices will drop another 5% this year and values won’t start rising again until next year. Australia will have the worst property market out of 24 countries for the second year in a row.
Why does Fitch think prices will keep falling this year? The two main factors it pointed to were lower investor credit growth because of tougher lending requirements and the Hayne Royal Commission potentially leading to even tighter restrictions with any official recommendations.
Indeed, the AFR has reported today that investor mortgage lending dropped 4.5% in one month in November 2018 compared to October 2018. Investor lending has fallen 22.6% compared to a year ago. The share of investors in the home loan market is the lowest since 2009.
With an ultra-high level of household debt-to-GDP ratio at 121%, Australia is vulnerable to any economic shocks. This level of debt could be particularly painful with Australian banks like Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) implementing out-of-cycle interest rate hikes.
But, in my opinion, things aren’t all bad. The US Federal Reserve has signalled it may reduce the number of rate hikes over the next couple of years. Australia’s unemployment rate sits at just over 5%, which is very healthy and should mean Australia’s economy stays strong. It would probably take a significant rise of the unemployment rate for house prices to fall more than 12% this year.
However, there is a decent chance that Australian house prices could fall by more than 5% this year, which is why I wouldn’t want to own shares of Commonwealth Bank, JB Hi-Fi Limited (ASX: JBH) or Nick Scali Limited (ASX: NCK) in the short-term.
I’d rather own quality defensive shares, which is why I already have two of these quality shares in my portfolio.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.