Down, down, sentiment is down

On the residential side, the outlook for construction and prices has worsened and firms expect a double whammy of tighter credit conditions and higher interest rates over the next year. At the same time, demand from foreign buyers is still falling.

ANZ Research’s recent Housing Update noted many indicators are around the worst levels in years.

Overall housing credit is growing at the slowest rate since 2013, investor credit is growing at the slowest rate on record. Prices are posting the sharpest declines since 2009 and auction results are the lowest since 2012. The current environment is clearly weak and the ANZ-Property Council survey reflects this.

ANZ Research believes the soft outlook can be traced back to two key indicators within the survey – finance availability and interest rates.

Survey respondents have highlighted the outlook for finance availability has worsened further and is at the lowest levels since the survey commenced in 2011. At the same time, respondents increasingly expect interest rates to rise over the next year which likely reflects a combination of out of cycle mortgage rate hikes, driven by rising bank funding costs, and talk of potential RBA rate hikes. 

Another development contributing to the softness in the market is lower demand from foreign purchasers.

Survey respondents suggest the share of housing sales to foreign purchasers has halved over the past two years. An estimated 13 per cent of property transactions are currently foreign buyers, down from the peak of 24 per cent in 2016. Both New South Wales and Victoria are leading this decline.

ANZ Research previously noted foreign purchasers were not the main driver behind Australia’s housing price growth - nor are they the main driver of the current downturn. But the withdrawal of potential buyers is certainly contributing to the current weakness.

In line with all these negative factors, the ANZ-Property Council survey shows the outlook for housing prices has slipped further into negative territory.

A net 70 per cent of respondents in New South Wales and 50 per cent in Victoria expect prices to fall over the next 12 months.

Finally, it is not just prices that have a bleak outlook: for the first time ever, survey respondents expect residential construction to fall over the year ahead.

Once again, most of this weakness is evident in New South Wales and Victoria. ANZ Research thinks a record backlog of work (over $A40 billion) will support activity over the near term, before the decline in residential construction accelerates through 2019 and 2020.

Daniel Gradwell is a Senior Economist at ANZ