The central bank’s head of economic analysis says capacity constraints in some areas of the construction industry will likely keep a lid on housing investments in the near term, as a new report from Deloitte tips the number of mortgages could fall as much as 5 per cent this year.
Deloitte’s annual mortgage report cites a drop in the number of investor and interest-only loans in response to tighter credit standards but notes a period of moderation is more likely than a housing price crash, as underlying demand remains solid in the face of vulnerabilities.
The report details the predictions Australia’s leading lenders and mortgage brokers have for property lending in the coming year.
“It is already appearing as if 2018 will be the second consecutive year since 2012 that settlement volumes either flatten off or reduce. When placed into perspective, the strong lending growth of the 2013 to 2016 period was never going to be sustainable in the long term,” Deloitte financial services partner James Hickey said.
“The market recognises the need to take stock and find a new sustainable base for the long term. In addition, there is uncertainty around possible new rules and legislative change as a result of the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry,” he added.
Conduct, compliance and distribution challenges will be the focus for lenders as the royal commission moves through 2018, Mr Hickey noted.
While consumers are eyeing up a regulatory crackdown as a result of the royal commission, it may take some time for conduct and consumer interest changes to work their way into any regulation, Deloitte says.
“There’s every reason though that market providers should be cautious given the heightened uncertainty around the future regulatory landscape. Maybe ASIC will return with sharper teeth? While there are current laws already in place to manage conduct, I expect to see a greater obligation for lenders beyond the current ‘must not be unsuitable’ legislative hurdle.
“In the future, lenders will have to consider how they can demonstrate that the customer has a true understanding of their product. This will mean a more thorough assessment process, tailored to individual customers and their understanding of the loan. This will inevitably slow market growth,” Deloitte financial services partner Heather Baister said.
Investor lending and interest-only loans have so far been the target for regulators, resulting in a cooling of activity that has seen a slowdown in house price growth from the middle of last year.
Despite the vulnerabilities, the housing market will be buoyed by other fundamentals, Deloitte Access Economics’ Director Michael Thomas said.
“Underlying demand remains solid with strong, albeit uneven, population growth expected to continue into 2020. Jobs growth has also been strong, especially in Victoria.
“The outlook for construction activity in the near term varies across the state. For both NSW and Victoria, growth in housing construction has slowed from its peaks but remains at high levels and is underpinned by solid underlying demand,” Mr Thomas said.
“Taken together with the outlook for interest rates, slowing house price growth, moderating the prospect of further capital gains, restrictions on lending, such as on interest-only loans and loans to investors as well as to lending to foreign investors, we expect a period of moderation, rather than an abrupt adjustment,” he added.
These sentiments were echoed by the Reserve Bank’s head of economic analysis Alexandra Heath in a speech she gave today at the Urban Development Institute of Australia on the outlook for the housing market.
“Dwelling investment is not expected to contribute much to growth over the next couple of years, but is expected to remain at a high level,” Ms Heath said.
“Liaison contacts have suggested to us that capacity constraints in the construction industry, particularly in New South Wales, will make it difficult for construction activity to increase,” Ms Heath said.
Population growth would see demand for housing remain strong, Ms Heath added, but she cautioned that there isn’t a single national housing market across Australia.
“The housing story is different across states and across regions within states, partly because population trends differ. The effects of the mining investment cycle on population trends and housing markets in Western Australia is a clear-cut illustration of this point,” she said.
Ms Heath noted that subdued property price growth in Brisbane and Perth was consistent with falling population growth and increasing housing supply in those markets, which was in contrast to the strong growth in Sydney and Melbourne until recently.
“Given that housing accounts for around 55 per cent of total household assets, we are paying close attention to these developments,” she added.
The Deloitte report also pointed to the impact open banking and comprehensive credit reporting would have on retail banking in 2019, with increased competition from fintechs set to make the biggest mark.
“Also as global banks emerge from regulatory driven remediation and refocus on growth, we could see this reinvigorate their interest in the open banking opportunities of ‘digital only’ retail bank offerings,” it said.
By Cliona O'Dowd
The Australian Business Review
5 July 2018