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Housing rated the top risk to credit markets in 2019

13 December 2018


Australia’s housing market will be the top risk facing credit markets next year, compounding an already bleak real estate outlook according to Fitch, one of the world’s leading credit rating agencies.

Already a credit crunch by major banks has hit property developers hard in Adelaide and other state capitals where investors in major residential towers in city centres and in land subdivisions on the outskirts of cities, have cancelled or postponed projects.

Background to the prognosis

The origin of this gloomy prognosis was a survey of global fixed-income investors who oversee more than $500bn loaned to Australians involved in riskier property purchases and developments.

International investors, aware of a weak housing market and influences likely to further weaken it, are becoming increasingly disinclined to be supportive with inflows of cash as in recent years.

Nationally housing prices have dropped on average of 2.7% in 12 months as regulators tighten the screws on lending to risky property developers.  Concurrently banks and other lenders have hiked mortgage rates, and in the wake of the financial services royal commission, credit restrictions for apartments are also increasing.

More than 80% of investors surveyed by Fitch expect housing prices in Australia to fall another 2% to 10% in 2019, and Morgan Stanley says the down-turn could be as high as 15%.  But as yet Adelaide, according to Corelogic figures, is defying this trend.  House prices here have increased 1.4% over the past year to a median of $475,067, and units 1.3% to a median of $325.976

Generally there is a domino effect

Three fifths of overseas investors in Australian projects believe commercial lending standards will become increasingly rigorous in the months ahead to the detriment of high-yield corporates, SMEs, and the retail sector.

Malaysia’s SP Setia has S1.6bn ready for pipeline projects in Australia, but CEO Choong Kai Wai says developers associated with these are struggling to get bank loans.

There was a surplus of apartments in Australia in 2016, but because there’s an estimated need of 5,000 CBD apartments annually and developers are being reigned in by tightening credit restrictions, it’s expected there will be a national shortage of apartments in 2020.

Meanwhile analysts are rating property market exposure as the current most serious risk to bank asset quality, exceeding jitters associated with emerging markets (referred to in our November newsletter).

This exposure’s threat to the quality of banks’ assets is viewed more seriously too than the end of quantitative easing – the introduction of new money into the money supply by central banks – and is of even greater concern than the possibility of a hard landing by China’s slowing economy.

The Reserve Bank of Australia (RBA) in its most recent Stability Review, notes, with what Macks Advisory suggests is careful restraint, that: “Housing markets are evolving as the sector absorbs the impact of tighter lending standards alongside weaker demand, which has been reflected in slower credit growth.”

So what of the banks’ retreat?

The banks’ retreat from commercial property lending where they provide 90% of the sector’s finance, begs the question of who will fund the widening gap between demand and available loan money to satisfy it?

For decades banks’ concern about risk associated with property loans, despite rising prices, has been minimal.  Now it’s a major concern as the demand for commercial property loans increases.

Andrew Schwartz of non-bank lender Qualitas believes that inherent in this dilemma are opportunities for organisations like his.

He predicts that non-bank lenders’ share of commercial property lending will eventually grow from its present 10% to 40% -- the level it’s at now in the UK and US.  “For every 1% of this market that banks fail to service in Australia, that leaves $3bn of funding to be provided by non-bank lenders.”

Multiplex regional managing director Graham Cottam was reported recently as saying the pace of development and construction in Melbourne had already come to an end, and warned of a likely negative effect on the economy of banks’ increasingly cautious approach to lending.

Bleak outlook for owner occupiers

In late November and early December clearance rates for housing auctions had dropped to around 40% in many major Australian cities, and UBS analyst James Druce says data suggests credit tightening has accelerated and broadened into the owner occupier market.

In the past three years borrowing capacity for owner occupiers of housing has been reduced by 7% to 10% and from 10% to 30% for investors.

Macks Advisory will be watching the forthcoming impact on the housing market of debt to income limits, together with comprehensive credit reporting,


Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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