A slump in the housing market is now the biggest threat to Australia’s economy and creditworthiness according to global credit rating agency Fitch.
In a survey of leading fixed-interest and bond traders, Fitch found a domestic housing downturn had replaced the prospect of a hard economic landing in China as their biggest worry.
“Investors also identified property market exposure as the greatest risk to bank credit quality over the next 12 months, and financials as the asset class facing the greatest refinancing challenge,” Fitch said.
The survey covers the views of managers who look after more than $300 billion in fixed-income assets, accounting for over three-quarters of the Australian domestic real money market.
Fitch said, while concerns about risk were mounting, only 4 per cent of those surveyed believe house prices will fall by more than 10 per cent by 2019.
“Confidence [was] underpinned by their stable views for unemployment and interest rates,” the ratings agency added.
“At the same time, a string of regulatory initiatives, coupled with active supervision have added starch to bank underwriting standards.”
Housing completions point to top of cycle: Morgan Stanley
There is also growing evidence that the housing cycle has already peaked, according to big global investment bank Morgan Stanley after the release of the latest Australian Bureau of Statistics data, which showed an extraordinary spike in housing completions.
Total completions set a new record in the June quarter pushing above 200,000.
Once again the apartment sector was the main driver for the flurry of activity, with completions up 37 per cent over the quarter to 101,000 – an increase of almost 90 per cent on the same time last year.
The ABS quarterly building activity survey is seen as a key input to modelling the housing cycle, given it is the only source of commencements and completions statistics.
Morgan Stanley strategist Daniel Blake said the total completion rate was ahead of his estimate of demand for new property dwellings running at around 160,000.
“We see this lagged data as consistent with the deterioration in rents this year, and expect reported vacancy rates to continue rising.”
A report out today from property information and advertising firm Domain shows that rents in most capital cities are stagnant, with rents falling across the board in Perth and Hobart and unit rents down in Darwin as well.
Mr Blake said the weakening conditions appear to be taking some of the steam out of future apartment projects.
“We have argued the next wave of projects will slow sharply, and while approvals have surprised us, today’s data shows multi-dwelling commencements actually fell 25 per cent to 95,000,” he noted.
“This may prove to be just quarterly noise, but a more optimistic scenario for financial stability would be that tighter credit conditions and weaker fundamentals are indeed slowing activity.”
Consumer unease mounting about property
The view that housing cycle may have peaked and concerns in the money market are supported by rising consumer unease about property.
The overall measure of consumer confidence in the monthly Westpac survey rose but, importantly, a measure of whether it was a good time to buy a house fell in October.
Paul Dale said, while housing market has strengthened with house price inflation pushing back above 7 per cent annually, it is activity indicators that point to what is going to happen next.
“The fall in the time to buy a home index is broadly consistent with house price inflation slowing to below 5 per cent in the next year.”</p> <p>
Morgan Stanley’s Daniel Blake said the messages from the secondary – or already established – property market are mixed.
“Auction clearance rates have been firm, but on 15 per cent lower volumes than a year prior, with the real test coming as we enter spring season,” Mr Blake said.
He added that price trends are also tricky to read, with Core Logic’s series pointing to an 8.6 per cent rise so far this year, while another study of median prices comes up with half that rate at 3.8 per cent growth to August.
Mr Blake said he was cautious, particularly around apartments, on the Australian economy in general and banks in particular.
“On a one-to-two-year view, we believe the housing boom has been responsible for driving the transition from mining capex, and the necessary slowdown to rebalance the market will weigh on growth,” he said.
“In the meantime, apartment settlement risk is elevated as foreign investors look to secure credit following the pullback by domestic banks.”