Over the second quarter of 2018, national dwelling values have declined by -0.5%, matching the -0.5% fall in values over the March quarter.

Throughout the 12 months to June 2018, national dwelling values have decline by -0.8%. Although a -0.8% fall isn’t overly large, it is the greatest annual fall in values since September 2012 when values had fallen -1.1% over the year.

While the headline figure is recording falls largely due to declines in Sydney and Melbourne dwelling values, housing market conditions have also softened in most other capital cities. In fact, Brisbane, Adelaide and Hobart are the only capital cities where dwelling values remain at peak levels. In Perth and Darwin, values have been below their peak since 2014, while markets such as Sydney, Melbourne and Canberra have also entered a downturn. Even in Brisbane and Adelaide, where the pace of capital gains has been relatively sustainable, the rate of value growth has slowed over the past 12 months.

Weaker housing market conditions at the national level are primarily being influenced by a downturn across the capital city regions; especially the largest housing markets, Sydney and Melbourne. Regional housing markets have seen value growth slow over the past year however, values remain in positive territory, at least at a macro level. Despite the more resilient conditions across regional markets, CoreLogic indices data has recently indicated a slowing of value growth in most regional NSW housing markets and on the Gold Coast while regional areas of Vic and the Sunshine Coast are seeing the rate of value growth accelerate.

The current decline in values across the Australian housing market is quite different from previous downturn which have typically been triggered by a change in monetary policy (interest rates) or via an economic shock (such as the Global Financial Crisis). The current downturn has occurred on the back of changed credit regulation which has resulted in much tighter credit conditions. Since late 2014, the Australian Prudential Regulation Authority (APRA) has implemented a number of measures designed to remove some of the risks in the mortgage market and tighten lending policies. These changes have included, but not been limited to: calculating mortgage serviceability on a mortgage rate in excess of 7%, a 10% speed limit on annual investor credit growth for all lenders, limiting the flow of new lending for interest-only purposes to a maximum of 30%, requiring lenders to more accurately assess income and expenses and a more detailed understanding of borrower’s existing debts.

The repercussions for borrowers of these changes to lending policies is that the availability of credit has been tightened. Investor and interest-only mortgages have become less readily available and those wanting to take out these types of mortgages are being charged higher mortgage rates. The amount that borrowers are able to borrow for a mortgage has been reduced and more information is required when applying for a mortgage.

An immediate impact of these changes have been a sizeable fall in lending to investors who were, in Sydney and Melbourne in particular, a major source of mortgage demand over recent years. Although new housing finance commitments to investors is still well above long-term averages in NSW and Vic it has declined substantially from the peak levels.

Australia has also seen a boom over recent years in new housing construction, particularly for units in Sydney, Melbourne and Brisbane where the number of apartments built reached unprecedented levels. Many of these new units had been purchased by investors ‘off the plan’ and we are seeing some evidence that more units are settling with a valuation lower than than the contract price and there is a heightened supply of rental accommodation which is leading to a slowing of rental growth. This has been apparent in Brisbane for some time but rental growth is now also slowing in Sydney and Melbourne.

Low mortgage rates have not been enough to avoid recent dwelling value declines. While housing affordability is stretched in Sydney and Melbourne and falls are somewhat understandable considering the strong run up in prices, tighter new lending policies are likely a key driver of the housing market weakness. With a Royal Commission into the banking and financial services sector underway, it is reasonable to expect that getting a new mortgage is set to remain more challenging relative to previous years for some time. Given this, it is reasonable to anticipate that dwelling values are likely to continue to decline over the coming quarters, particularly in Sydney and Melbourne where investment demand has been the strongest and where affordability pressures are the most pronounced. it will be important to monitor the extent to which any weakness in Sydney and Melbourne infects other housing markets across the country.