Australia's property market is slowing, and its not over yet

Property values, particularly in Sydney and Melbourne, have been falling now for a number of months.

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And now the latest ABS housing finance data indicates that impact of these falls is now also being felt in demand for new mortgages.

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While the value of lending fell over the month for owner occupiers and investors, the slowdown was much more substantial for investors, and the sharp month-on-month fall follows a downwards trend that has been evident across several rounds of macro prudential measures over the past few years.

According to Corelogic research analyst Cameron Kusher, this really isn’t a surprise given so much of the lending to investors has been focused on Sydney and Melbourne and these cities are seeing values fall and yields at close to historic lows while investors are also incurring higher mortgage rates than owner occupiers, with additional rate premiums they use interest-only mortgages.

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“CoreLogic has believed for some time that investment in housing, particularly in the most expensive markets of Sydney and Melbourne, made little sense given stretched affordability, yield compression and little near-term value growth prospects with values currently declining,” Kusher says.

Despite this, lending finance data has continued to show investor activity which is well above average levels in NSW and Vic.

“We would expect that the coming release will show a further weakening of demand in these two states,” he said.

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What next?

Over the coming months Corelogic anticipates that mortgage activity, particularly from the investment sector will remain weak relative to recent years.

With APRA recently announcing they will lift the 10% speed limit on investment credit growth from July 1, it will be important to watch the trend in investment credit flows.

There have been recent reports that lenders are starting to reduce the interest rate premiums on some interest only loans and investment loans.

But Kusher warns that any reduction in rates could be offset by stricter serviceability testing on borrower expenses and incomes as well as the prospect for renewed focus from lenders to reduce their exposure to high loan to income ratio loans as well as maintaining their reluctance to take on high loan to valuation ratio loans.