Life has been tough lately for Australia’s housing market. After the regulator tightened bank lending standards in 2014, housing prices have been cooling. There are a number of reasons to believe that we are at the bottom of the price decline. The first is a clear easing of monetary policy and the second is undoing part of the tighter regulatory environment for Australia’s housing sector.
On monetary policy, the Reserve Bank of Australia lowered the policy rate consecutively in June and July, which is immediately passed on to households, as floating rates are the norm for Australian mortgages. Given the subdued wage growth, the RBA has had to resort to rate cuts to reduce mortgage payments and alleviate Australian households’ heavy debt burden.
Beyond monetary easing, prudential regulation is also turning toward a more supportive stance after a clear tightening since 2014. In fact, the regulator has recently loosened the requirements for banks to assess borrowers’ ability to service loans. Furthermore, the new government has promised to provide financial support for first home buyers.
On the negative side, though, foreign investors do not seem to be coming back to the market notwithstanding a very weak Australian dollar. While the key reason probably is lackluster demand from Chinese investors as a consequence of heavy capital controls, Australian regulators are clearly not helping either, as the Foreign Investment Review Board does not seem willing to lift the additional taxes for foreign investment applications or soften the strengthened compliance and penalty rules for overseas investment. This has led to a substantial reduction in the share of foreign investors in Australia’s housing market from its peak in 2014 of close to 17% to less than 5% today.
Finally, the long-term fundamentals in the housing market remain solid thanks to strong population growth on the back of rapid immigration from overseas. In light of the short-term tailwinds and a favorable long-term outlook, Australia’s housing market should indeed be closer to the end of the tunnel representing a buying opportunity for investors.
Alicia García Herrero is the chief economist for Asia-Pacific at Natixis. She also serves as senior fellow at the European think-tank Bruegel and non-resident research fellow at Madrid-based political think-tank Real Instituto Elcano. Kohei Iwahara is a senior economist specializing in Japan and Australia macro research at Natixis.