Falling property prices are an opportunity, not a tragedy

Cheer up ... it's not really the beginning of the end for property or the economy

At the end of November last year we were reading headlines saying "Sydney house prices have biggest monthly fall for 14 years and Melbourne close behind".

CoreLogic numbers showed Sydney prices had fallen 8.1% in a year with Melbourne down 5.8%. Melbourne and Sydney between them account for 55% of the Australian housing market by value. The national annual fall in house prices in capital cities was 5.3%.

The 8.1% fall in Sydney was the steepest since May 1983 but that hides the city's peak-to-trough fall, which was even worse at 9.5%. This almost matches the record 9.6% peak-to-trough drop between 1989 and 1991, which notably was during a recession. The observation is that we have had an almost record drop in property prices but this time without a recession.

The price fall could possibly be blamed on an increase in the housing supply, slowing demand and a reduction in foreign buying activity. But the most significant factor has clearly been the tighter lending imposed by APRA.

The target of that regulation was the frothy end of the investment market but the result, since lending restrictions were imposed on the banks in March 2017, has been an almost record, unintended destruction of the core housing market.

APRA rather laughably said last year that its lending restrictions were designed to prepare the housing market for a "cold snap" but it is perhaps overlooking the fact that rather than prepare Australia for a dip in the housing market it may in fact have caused it.

Meanwhile, the Australian economy, which is a core driver of the housing market, is cracking along. The Reserve Bank said in its recent minutes that "GDP growth is expected to be around 3.5% on average over 2018 and 2019" and "GDP growth is expected to ease to around 3% towards the end of 2020 as LNG exports reach capacity production levels by the end of 2019".

In the RBA's eyes, it seems, we have to worry about LNG exports rather than the housing market. The conclusion is that our economic concerns are overdone.

The more optimistic interpretation is that this almost record peak-to-trough decline in house prices, particularly in Melbourne and Sydney, is not only as bad as it gets but it has overshot.

APRA, in its attempts to contain the speculative end of the market, managed to rather unnecessarily kill it instead. Combined with the royal commission it paralysed the bank sector, slowed lending rates and needlessly dented house prices. If it was looking to blow the froth off the investment market and off the international interest in the Australian market, it went too far.

The RBA acknowledged the damage in its recent minutes: "Conditions in the Sydney and Melbourne housing markets have continued to ease, following significant growth over preceding years. Credit conditions are tighter than they had been for some time, partly because lending standards had been tightened following the introduction of supervisory measures to help contain the build-up of risk in household balance sheets."

The economy, meanwhile, is fine, and so it won't take much to rescue the housing market and fend off the "unseasonable cold snap" as described/caused by APRA.

And clearly APRA is getting the message. Just before Christmas it began to loosen lending restrictions, claiming that its "benchmarks on investor and interest-only lending were always intended to be temporary".

More likely the RBA has passed the message to APRA to pass the message to the banks to "get on with it" again, to loosen lending requirements, to get loan approvals back down from 6-8 weeks to 2-3 weeks, and let the housing market breathe again. Net result: this market will just as rapidly recover, as it always has from this level of price depreciation.

So my advice is not to give in to the fear about the housing market, or about the Australian economy coming to an end because of the housing market.

If prices are a combination of value and sentiment, we are at a sentiment low, and rather than housing dropping into an even bigger hole the chances are that price growth, which is as bad as it's been since the last recession, is as bad as it gets.

This is not the beginning of the end; it is an opportunity. If you are supposed to buy when others are fearful, this is not a time to imagine the worst.

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