Australian Housing Prices Finally On A Downward Trend Due To Higher USD Funding Costs And Regulatory Constraints But Do Not Expect A Massive Correction

The Australian housing market finally began to show signs of cooling. After rising at around 10% p.a. for three years, residential property prices fell slightly during the second quarter of 2018. The cool down was arguably triggered by tighter government regulations but also by the banks’ own tightening of its lending standards. More specifically, FIRB, which develops Australia’s foreign investment policy, restricted overseas investment in Aust ralia’s real estate market, as foreign demand constitute d about 16% of new properties at the peak in 2014 . Furthermore, banks tightened their lending standards, following a rigorous scrutiny under the Royal Commission, which was recently established by the Australian government to investigate potential misconduct in the financial industry. In addition, increasing USD funding costs for Australian lenders have started to be passed on to households through increases in mortgage rates although still very moderately as the RBA cash rate remains flat at a historically lowest level. Despite these headwinds, the housing market is likely to avoid a significant correction as the nationwide vacancy rate remains low and domestic demand should continue to increase supported by even stronger immigration. In the same vein, we do not expect a very rapid increase in mortgage rates as the RBA is anticipated to keep the monetary policy accommodative to further support economic transition away from mining towards services. However, the increasing cost of cross-border wholesale funding for Australian banks may have a bearing on mortgage rates.