Australia’s real estate market has been a problem for some time, but it is now facing an even worse landscape. A variety of problems, from banks struggling to control their loans to political uncertainty, has led a leading global credit agency, Fitch Ratings, to say that Australia is going to have the biggest drop in its market this year out of all major countries.
This startling revelation underlines just how far the bottom is falling out of real estate as high house prices that reached unattainable figures begin to come down. Because the correction does not seem to be small by any means, it is likely to continue throughout the year.
Such an issue is likely to be a political football for the major parties as Australia’s elections loom this year. Current Prime Minister Scott Morrison has previously said that housing prices do need to come down, but this process must have appropriate management to avoid it turning into a slide that cannot stop. A plummeting housing market is often one of the key precursors to a recession, and the incumbent leader wants to make sure that such a brush does not tarnish him before the elections.
Morrison’s challenger, Labor’s Bill Shorten, has been pushing for negative gearing reforms as he paints himself on the side of the Australian looking to get on the housing ladder and avoid large amounts of debt. Although Shorten faced attacks for his suggestion up until recently, his plan has secured backing from leading consultancy company KPMG, which has now added credence to his proposal.
The banks themselves are in a bit of a bind due to the Royal Commission inquiry, as they were handing out too many loans that people could not pay back. The major lenders received criticism for carrying out too few background checks on loan buyers to ensure that the numbers stacked up. Now, however, there is serious concern that the banks have gone too far in the other direction and that their incredibly cautious approach is stopping many people from getting housing approval.
According to Fitch Ratings, the average house price in Australia will come down by another 5% this year. Values should pick back up again in 2020 in many cases, although this will not apply to all the big cities.
The report, which compiled data from 24 major worldwide countries, revealed that Australia is set to struggle the most. It has now received this unwanted accolade for the second year in a row.
Tougher regulations and restrictions on which mortgages can be handed out has been key in lowering investor demand, and Fitch said that this is the main reason for the falling market. Australian house prices have already come down 6.7% from their highest point, and if they were to reduce by another 5%, then this would represent a significant loss of liquidity for many households. People will not be able to move up the real estate ladder, as they will have less available capital. In turn, there are fewer affordable homes available in Australia, and this cycle will continue as demand reduces.
Fitch also noted that Australians have the highest household debt level in the world, and this makes them more perceptible to economic shocks and downturns.