9 Month’s Notice Given to Australia’s Property Sector

ANZ economists David Wilson and Jo Masters give homeowners in Australia a 9-month deadline to get themselves ready for higher interest rates and tighter lending restrictions, making them consider that Canada’s approach to their own property market could be a roadmap.

The bustling cities of Toronto and Vancouver in Canada, according to analysts, are often associated with Australia’s Sydney and Melbourne, with post-GFC low interest rates triggering considerable house price booms in all four markets. Now as financial screws in both countries are being tightened, Australia, as per economists, should closely watch how Canada performs, seeing that this country has already used higher interest rates and tighter lending regulations to put its soaring house prices at ease.

Meanwhile, Australia is already seeing house prices soften and investors retreat following tighter lending restrictions just like in Canada. This also strengthens why those who monitor the Australian economy should more consider watching Canada’s developments when it comes to real estate and policy cycles— especially that Australia is also looking forward to two rate hikes in 2018.

“Canada is arguably ahead of Australia in its economic and policy cycles, so watching developments there can be useful for those monitoring the Australian economy,” according to ANZ economists David Wilson and Jo Masters, who note house price growth in Canada has halved in the last year.

“Canada is nine months ahead in terms of monetary tightening,” Mr Masters told Domain, pointing to two recent interest rate hikes in Canada, and ANZ’s prediction that the Reserve Bank of Australia will hike twice in 2018.

“Canada recently released additional macro-prudential measures for the property sector. These are likely to have a material impact on mortgage originations, housing affordability and property price growth in 2018. The hottest property markets in Canada – Vancouver and Toronto – are likely to be hit the hardest by these measures.”

With hikes in July and September raising the official cash rate to just 1 per cent, which is below Australia’s current 1.5 per cent, it is noticeable to say that Canada’s interest rates have come off at a lower base than Australia’s.

Shane Oliver, AMP Capital’s chief economist, also believed that Australians should be examining Canada’s scheme even if interest rate rises and a possible housing market slowdown were more likely to still be 12 months down the road.

“It’s a fair comparison to make, both countries have had strong immigration levels and pretty strong property markets, which have led to a deterioration of affordability,” he said.

Dr. Oliver added that any rate rises would help slowdown Sydney and Melbourne’s housing markets, but would undoubtedly put pressure on a few other state capitals like Adelaide and Perth.

“Australia’s complicated. It’s impossible to talk about a property boom in Perth or Adelaide,” he said.

In fact, a property boom in Australia, as stated by Dr. Oliver, had already begun to strike south in Sydney due tighter lending to investors; and that Melbourne also remained strong because of flourishing population growth in the city.

“If we go down the Canadian path we will risk a steeper decline,” he said. “The RBA doesn’t want to crash the property market, the housing market is too big too fail.”

He also added that even though growth in property price would slow down to allow wages to catch up, there are still criticisms saying that the idea portrays a “goldilocks scenario”.

Rate hikes in Australia may also cause more pain than in Canada since house prices are easing and investors, as early as now, have already been observed dropping off the real estate market, causing a drop in the number of those purchasing any household-related items.

And with housing and construction as one of Australia’s major employers, the fear is visible for the country—since any drawback could bring knock-on effects all around the country.

“With household debt sitting at record highs, the RBA faces uncertainty about how consumer spending will respond to slowing house-price growth,” ANZ said.