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House prices fall in Sydney for first time in 18 months

Eryk Bagshaw

Sydney house prices are set to suffer their first fall in 18 months, new figures show, in the wake of strong action from regulators designed to curb the growth in investor loans.

The survey could offer some relief to owner-occupiers who have been locked out of the Sydney and Melbourne markets, and to the Turnbull government as it plays down housing affordability as the focus of the May budget. 

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Rental prices on the rise

Supply is tight and rents have continued to rise for the March quarter.

CoreLogic's figures for the first 27 days of April show Sydney house prices have fallen 0.1 per cent for the first time since December 2015, while Melbourne's property prices have risen 0.5 per cent, half as much as the previous month. 

The full analysis for April, which could see Sydney's monthly prices fall 0.2 per cent, is due to be released on Monday and is likely to be welcomed by the Coalition after Treasurer Scott Morrison urged regulators to clamp down on "the sharp increase in the level of investor credit" fuelling the runaway property market. 

"I have been concerned over the last couple of months that the measures that were put in place a few years [ago] have worn off and it is now for the council of financial regulators to determine what the next step is," Mr Morrison said in March. 

The big four banks reacted swiftly by raising the interest rates of investor loans following the announcement, with the Commonwealth Bank moving again to raise rates in April by 0.25 percentage points.

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ANZ followed suit on Friday, raising its interest only rates out of cycle by 0.4 percentage points to "reflect our need to closely manage our regulatory obligations, portfolio risk and the competitive environment", before the Reserve Bank's interest rate meeting on Tuesday. 

In research released on Friday, the bank said while housing finance remained strong, "the stock of owner-occupier and investor credit appears to be heading in different directions", with owner-occupier loans increasing as investor loans slowed. 

While the government has begun managing expectations of the May budget's housing affordability package, it has maintained it will be a key part of its policy pitch.

Measures to help first home buyers pay for a deposit are still under consideration, while raiding super, adjustments to the capital gains tax concession and negative gearing appear to have been ruled out.

On Friday, Labor's finance spokesman Jim Chalmers told Sky News "any policy on housing affordability which doesn't make important and considered changes to capital gains and negative gearing has a hole in the middle of it". 

The slower house price growth in Melbourne and Sydney is also likely to be welcomed by the Reserve Bank after it warned regulators could take drastic action to slow the cities' runaway housing markets if interest-only loans were not brought back under control.

Interest-only home loans are typically used by investors to claim a tax deduction or by buyers who want the property for only a few years before selling. The interest is paid over a set period, usually five years, before both the principal and the interest become payable, making it a more expensive option for longer-term homeowners but attractive to quick turnover investors.  

Analysis of Australian Bureau of Statistics data in March showed investors had stormed back into the market, taking out nearly 50 per cent of all loans in January for the first time since 2015, with up to 40 per cent using interest-only loans, while foreign buyers spent $8 billion a year on new homes in NSW and Victoria, locking out owner-occupiers.

On top of higher interest rates putting a dampener on demand, new restrictions implemented by the Australian Prudential Regulation Authority will require banks to limit interest-only lending to 30 per cent of residential lending. 

Despite the slowdown in investor credit, international ratings agency Moody's believes housing affordability will continue to deteriorate this year. In a note to investors, it said that despite lower interest rates helping people into the market, house price rises fuelled by demand would "tip the balance" towards making housing less affordable. 

On Tuesday's coming interest rate decision by the Reserve Bank, CommSec chief economist Craig James said "rate cuts are off the agenda".

"And while it is a little early to focus on rate hikes, the Reserve Bank will carefully monitor the 'upstream' price pressures," he said.

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