APAC home prices to fall on reduced demand and affordability

Australian home prices may drop a further 5%.

Reduced demand on the back of tightening regulatory interventions and stretched borrower affordability will weigh on home prices across Asia-Pacific (APAC), according to a report by Fitch Ratings on global housing and mortgages.

The report highlighted how all countries in the region, with the exception of Japan, have implemented macro-prudential controls designed to cool demand, stabilise home prices and avert systemic risk associated with a build-up of housing debt.

In Australia, New Zealand and Singapore, authorities have imposed regulations targeted at non-resident demand and improving borrower credit quality.

Also read: Australia's GDP growth may fall to 2.5% in 2019

“We forecast Australian home prices to fall by a further 5% in 2019 before stabilising in 2020 with the fall driven by reduced affordability, restricted access to mortgage finance and higher stamp duty for non-resident buyers,” Fitch said. “Fitch expects prices to stabilise due to solid, above-trend economic growth and further immigration despite potential additional immigration restrictions.”

In South Korea, annual price declines of approximately 0.5% are forecasted for 2018-2020 on the back of subdued demand as a result of macro-prudential limits including a loan-to-value (LTV) cap of 40% in Seoul and other areas that have attracted speculation, on top of expectations of rising mortgage rates. Fitch also said it expects the Bank of Korea to raise its base rate by 25bp in both 2019 and 2020, with mortgage rate increases expected to be modest by a minimum of 30bp.

Likewise, a modest correction in China can be expected as home purchase restrictions remain in place.

“We expect home prices in tier one and two cities to be flat over the next two years whilst tier three cities will experience a moderate decline of 5% a year as home purchase and reselling constraints remain in place under the national policy that ‘houses are for living in, not for speculation’,” Fitch noted.

It added that the government’s measures to meet pent-up demand by constructing properties for joint ownership and long-term leasing are only likely to have a longer-term effect on a small portion of the market. And amidst banks pushing to increase their retail lending, Fitch does not expect large discounts in mortgage rates to be offered given banks’ funding costs.

Also read: Home price growth could ease to 2% in 2019: Fitch Ratings

Housing affordability is predicted to remain stretched, with the report noting how Australia, Japan and New Zealand continue to have home price-to-income ratios at near all-time highs. Australian borrowers in particular may continue to be vulnerable to financial shocks, the report added. South Korea and Singapore on the other hand have been experiencing high wages that are outpacing home price growth.

“Fitch expects the housing non-performing loans (NPL) ratio to rise to 0.7% in 2020 from the 0.4% projected for 2018 as Singapore mortgage rates continue to climb,” Fitch commented. “However, we expect any increases in delinquencies to be limited due to support from rising household incomes, a tight labour market and strong household balance sheets.”