As they say, “all good things must come to an end” and the run of eleven consecutive monthly gains for the Australian share market came to an end in September. The All-Ordinaries index closed the month 2.5% lower at 7,629.70 points (and is sharply lower on today’s open after US markets closed the month down).
The pull-back has come amid concerns over an increase in bond yields in the United States (due to inflation fears) and the Australian banking regulator signalling concerns over rapidly rising household debt-to-income ratios (on the back of rapidly rising house prices).
The Reserve Bank of Australia (RBA) held the official Cash Rate at 0.1% per annum in September (unchanged since August last year). The Australian Dollar fell by 1.2% in the month, with 1 Australian Dollar currently buying 72.26 US cents.
Global share market results were weaker in September (with the notable exception of Japan). The United States Dow Jones index fell by 4.3%, the London FTSE fell by 0.5%, the Japan Nikkei 225 gained by 1.7% and the Hong Kong Hang Seng Index fell by 5.0% for the month.
CoreLogic’s latest house price data shows that house prices climbed 1.50% on average in September, with average housing values some 20.30% higher over the past year. This annual growth rate is the fastest since 1989!
The rapid rise in house prices has caused the Australian banking regulator (APRA) to remark that it is considering introducing measures to limit the debt-to-income ratios that banks use when assessing mortgage applications. The supply of credit is an important factor when considering the direction of house prices.
The chart below shows the monthly change in housing prices on a historical basis.
Source: AMP
As noted above, in 2018 and 2019 house prices were falling on a month-to-month basis. At this time, the Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry was underway, and banks were queried whether the use of the standard Household Expenditure Measure (HEM) was an appropriate method for determining a borrower’s ability to service a home loan.
Furthermore, ASIC litigated against Westpac in the Federal Court over the use of the HEM (as opposed to the alternative of reviewing in detail borrowers’ expenditure based on statements), with the case dismissed in favour of Westpac in August 2019. While this litigation was underway, the flow of credit eased, and house prices fell.
Time will tell if APRA’s remarks that it is considering introducing measures to limit the debt-to-income ratios will have the same impact on house prices. While it is important to ensure prudent macro-economic controls, and with a Federal Election looming, the last thing that the federal Liberal government would want is a sharp decline in house prices. Falling house prices can have serious ramifications on consumer confidence and by extension, economic growth.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.