Fizzling demand likely to cause house-price drops

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Tightened macro-prudential restrictions and low affordability are predicted to weigh on housing demand in Australia, and this movement is likely to trigger house-price drops in the country this year, according to a new report by Fitch Ratings.

These findings support the conclusions of a recent study by investment company Citi, as well as other forecasts, which revealed the potential downturn of Australia’s housing market.

Fitch is expecting national house prices to drop by 5% in 2019, similar to last year’s rate, taking the peak-to-trough decline to 12%.

The report showed that price declines are likely to be more drastic in Sydney and Melbourne. These capitals not only recorded the most robust gains over the previous five years, but have also logged a decline in housing affordability.

Declining investor demand is also driving the weakness of the market. Investor demand has been bearing the brunt of the increase in stamp duty for non-residents and macro-prudential limits on interest-only and investment lending.

Mortgage arrears are anticipated to climb slightly or remain stable as a result of the housing downturn. Deteriorating housing market conditions will cut refinancing options for borrowers who are already struggling to pay their mortgages. In addition, properties-in-possession are likely to take longer to sell, increasing late-stage arrears.

 Fitch also forecasted that economic growth would slow and interest rates would likely rise slightly in some markets, although the change in conditions is unlikely to be large enough to pressure most borrowers.

Australia's high household debt and a large proportion of mortgages with variable rates would make it Asia-Pacific’s most vulnerable market to record a severe rise in interest rates.

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