It is without a doubt that the market is spiralling down as prices continue to decline particularly in Sydney and Melbourne. While the expectation of a market crash is unlikely, industry watcher Tristan Harrison said in a think piece on The Motley Fool Australia that there are triggers that could send prices hitting unexpected lows.
One factor is the stricter assessment of borrower expenses. Harrison said banks are being more conservative in how they use the household expenditure measure (HEM) to assess basic living expenses. This could result in borrowing capacity to shrink by 10% to 20% if banks started factoring in higher living expenses.
"The Australian Prudential Regulation Authority (APRA) has sought to reduce the amount of loans that are lent at debt-to-income levels of more than six times," Harrison said, noting that the current Sydney housing market has an average of nine times debt-to-income and Melbourne eight times.
In fact, a third of loans have actually been given out at more than six times debt-to-income. As a result, Harrison argued that borrowers would not be able to buy homes above a certain price if banks adhere to this new ratio.
Access to finance will be stricter once new credit reporting applies. While banks rely on borrowers to disclose their debt, they new rules compel them to get the full debt profile of potential clients.
"Not only may mortgages become harder to get, but all other forms of debt could be harder too. This may stop a lot of people who borrow to fund the deposit," he said.
Meanwhile, interest-only borrowers face the risks of higher repayments as their loans turn into principal and interest.
Lastly, the foreign segment has not been performing quite well as of lately. Foreign buyers in the past represented roughly 20% of new housing purchases, but with Chinese nationals finding it hard to get money out of China and regulators tightening investor lending screws, demand has been dismal.
With all these factors, Harrison stressed price falls are not hypothetical.
He said: "I don’t think we’ll see a 20% fall in prices in one year, but the next two or three years could see numerous months where prices fall in Sydney and Melbourne by more than 0.5%. I wouldn’t be surprised to see prices another 10% lower in two years compared to today,"