In late 2016, we started to advise our clients to be careful of Sydney and Melbourne property. We also ran some seminars late that year to share our concerns and discuss alternative investments.
We were not entirely certain what the trigger would be for the collapse, and we did not see it being the regulators acting so aggressively to limit lending.
What we were concerned about was the amount of people who listed their main reason for investing as FOMO - Fear of Missing Out.
People were planning simply to hold on for a couple of years and then sell once they had made their profits- already banked in their mind. No one was planning for how they would hold in a downturn if the rent did not cover the cost of holding the property.
Property investing is a long-term strategy. You might get lucky by buying and selling 12 months later, but that is not the normal experience. The ‘new normal’ could not last forever. We were concerned about people taking on too much leverage because they had never experienced property decline. Clients went from enquiring about rates to enquiring about borrowing capacity. It was all about ‘how much money can I get?’
The final giveaway of the end of a property boom for me is the number of mums and dads who made an appointment with us to discuss property development.
Clearly the regulators were concerned about this also. The same regulators who allowed much of the issues to grow without doing anything, waited until the exact moment, when we had more stock coming to the market than ever, to tighten lending criteria. It was always going to end poorly.
We have now had two rates cuts and it is now more affordable to make your loan repayments than anytime I can recall. However, rates were already low, and were never the main handbrake on the market.
My view on the property market downturn is that whilst property has fallen, no one has lost confidence in the sector. This feels solely like a credit driven downturn.
The reason people bid less at auctions was because the bank was not willing to lend them more. If they were approved for a higher loan amount, they would have kept bidding.
The reaction to the price falls has been the same as we have seen in previous declines.
People have taken their properties off the market and stock levels start to work to support prices. The first evidence of this is coming through in the June & July 2019 data.
Given all this - the news that APRA has agreed to allow banks to lower the rates at which they assess a customer’s ability to afford repayments is massive. This lower buffer will allow people to apply for increased borrowing amounts. Lenders can now add 250bps to the actual rate, rather the 7% or higher which was previously used.
This means the two rate cuts passed, and any passed in the future, will now have a direct impact on the amount you can borrow.
If we are correct and the sentiment about the property sector has not been affected greatly, then it is likely to seem more activity in Sydney and Melbourne property, especially moving into Spring.
My personal view is that the market bottom was May. If we get an external shock caused by any of the multiple global issues being played out at the moment, and trade and growth slows substantially, the trend could reverse as is always the case.
Leaving that aside we are likely to see property stabilise and drift higher but not at the rate we were used to.
Property, whilst it has fallen is still expensive. Maybe I am showing my age but I still find it hard to understand a two bedroom apartment in the Hills Sydney going for prices above $800,000. Property is by no means cheap.
The issue of affordability still exits. Lower rates improve affordability but before the property market really starts to grow strongly again there is still a need for improved affordability. Lending criteria even allowing for a lowered servicing buffer is still more strict than it ever has been.
Wages growth is the key to improving affordability. The price of a house in 1977 was less than the average annual wage today. The big issue though is we are not seeing wages growth, and are unlikely to do so in the short term. This is not just an Australian problem, it is a global issue.
Well placed property in places people want to live, will always hold its value well. But unless we open our markets to foreign buyers again, without wage growth it is hard to see another widespread boom for some time yet.
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