Has the property market reached its peak?
Friday, May 5, 2017/
The property market has topped. Well, that’s what some experts are saying.
Initially analysts at investment bank UBS called the top of the housing market a few weeks ago, suggesting both market activity and price growth will now moderate.
This week Corelogic’s statistics showed their five city aggregate hedonic home value index has virtually held steady over the last month, rising just 0.1% over April.
Tim Lawless Corelogic’s head of research explained:
“Recent regulatory changes aimed at slowing the pace of investment and interest-only lending have pushed mortgage rates slightly higher and slowed the pace of investment demand. These changes appear to be having a dampening effect on housing market conditions”
Is it time to worry?
Let’s be honest, the last couple of years have been a dream for many property investors.
Money was cheap, banks were falling over each other to lend to investors, our markets were booming (particularly in Sydney and Melbourne) and an underlying shortage of supply together with a rising population created the perfect storm for booming property markets.
But the reality is the market is changing and the conditions that drove the dramatic growth we’ve seen over the last couple of years are not going to take us into the future.
However, we need to be cautious in calling a peak in the market on just one month’s results, and of course we recognise that there is not only the one ‘Australian property market’.
Each state is at its own stage of the property cycle and within each state there are various submarkets defined by geographic location, price point and property type.
And each of these submarkets are at different stages of their own cycle.
So clearly when “overall prices” in Sydney and Melbourne did not rise last month, the value of some properties rose, others remained flat and the value of some properties actually fell over the month. That’s how averages are made up.
So the question is where are we heading now?
Some commentators are suggesting the market is about to turn, citing lower auction clearance rates and slowing investor finance as signs we’re at the top of the property cycle.
Sure, auction clearance rates are now in the mid-70% range rather than the heady 80% plus range. But history shows there’s no need for concern till clearance rates drop below 60%.
And while the fact that new loans to investors in March climbed at the slowest pace in six months will be music to the ears of the regulators, there are still more investors looking for property in Sydney and Melbourne than there are good properties.
I see a period of more moderate property price growth for the rest of the year, followed by a period of stagnating property values and moderate price falls in some areas.
Now this doesn’t mean the sky is falling and we are doomed, as some overseas experts are suggesting. But investors won’t be assured of strong capital or rental growth in the immediate future (in reality, it is never assured!).
This means as we transition through the next stage of the property cycle investors will need to strategically position themselves for the next few years.
What will drive our property markets now?
As always our markets will be driven by broader macro economic factors as well as by local micro economic factors.
At the macro level things like our economy, interest rates, availability of credit, consumer confidence, world economic events, government policies (interference) and external political factors will influence the strength of our real estate markets.
At the local level, economic growth, jobs growth and population growth will drive (or hinder) property price growth. As will the supply and demand ratio of properties.
Property is a game of finance
Every property cycle I’ve invested through over the last 44 years has eventually come to a halt because of finance.
In the old days it was because of a government induced credit squeeze when finance became difficult to obtain.
Since deregulation it has been the Reserve Bank raising interest rates that has put an end to each property boom.
But this time around it’s back to a credit squeeze — I’m surprised no one else has used that term, maybe there are not many of us old enough to remember it — with the Australian Securities and Investments Commission’s macro prudential controls forcing banks to tighten the screws on investor lending.
Now, this is not a bad thing.
The strength of the Sydney and Melbourne property markets was unsustainable. And the fact that around half of all purchases in some locations in these cities were made by investors could have lead to unstable markets.
I’d rather see a softening of our markets, as I’m now expecting, in the low interest rate environment we’re experiencing, rather than a general recession and market crash brought about by high and rising interest rates.
Let’s start by examining some of the factors affecting our property markets.
- 1. Subdued economic growth. Australia’s economic growth is below its long-term average and this trend is likely to continue considering the current world economic environment. This is likely to keep interest rates on hold for the foreseeable future.
- 2. Jobs growth is very fragmented. Almost all the permanent jobs growth is occurring in Victoria and New South Wales which is driving local population growth, the local economy and therefore their property markets. And this trend is fragmentation is likely to occur in the foreseeable future.
- 3. Low inflation. The latest Consumer Price Index figures show inflation has ticked up a little bit but is still at the lower end of the RBA’s desired range. This, together with our generally weak economy, means the RBA is unlikely to raise interest rates anytime soon.
- 4. Fickle consumer sentiment. Our local problems, together with the world’s political and economic uncertainty, mean consumer sentiment has dropped recently. When people are uncertain, they tend to stop spending
- 5. More macro prudential controls. Even though the RBA is keeping interest rates steady, banks are raising interest rates and tightening serviceability criteria for investors and, as I’ve explained, this is one of major factors slowing our property markets. It’s likely that credit will become even more difficult to obtain in the future, before things eventually become easier, so it may be a good time to consider fixing a portion of interest rates on your loans.
- 6. Population growth is slowing and concentrating in areas where jobs are being created, particularly Victoria and NSW (really Melbourne and Sydney).
- 7. Significantly less foreign investment. Foreign investment, which fuelled our inner city apartment high rise boom, is expected to more than halve this year, from 40,000 to 15,000 transactions. Treasurer Scott Morrison has said: “Cooling foreign investor interest, due to tougher foreign investment rules implemented by our Government and capital outflow restrictions in China, are already having an impact.”
The bottom line
Like it or not, the markets are moving into the next phase of the property cycle — one of more moderate growth.
Obviously there will be out-performers and under-performers.
As a property investor, your job is to find the type of property that will outperform the market averages and remain stable — in other words not fluctuate in price significantly.
This is likely to occur in the areas where economic and jobs growth (basically our service industries) will lead to population growth and property demand, as well as consumer confidence because of job certainty.
In general, this will be in the inner and middle ring suburbs of our three big capital cities.