A Complex but Positive Outlook Emerges for 2020.
Australia’s residential property markets should reflect carefully on a combination of positive events that might well signal an upward trend in demand and prices. The ‘three-pillars’ as the trend has been branded, comprise of further assistance to first time buyers, improved access to credit (APRA policy changes) and falling interest rates.
However, each is a complex area and the impacts have the potential to be mixed relative to local market conditions. We also need to add another big factor and that’s supply. While supply is always perhaps the most important factor, sentiment over the last six-months has been more volatile than usual however, post the Federal Election, volatility has been reduced and confidence has started to improve.
According to Dennis Vertzayias, Head of Residential Project Marketing NSW, Colliers International, “In NSW and particularly in Sydney, the three pillars are exasperated by significant infrastructure investment of $89.7 billion by the NSW Government, which at the front end will translate to more jobs, this in turn drives confidence and spending and this infrastructure makes it so much more attractive for people to buy and invest.”
Better Market Prospects from a Low-Base.
What we now see is the debate moving from ‘gloom’ to brighter prospects, and the question is now focused around timing. While in the last few weeks we have seen sentiment shift, almost overnight, caution dictates that simply or quickly going from ‘gloom’ to ‘boom’ looks a little hasty.
The current market correction started back in July/August 2017 and it’s been one of the biggest we’ve seen in many years, even in decades. If we start to see demand pick-up, helped along by lower interest rates and more access to credit, then prices should settle over the next six-months and then potentially start to recover in 2020.
However, caution is required as better auction results need to be sustained around 60% plus for several months and the current bounce should not be over-rated.
After all there’s a degree of built-up demand from the pre-election hiatus and also a fall in the number of listings also creates more immediate competition. The pace of market recovery is going to come of a very low-base and will vary from state to state and even inter-city rates will vary.
According to Core Logic sales transactions year on year for settled sales are well below the decade average, with Sydney (–21.6%) and Melbourne (-25.3%). National combined capitals are down (-16.4%).
There’s also been a big increase measuring the time on market between April 2018 and April 2019 with Melbourne increasing from 27-days to 43-days and Sydney from 31 to 62-days.
Sydney prices have fallen by as much as 15% and in Melbourne 10% since the 2017 peak, and while the trend has slowed, an orderly recovery would be the best result, rather than a premature false recovery.
Varied Markets across The States
Predictions of a market recovery need to be very carefully weighed against one of the sharpest corrections we’ve seen in decades. While there will always be exceptions to any trend, the optimism expressed after the Federal Election is already been tempered with caution. Put simply let’s not get carried away!
We need to appreciate that buying a house in any market remains an expensive exercise and servicing mortgage repayments can take between 46% and 20% of household income.
With Sydney and Melbourne are the most expensive cities and Darwin, Canberra and Perth less expensive in a range of 19% to 28%. Against these sort of figures any rise in unemployment will be a concern.
Over the next 6-months a keen eye will be on the Sydney & Melbourne markets. It’s entirely possible we will see some further declines and there will also be gains, as already seen in auction clearance results.
However, taking the relative number of auctions and the cost of housing in these two markets, we will need to see sustained improvement. It’s not as crude as seeing markets bounce around at the bottom of the cycle, but that might happen.
Auction results for Sydney and Melbourne are positive and are pulling up the national average above 62% from around 56%, 12 months ago. Sydney has even managed to reach 70% and Melbourne 65%. However, both cities look set to sit in the 55%-60% range for some months to come.
Beyond auction results there’s also the reality that homeowners are currently shy when it comes to selling their properties and this includes down-size-sellers.
New figures from CoreLogic shows that new listings are at their lowest point for 12 years, with the trend again most noticeable in Sydney and Melbourne.
What these figure might indicate is that the housing market may not reach its absolute rock-bottom until later this year. Despite the good news from APRA the reality is that tighter lending criteria will remain in force and may still possibly continue to limit finance from the big-four banks, making it difficult to get a mortgage for some time yet.
Andrew Scriven, Director, Colliers International Residential QLD, believes that “the regional differences will continue as we can see with South East Queensland, including Brisbane.”
“In Queensland there’s a return to a trend where local property markets are again driven by interstate population migration driving demand, most of which is moving to Brisbane and regional suburbs. Retirement, another Queensland market-driver, is assisting demand on the Gold Coast and Sunshine Coast.
“Infrastructure is also important not only to Queensland but also in NSW, Victoria and all of the other states. Infrastructure spending is important in creating and supporting jobs and is now a central economic driver.
“And while NSW has a very positive state budget, the federal budget will further boost activity. However, for SEQ and Brisbane the positive benefits of affordability offers further incentives for the housing market, while the region has one of the lowest vacancy rates in the nation at less than 3%.
“Low vacancy rates are helping to keep yields higher than Sydney and Melbourne. In Brisbane new apartments are currently yielding 4.5-5.5%.
The Brisbane market slowed before the other states and buyers are still cautious, however declines have been less and with dwindling stock and improving sentiment, it looks like it will be the first to emerge back in positive territory.”
First Time Buyers Looking Happier
All of the positives in the market need to be given time to settle and some measures like the government’s First Home Loan Deposit Scheme have yet to be fully legislated and may well evolve.
The scheme is also limited to 10,000 home buyers. Plus, a stronger flow of funds to the housing-loan market may take several months to happen.
It’s clear that market confidence is being re-built although buyers are going to look for strong evidence that prices are no longer falling. They will also look for more market activity with evidence of more transactions and less time on the market.
We are then going to have to face the prospect of how the wider economy is performing a key factor driving interest rates. There’s some notion that unemployment might tick-up. While way beyond the impact of local house prices the international economy looks at best complex. If these areas serve up any nasty-news, then recovery will be put at risk or at best delayed and a weaker economy will greatly impact first time buyers.
Forecasts and hindsight are both interesting subjects, and that’s equally so when looking at our residential property markets.
Affordability, access to finance, a possible credit-crunch, taxation policy, population policy and infrastructure, were all important factors highlighted late last year as impacting the residential market.
All of these areas were contributing to a lack of buyer and developer confidence, delaying resilience as buyers lacked confidence.
Now, just 175 days later we can see that the market has started to improve. The media has been rapidly reporting that post the Federal Election, the housing market is looking much more positive. A few events, beyond the election itself have helped.
APRA Set to Relax Mortgage Servicing Regulations
Banks mainly exist to lend money, sooner or later, the sometimes denied ‘credit-crunch’ would need to wind down. There’s also evidence to suggest that non-bank finance is thriving as regulatory restriction have kept the banks at somewhat subdued lending levels or at the very least restricted lending.
The stringent credit conditions APRA had imposed on major banks have, although publicly denied, helped to pour cold-water on the housing market, but now, among other welcome news, those polices looks set to change.
It has been revealed that APRA has written to all deposit-taking institutions (the major banks foremost among them) proposing a change to the serviceability calculations for residential mortgages, with the changes including a number of measures in favour of borrowers.
Currently and this measure has attracted recent criticism, lenders were required to calculate a borrower’s ability to service a loan using an interest rate that is the maximum of either a floor of at least 7%; or a buffer of at least 2% above the borrower’s actual loan interest rate.
However, according to APRA most lenders relied on the maximum of either 7.25%, or a buffer of 2.25% above the actual loan interest rate. This had the impact for some borrowers, of pushing home loan repayments beyond acceptable serviceability.
Now in a popular move, it has been announced that APRA plans to scrap the 7% floor, replaced with a policy that allows the lender to calculate a borrower’s ability to service a loan using a buffer of 2.5% above the loan interest rate. However, APRA have stimulated that this must ignore any introductory or honeymoon rates offered at the start of the loan.
APRA is currently undertaking a four-week consultation period to the 18 June, before releasing its final updated guidance.
Assuming APRA does introduce this change later in June, and assuming that other loan conditions remain stable including loan to value ratios the impact has been seen as positive as it would generally increase the borrowing capacity of new borrowers.
The change for a borrower will depend on the rates on offer, although there is currently a large number of loans around or less than 4%.
Supply Set to Take a Hit.
Looking to 2020 and beyond over the next 2-3 years supply is set to play to play an increasingly central role in the outlook and health of residential markets. While’ there’s been a big focus on finance and interest rates we are also set to see new supply fall. The fall will impact both apartments and traditional free-standing home.
According to research from Charter Keck Cramer, the supply outlook for Sydney apartments already looks to decline into free-fall with the trend most pronounced in 2021.
The research highlights a few key trends: overall completions in 2019 and onwards are pipelined to decline, back in November 2018 apartment approvals had already decreased 18.8% and the Inner Sydney apartment supply pipeline will drop by approximately 40% in 2019 by comparison to 2017 levels.
Total approvals across apartments and standalone houses have halved from their market peak and the slide continues. A big slowdown in detached house construction has seen the lowest numbers since 2013.
Further research shows that as the population of Greater Sydney heads beyond 5.2 million in 2018 dwelling completions had fallen to their lowest level in almost a decade.
Research from Core Logic also shows some similar trends. Building approvals have been falling since March 2016 and have shown some wild swings, while construction has been heading in a downward trend, with apartments leading the falls.
Falling levels of approvals and construction are expected to continue over the next 12-months, a development that will also have a negative impact on construction employment and make an early start to the many flagged infrastructure projects even more urgent.
However, by any measure the falls in approvals and construction will impact deep cuts to the available supply coming onto the market, when this fact is combined with a more usual credit market and even lower interest rates prices pressures will emerge.
While the removal of downbeat sentiment over negative gearing and a stronger, government assisted first time buyer’s market may well add further pressure to prices as supply falls.
Lower Interest Rates a Mixed Blessing
It comes as no surprise that we are seeing variable interest rates drop for the first time since 2016. This is a mixed blessing and may well deliver some positive and negative news for the economy.
Anyone with an existing home loan or are in the market for a new loan will be well advised to look hard for the best rate and deal.
While, potential buyers may see lower rates start to push up demand and prices. There’s also a reasonable prospect that more investors will turn to property with the potential of a higher returns, as other low-risk investments (like bonds, cash and term deposits) see returns fall to unacceptably low even negative levels.
However, last week’s rate cut offers some complex and mixed messages for the residential property market.
The Reserve Bank of Australia (RBA) has cut the cash rate to 1.25%. The last cut to 1.5% was in August 2016 and since then the residential market has peaked and then start to decline since late 2017. It has taken the RBA almost 2 years to drop rates as house prices started to decline.
In the lead-up to the RBA’s announcement and immediately after we have seen all lenders, to varied degree cut their interest rates, however there are limits to how far the banks will cut rates.
There’s also the continued prospect that more non-bank lenders will continue to enter the market, lower rates may well help deliver a more dynamic pool of lenders for individual buyers and developers.
Given the market corrections we have seen over the last 6-12 months there's no guarantee prices will lift in the short term, we need to see a sustained lift in demand before that happens.
The combination of lower rates, a boost in support for first time buyers and better access to credit might all be great in boosting buyer confidence, and that’s important.
However, if further rate cuts are required to boost economic activity and to contain any risk of rising unemployment then that will not be good news. It is notable the RBA has gone out of its way to signal that this cut was not an emergency measure. The RBA governor has also stressed that the decision was not a response to a deteriorating economic outlook.
Economists have noted that any cuts may take time to work through the economy and that the Federal Government has to work harder to encourage policies that lift productivity and innovation in the economy.
Looking Beyond the Three-Pillars
It would be a mistake to only focus on the housing market and mortgage interest rates and not see concerted efforts to boost the entire economy as the housing market cannot recover in isolation. There’s already a credible suggestion that governments at state and federal level may be looking to stimulate the economy beyond interest rates.
Lower interest rates have taken almost 2-years to materialise and that’s welcome, the test will be how this combines with a stronger first-time buyer market, improved access to credit and a big drop in future supply in shaping the residential market into 2020 -2021.
In the early part of 2019 sales volumes fell to their lowest level in at least two decades, there’s a big supply, although rapidly slowing over-hang to absorb and markets remain complex.
As already outlined policy interventions are important and are usually very positive for the market. We also need to factor in the impact of ‘human nature’.
When potential buyers see prices falling they naturally delay buying, and as vendors see prices fall, they desert the market and either do not move or they add their property to the rental market.
Only when financial pressures dictate that either you must buy (because prices are so low) or sell because you have to, will this conundrum be broken, and the question remains if markets have yet past that critical measure.
Against this grass-roots perspective and the bigger picture of supply and development options, there’s no surprise that an instant turnaround may not be a good thing. Perhaps it’s better that we see a steady improvement with measured stimulus applied to the general economy.