Over the last year or two a number of factors played out to create a perfect storm causing house prices (particularly in Sydney and Melbourne) to drop and house price growth in other states to slow.
• Poor affordability after house prices in our two biggest capital cities had grown at unsustainable rates for a number of years. In particular first home buyers are having difficulty saving a big enough deposit to get a foothold in the market.
• Tight credit conditions – initially because of APRA’s macro prudential controls (decreasing lending to investors and reducing the number of interest only loans); but then the Haynes Royal Commission into Banking exposing some, let’s call them “interesting”, lending practices which caused the big banks to become allergic to risk.
• A surge in the supply of new and off the plan apartments in most of our capital cities.
• A collapse in foreign demand as we pulled the welcome mat out from under the thousands of overseas investors who were driving up the price of new apartments;
• An out of cycle interest rate rise by the banks in August and September.
• Increased interest rates for some property investors while other borrowers had to meet the extra cash flow commitments of switching from interest only to principle and interest loans.
• Fears by investors of what the proposed changes to negative gearing and capital gains tax could mean if there was a change of government next year.
• A general crisis of investor confidence caused by the media’s continual conveyor belt of scary headlines
Yet despite all this we are experiencing what I’m calling a “soft landing.”
You see…there are no forced sales with desperate vendors having to give their homes away at any price.
In fact, the current downturn is quite different from previous ones which have typically been triggered by a change in monetary policy (interest rates) or because of economic shocks such as the Global Financial Crisis.
This time we’re in the middle of an orchestrated slowdown due to significantly tighter credit conditions brought on by our regulators who wanted to avoid the type of market crash we could have experienced had the Sydney and Melbourne property markets kept growing at the unsustainable rate they were.
What nobody really predicted was the extent of tightening credit conditions in the wake of the Haynes Royal Commission which, on top of the previous regulatory tightening, resulted in many borrowers simply not being in a position to borrow as much as they could a year or two ago.
Now let’s look at the latest statistics and charts provided by Corelogic to see what’s happening to the property markets around Australia.
The national housing markets continued to lose steam last month, with price falls largely confined to Sydney and Melbourne which together comprise approximately 55% of the value of Australia’s housing asset class.
Since peaking in July last year, Sydney’s housing market is down 9.5% which is on track to eclipse the previous record peak-to-trough decline set during the last recession when values fell 9.6% between 1989 and 1991.
Melbourne dwelling values peaked four months later than Sydney, in November 2017, and have since fallen by 5.8% through to the end of November 2018.
Let’s put some context to this:
Australia’s total residential property markets are estimated by Corelogic to be worth $7.6 trillion dollars, yet the total value of all residential debt is $1.8 trillion.
Put simply, with a total loan to value ratio of less than 30% all the fuss made about the high level of mortgage debt is really unfounded.
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