Australian Property Market Update

4 June, 2019

Home prices continued to fall in the month of May, but at a slower pace than previous months. Although the property downturn continues to lose momentum, the RBA, APRA and Coalition Government are all galloping in to save the day.

Will it be enough to breath life back into a weary property market? It all comes down to how much more Aussies are willing (and able) to borrow.

Auction Clearance Rates 

Many of those brave sellers who scheduled auctions post-election are being rewarded with rising auction clearance rates. Both Sydney and Melbourne saw a bump in buying activity on rising auction volume.

Here’s a look at preliminary and final auction data for the combined capital cities, plus Sydney and Melbourne, over the past five weeks:

Click the link in the Capital City Average columns to see the sources of the data.

There’s still some slippage between the preliminary results and final count, but the margin seems to be narrowing, especially in Melbourne. Depending on how the Sydney count plays out, this may be the first week in many months where both Sydney and Melbourne return a clearance rate above 60 percent.

Here are the latest preliminary auction results from CoreLogic for all the capital cities:

Source: CoreLogic

Home Prices  

Median dwelling prices continued to fall in May, but again, at a slower pace than the previous month. As you can see below, the rate of decline in Sydney and Melbourne has been decreasing steadily since January.

Here’s a look back at Corelogic’s recent monthly price movement data:

While the downward trend is improving in Sydney and Melbourne, Brisbane continues to fall at a brisk pace, and Perth has reverted back to a plunge downward, as in January and February. Canberra and Adelaide are mostly flat, while Hobart is showing signs of rolling over.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

In terms of falls from the peak, which can be extracted from CoreLogic’s back series of data, the Sydney market, which peaked in July 2017, has now fallen 15.0 percent. Melbourne, which began falling in November 2017, is now down 11.5 percent from its highest level.

At the current rate of slowing decline, I expect Sydney and Melbourne house price movements to flatten out sometime in the next six months, likely pulled forward to the next three months by cheaper and easier credit and improved post-election sentiment.

RBA Shoots Down the Cash Rate

After a strong dovish signal in a speech last month, Philip Lowe has finally started earning his wage, cutting the RBA cash rate to a historic low of 1.25 percent. It was August 2016, back when Glenn Stevens was the RBA chief, when we last saw a rate cut from our central bankers.

Futures traders had already fully priced in the 25 basis point rate cut, with another cut of the same measure priced in for October as well. Many economists expect a follow-up rate cut to 1.00 percent sooner than that, at the August meeting.

As reported last month, the dovish policy is in response to a completely impotent CPI reading in the March quarter, bringing year-on-year inflation to just 1.3 percent. The RBA’s primary goal is to keep annual inflation somewhere between 2 and 3 percent, preferably now at the higher end.

Just how low will interest rates go? Well, AMP is expecting an RBA cash rate of 0.50 percent by mid-2020. If there’s ammunition left in the gun, the RBA will no doubt use.

Treasurer Josh Frydenberg gave a stern warning to the banks that the Australian public is expecting them to pass today’s rate cut along to consumers in full. Of course, that will also benefit the Coalition party, but yeah… it’s mainly for the consumers.

ANZ and Westpac have defied the Fryd by only passing along a portion of the rate cut to borrowers. Commonwealth Bank and NAB, along with most other smaller lenders, have all fallen into line and passed along the full quarter of a percent rate cut to borrowers.

But the big question looming in property investors’ minds is whether lower interest rates will open the door for more buyers to enter the market. Maybe with a little help from APRA.

APRA Pulls a Knife on Interest Rate Buffer

Back in 2014, house prices were soaring higher and the RBA had plans to cut its cash rate far below 2.50 percent. Regulators needed a way to keep too much credit from flooding the housing market too fast, so APRA enforced an interest rate risk buffer on borrowers. Lenders were forced to assess the repayment capacity of borrowers not on the actual interest rate they would be charged, but at their current interest rate plus 200 basis points, or at 7 percent, whichever was higher. Although this was the official policy, APRA actually told lenders to be more strict than this, so most banks adhered to an assessment rate of 7.25 percent.

In line with anticipated interest rate cuts from the RBA, APRA has now signaled it will slash this 7 percent minimum requirement, allowing lenders to review and set their own minimum interest rate floor for use in serviceability assessments. This likely means means that as the cash rate falls, serviceability of buyers will be assessed against the two percentage point buffer alone.

According to APRA Chair Wayne Byres…

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”

As interest rates fall, and for lenders who pass on the rate cuts, borrowers will likely end up being assessed on their ability to repay a 5.5 to 6.5 percent loan. That would mean a couple with two kids on $80,000 per year may be able to borrow about $120,000 more than they could before.

History has shown that most homebuyers aren’t really great at assessing their own risk. They let the banks do that for them, or at least that’s what they think the bank is doing. So this change will very likely increase the number of buyers entering the market.

However, before the flood gates will truly open, lenders will need the freedom to move away from verifying actual household expenses and instead return to the Household Expenditure Measure (HEM) for estimating expenses. As Philip Soos has accurately pointed out…

This is why the decrease in the RBA policy rate and APRA serviceability rate will do nothing to inflate house prices: the HEM is by far and away the largest factor in inflating loan sizes. Using verified expenses easily counteracts any benefit in cutting both rates. pic.twitter.com/IvH6VNqmz7

— Philip Soos (@PhilipSoos) May 26, 2019

Coalition Government Saddling Up First Homebuyers With a Carriage Full of Debt

The week prior to the election, in a bid to garner votes from a younger demographic, the Coalition threw out a scheme to lower the amount first homebuyers would need to save to buy a house. For up to 10,000 applicants (earning less than $125,000 a year or couples earning a combined income of less than $200,000), the Government has promised to guarantee the additional amount needed to reach a deposit of 20 percent, with the first homebuyer bringing as little as a 5 percent deposit. Qualifying buyers will therefore avoid having to pay Lenders Mortgage Insurance (LMI).  

Why any first homebuyer would think it’s a good idea to borrow to buy a home at a 95 percent LVR in a falling market, I have no idea. Unfortunately, we as humans have not had a great track record of assessing risk during our twenties.  

Case in point… Domain reported this week on five first homebuyers who went to war at auction for a two-bedroom apartment in Northcote. By the time the fourth buyer had bowed out, the winning bid was nearly $90,000 above the seller’s reserve. For perspective, the median price of a two bedroom unit in Northcote is $577,500.

Land Developers Desperate to Make Out Like Bandits

Developers of struggling greenfield projects could be the most desperate for an uplift in sales from the recent regulatory stimulus. In Sydney and Melbourne, 27 percent of new homebuyers have been defaulting on their land purchases, unable to get finance due to more stringent lending criteria and low valuations.

For insight on just how much it sucks to be one of these buyers, click the video below to watch this 7News piece:

Hundreds of Melbourne families are panic selling housing blocks as they face financial ruin. @NickMcCallum7 #7NEWS pic.twitter.com/9ofC4RWWLx

— 7NEWS Melbourne (@7NewsMelbourne) May 20, 2019

Don’t Get Shot Down In a Blaze of Glory

What does all of this mean for property investors?

Although the regulators are coming to the property market’s rescue, the leading market indicators are still flashing red. Housing credit growth had another dismal month in April, growing at only 0.3 percent and residential building approvals fell sharply again over the month, down 4.7 percent.

While low credit growth tends to signal falling prices over the next six months, we’ll probably see the credit growth numbers improve once APRA’s changes go into effect.

Given enough time, the weak building approvals data should have the effect of decreasing supply, which should help house prices. However, it will be a tough year for tradies and others in the building industry, which won’t help to boost wage growth, which is what’s needed most if we’re going to see sustainable rises in house prices.

As we see a floor established under house prices in the coming months, it should be good times for manufactured growth investors. When you’re looking to do renos and subdivisions, what you need is a stable market.

But if you’re looking for a good time to jump in to a buy and hold deal, it may be best to wait a few more months and see how the market shakes out.

What do you think?

• Will we see house prices begin to rise soon or is there already too much debt in the system?

• For the Young Guns fans, did Pat Garrett really shoot Billy the Kid dead?

Take a moment to share your thoughts below.

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Australian Property Market Update 

7 May, 2019 

As the pace of house price declines slow and economists point to an impending RBA rate cut, is the worst of our property market woes finally behind us?

The Auction Market – Still Plodding Along

Last week’s auction results appear to show a healthy boost in demand, with the highest preliminary auction clearance rates posted in months. However, we also have a significant lack of reporting on the part of agents this week, which means we can expect to see the final numbers adjusted down more than normal.

That means the true auction clearance rates in Sydney and Melbourne are likely around the mid-50s, as was the case in late March and the first half of April.

Keep in mind that auction volume was much lower last week than in the weeks leading up to Easter, which could account for a boost in the clearance rate this week. If we still have the same number of buyers, but with fewer properties available at auction, clearance rates would be expected to rise.

Here are the latest preliminary auction results for all the capital cities:

Source: CoreLogic

Home Prices – Better than Last Month, Sort Of 

Dwelling prices are still falling, but the pace of decline is slowing. April marks the third month in a row that CoreLogic’s monthly figures have shown an improvement.

Could we see the Sydney and Melbourne markets flatten out and a buying opportunity emerge? It’s a little too early to tell, but watch this space.

Here’s a look back at Corelogic’s recent monthly price movement data:

Looking beyond our two largest capital cities, Brisbane remains weaker than at the start of the year, but managed a slight improvement from last month. The pace of house price decline is also slowing in Perth, and Adelaide remains mostly flat.

The best performing capital city in April was Canberra, rising nearly half a percent, and the worst performer was Hobart, declining nearly 1 percent.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

Looking back over the past twelve months, Sydney is down about 11 percent and Melbourne has fallen around 10 percent. But house prices in our largest capitals have been falling for longer than the past year. The Sydney market peaked in July 2017 and Melbourne started falling in November 2017. 

I keep monthly tabs on CoreLogic’s back series of data, and according to my assessment of their data, Sydney has fallen 14.56 percent and Melbourne is down 10.79 percent from the peak.

Keep in mind that’s just a metropolitan area average. Some suburbs have fallen more and some less. As Martin North recently reported, Gladesville and North Ryde have both fallen 21.6 percent since mid-2017. That means some homeowners who purchased around that time will now be in negative equity and have lost ALL of their cash deposit.

Mortgage Delinquencies on the Rise

As long as they can continue to make their mortgage payments and don’t become forced sellers, homeowners in negative equity may be able to ride out the storm. But according to a recent report by ANZ, an increasing number of mortgagees are getting behind on their payments.

The following chart tracks the number of households more than 90 days behind on their home loan payments.

Source: ANZ via SBS

In all states, mortgage delinquencies have been rising year-on-year. Things aren’t too bad in NSW at the moment because the job market is strong and unemployment is low. But WA is a different story, with an unemployment rate of over 6 percent.

While the RBA focuses primarily on the rate of inflation, to keep it between 2 to 3 percent, the unemployment rate is also on its radar. And for good reason. With house prices falling, a weak jobs market in NSW or Victoria would be devastating.

It’s About Time for Philip Lowe to Get Busy

The RBA just racked up a 33rd consecutive month without a change to its target cash rate. For now, we remain at a record low 1.50 percent.

But that streak is likely now coming to an end. May was the first month since before the last interest rate change 33 months ago that a rate cut was a 50/50 bet according to futures market traders. Looking forward to July, a full 25 basis point cut is already priced in, and futures traders have priced in cuts to a 1 percent cash rate by early 2020.

Why so much dovishness all of a sudden?

The consumer price index figures, the primary measure of inflation, was dismal in the March quarter. Economists weren’t expecting much, but they got even worse. Over the march quarter, the CPI was 0.0 percent. That brought the year-on year figure through March to 1.3 percent.

Yikes! That’s well below the minimum acceptable target for the RBA of 2 percent annual inflation. Were we not a few weeks out from an election, I reckon we would have seen a rate cut this week.

Will Lower Interest Rates Bring More Home Buyers?

One thing is certain – lower interest rates will not cause house prices to fall faster. But will a lower RBA cash rate stop falling prices or even cause prices to start rising again by bringing new buyers to the housing market?

While it’s true that we can see a direct correlation between falling interest rates and rising house prices in Australia from 2012 to 2017, low interest rates alone do not make house prices rise. There are two other factors we must consider: the availability of credit and the supply of housing.

Just because interest rates are lower does not mean banks will be writing more loans. Most banks are not permitted to assess the creditworthiness of borrowers at the variable mortgage rate. Regulators force banks to determine borrower serviceability assuming a mortgage rate of 7.25 percent, to provide a buffer against future rate rises. That won’t change with a rate cut unless APRA changes this assessment rate.

The other factor is the supply of housing. With many apartment developments still being built in Brisbane, Melbourne, and Sydney, and settlement risk still hovering over developers, plenty of supply remains in the pipeline. In fact, there are more houses on the market now than anytime since 2012.

Of course, the other wild card is how possible changes to investor tax concessions from Labor could impact the property market. According to the latest Newspoll, if the election was held today, Labor would come out on top.

Source: The Australian

It’s hard to imagine a scenario where negative gearing and CGT discount policies change and house prices don’t face further downward pressure.

March’s Credit Growth Numbers Really Sucked

Because housing demand depends primarily on the availability of cheap credit, the rate of credit growth is the most important leading indicator of home price movements. Changes in housing credit growth tend to lead changes in home prices by about six months.

In March, housing credit only grew by 0.25 percent. That brought the annual growth rate to 3.99 percent. That’s the lowest level on record.

As credit growth numbers are a leading indicator, home prices will likely still be falling six months from now, unless current lending restrictions loosen significantly.

Building Approvals Tanked Again

Although February was a solid month, building approvals tanked again in March. Approvals for the construction of new homes fell 15.5 percent, wiping out most of the previous month’s gains. This brought the annual figure through March to a decline of 27.3 percent.

Developers of apartments and units were the major culprit, plunging 30.6 percent in March. Approvals for houses only fell 3.2 percent.

Building approvals are important because they are a good indicator of what lies ahead in the construction industry. The latest figures mean there will be less work available for tradies and builders.

Longer-term, lower supply should be good for house prices, but it could take us a while to get there.

What does it all mean for property investors? 

On the bright side, house prices are falling at a slower pace than in previous months, especially in Sydney and Melbourne. We’re also likely to see at least one or two interest rate cuts in the coming months by the RBA.

But many headwinds remain. Our economy isn’t really growing, construction and property industry jobs are coming under pressure, and credit growth is slow.

That doesn’t mean it’s time to batten down the hatches and go into hiding. Astute investors will continue to make money in the coming months.

That said, if you’re a passive buy and hold investor, keep in mind the importance of market timing. It may be best to look for signs of the bottom before you jump into a deal.

If you’re a manufactured growth investor, make sure you have a solid due diligence system and, depending where you’re investing, factor falling prices or a longer sales period into your projected profit.

Regardless of your strategy or your market bias, commit time and money to your property education. You can never go wrong investing in yourself.

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Australian Property Market Update 

3 April, 2019 

Dwelling prices are still falling, but not as fast as in previous months. Is the latest housing market data showing signs of a soft landing?

The Auction Market – Don’t Be Fooled, Sydney

We continue to see Monday morning headlines about rising auction clearance rates in Sydney, with this week’s preliminary result at nearly 66 percent. But don’t be fooled; remember it’s the final (not preliminary) results that tell the true story.

Check out the difference in the table below between the preliminary results (released Monday morning) and the final results (posted on Thursday morning). This week’s preliminary results only include about 60 percent of the total auctions, and because most late reported results are for properties that failed to clear, the final figure tends to be much lower.

The data for the week ending 24 March is especially telling. Sydney’s preliminary auction clearance rate was 62.2%, but the final count comes in over 10 percentage points lower. That’s the widest disparity I’ve ever seen and indicates a final clearance rate this week of around 56 percent.

Melbourne’s preliminary results have been much closer to reality over the past few weeks. This may indicate that more properties are finding a winning bidder in the auction itself, rather than in post-auction negotiations.

If Sydney’s final result does come in around 56 percent, that does indicate an improvement from previous weeks. Melbourne’s final results are also trending upward through March, although this week’s preliminary result is several percentage points lower than last week, due mainly to an increase in auction volume.

Looking at the nation as a whole, the clearance rate continues to hover around the 50 percent range. But considering that auction volume spiked significantly this week, a clearance rate that doesn’t fall is a sign of improvement.

Either there are more buyers entering the market, or vendors are succumbing to market forces and becoming more realistic with their sales price expectations. Given the recent price action (which I’ll cover below), I’m inclined to believe it’s a little of both.

Here are the latest preliminary auction results (for what they’re worth) for all the capital cities:

Source: CoreLogic

Home Prices – Will they flatten out soon? 

Dwelling prices continued to fall in March, but not as much as in February. This was the second month in a row that the pace of decline slowed, meaning February’s price decline was not as great as January’s.

While it’s too early to be breaking open the champagne, it’s certainly a hopeful sign that the falling dwelling price curve could flatten out later this year.

It’s really only Sydney and Melbourne where there’s a clear trend of improvement. Brisbane price falls may actually be accelerating, and Adelaide, which has been subdivision paradise over the past year, seems to be softening.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

As you can see, all the capital cities, barring Canberra and Hobart, were in the red last month. Even Canberra seemed to be barely keeping its head above water with growth of 0.01 percent.

The rolling twelve-month declines are somewhat meaningless when we could be focusing on falls from the peak, so I’ll jump straight to those figures.

According to my assessment of CoreLogic’s back series of data, the Sydney median dwelling price has now fallen 13.96 percent from the market peak back in July 2017. Melbourne’s median dwelling price is now down 10.33 percent from the all-time high in November 2017.

If we average about half a percent decline over the next twelve months in Sydney before the market flattens out, the falls from the peak in Sydney will amount to around 20 percent. While that seems to be an optimistic outlook, given the current trend, it would still leave many 2017 Sydney buyers in a world of hurt.  

Many of these buyers on an 80 percent LVR will have lost nearly all of their equity by year end. Buyers who qualified for a 90 percent LVR loan in 2017 have already been losing sleep at night for months.

Comparison website Finder just released results of a survey of borrowers. Their findings estimate that 4.8 million households across Australia are already experiencing mortgage stress. Forty percent of mortgage holders are living “month to month”, 7 percent are “barely able to make repayments each month” and 2 percent are “behind in repayments”.

RBA chief Philip Lowe’s comments about how “prices are still 75 percent higher over the decade” will do little to console homebuyers who purchased at the peak. For their sakes, let’s hope the Sydney and Melbourne property parachutes have indeed opened.

Interest Rates – WTF is Phillip Lowe doing all day?

Speaking of Philip Lowe, he and his central banking cronies met this week and decided yet again to leave the cash rate on hold at 1.50 percent. That’s a record 32 consecutive months without a benchmark rate change.

While the cash rate may remain the same, the tone of his monetary policy statement has shifted. He hasn’t quite gone as hard-core dovish as his American and European peers, but his closing statement was different this month than previous months.

Previously, he had been ending with words to the effect of, “leaving the cash rate unchanged is consistent with sustainable growth in the economy and achieving the inflation target over time.”

This month, however, he shifted the wording. “The board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”

It seems they are now “monitoring developments.” I’m not sure what they’ve been up to for the last few years, but it’s good to hear that developments are now being monitored.

Expect a lower cash rate by year-end, especially if Labor comes into power. The future tax cuts that Scott Morrison and team are proposing likely won’t make it into a Labor budget, which would put more onus on the RBA to stimulate the economy.  

Credit Growth at a Snail’s Pace

Housing credit growth ticked up ever-so-slightly in February by 0.3 percent. That’s better than moving backwards, but it brings the annual growth rate of credit to a meagre 4.2 percent, the lowest growth rate on record.

We have tighter lending restrictions in part to thank for that, but the reality is there is only so much debt a nation can carry. According to the latest RBA data, total household debt to income has risen to 189.6 percent, as of December 2018. It seems we are approaching that ceiling and at some point we’ll need to deleverage.

Because housing demand depends primarily on the availability of cheap credit, the rate of credit growth is the most important leading indicator of home price movements. Changes in housing credit growth tend to lead home prices by about six months. That means that six months from now, home prices will likely still be falling. The pace of those falls will depend on other factors.

Woohoo! Building Approvals Just Spiked 19.1%

It’s been a rough couple of months for the building industry, with the recent summer months marking some of the worst approvals data since the GFC. January saw a slight bounce, but February’s data far exceeded expectations.

Analysts were expecting another drop in February of 1.7 percent. Instead, approvals for the construction of new homes jumped by 19.1 percent.

Again, we need to pause to look a little deeper before cracking open the bubbly. Looking back over the past year, total building approvals to February is still down 12.5 percent.

We also need to consider the finer points of the report. Approvals for houses fell 3.6 percent in February, but the “other dwellings” category, which includes apartment blocks and townhouses, soared by 64.6 percent. In other words, houses fell and units rose alot. That’s not a particularly great sign. Sustained growth in both sectors would be a promising sign.

March’s building approvals data will be important to watch. It’s not uncommon after a big jump like this to see a correction lower again in the following month.

What does it all mean for property investors? 

While the rate of price decline seems to be slowing in Sydney and Melbourne, it’s important to keep in mind that prices are still falling, and according to credit growth data, will likely still be falling six months from now.

If you’re a manufactured growth investor, factor that into your offer price. Make sure you discount your anticipated sales price from current comparison sales. If your renovation deal has a 10 percent ROI based on today’s prices, don’t expect that profit by the time you sell. Perhaps a 15 percent RO on a three to six month turnaround time would be a better target.

If you’re a buy and hold investor, be sure to read Steve McKnight’s latest article which he’ll be posting soon. He offers some great insights on how to invest in a down market.

If you’re currently searching for deals in South Australia or Queensland, be aware that tigher lending restrictions and buyer sentiment seems to be negatively impacted by falling prices in Sydney and Melbourne. While prices outside our largest two cities have not fallen considerably, properties are taking longer to sell, which will likely increase your holding costs and diminish your profit outcome.

Wherever you are investing, be prudent, focus on the numbers, and don’t get emotional.

The post Has the Property Market Parachute Finally Opened? appeared first on PropertyInvesting.com.

6 March, 2019 

We’ve seen what seems like a few little rays of property market data sunshine through the dark media clouds over the past few weeks. Is it time to call the bottom for Sydney and Melbourne home prices?

You may find yourself feeling a little like Lloyd Christmas at times – hanging on even the slightest glimmer of hope.

So let’s take a closer look at the most recent data and see if there is a chance the downward trend in house prices is nearing the bottom.

The Auction Market – Clearance Rates in the 60’s?

Two weeks ago, and this week, Sydney posted a preliminary clearance rate in the low 60’s. “So you’re telling me there’s a chance?” The final (not preliminary) results tell the true story.

Over the past four weeks, the nationwide auction clearance rate has been hovering around the 50 to 51 percent range. Auction volume has been gradually swelling since the market cranked back up in early February. However, auction supply remains weak for this time of year, with about 800 fewer homes taken to auction this week compared to the same time last year.

From the weeks of the 17th to the 24th of February (last week), we saw a significant surge in auction volume. With more homes on offer for buyers to choose from, auction clearance rates dipped last week, barely clearing 50 percent in both Sydney and Melbourne.

This week, with slightly fewer homes offered at auction, it appears based on preliminary reports, that auction clearance rates have again bounced back a little.

You’ll notice in the chart below I’ve compiled data from CoreLogic showing both the preliminary and final results over the past five weeks. Preliminary auction data is released on Monday morning, and is based on initial reports from agents at the end of the weekend. The final results, usually released on a Thursday, are most accurate, reflecting the totals of all auctioned properties.

It’s important to understand, we nearly always see the auction clearance rate drop from Monday to Thursday, as the preliminary data tends to have fewer unsuccessful auctions in the mix. Those properties finally make it into the count in Thursday’s report. Agents are quite happy with this, and may even use the subjective nature of the reporting to their benefit, as it helps to paint a rosier picture in the Monday morning headlines.

Following is the nationwide, Sydney and Melbourne auction data for the past five weeks. Notice the percentage point drop from preliminary (Monday) to final reporting (Thursday).

For all the final results in the other capital cities, click the relevant date in the table above.

Here are the latest preliminary auction results for all the capital cities:

Source: CoreLogic

Once this week’s final results are counted and reported tomorrow, expect the combined capital city clearance rate to sit between 50 and 51 percent, reflecting a slight improvement from the previous week, thanks to lower auction supply. Sydney might just clear 55 percent, but Melbourne will likely report in the low 50’s.

Keep an eye on supply in the coming weeks. Higher auction volume will mean lower clearance rates.

Home Prices – Is the Downward Trend Slowing?

While home values continued to decline in February (down 0.9 percent across our five largest capital cities), the rate of decline was slower than the previous two months. Is this an early sign that the downward trend is slowing? We’ll need a few more months of data before we can make that call.

Melbourne and Sydney dwelling values both fell about 1 percent in February, an improvement from January’s declines of 1.60 percent and 1.35 percent respectively. Perth’s weakness accelerated from a 1.0 percent decline in January to nearly 1.5 percent in February. Brisbane prices are down slightly, but Adelaide remained flat and Hobart surged 0.82 percent higher.

Melbourne and Sydney’s rolling twelve-month declines have increased to 9.14 percent and 10.37 percent respectively. This marks the first time we’ve seen double-digit annual falls. Adelaide and Canberra are in positive territory for the year, but Hobart is the standout, up more than 7 percent over the past twelve months.

How much have Melbourne and Sydney prices fallen from their respective peaks? According to CoreLogic’s back series of data, Sydney house prices peaked in July 2017, then four months later, prices began falling in Melbourne. Since their peaks, by my calculations, Sydney house prices have fallen 13.2 percent and Melbourne is down 9.62 percent.

For a little perspective, consider the average Sydney home buyer in mid-2017 with a 20 percent deposit on a $1 million property. There are thousands of these buyers, give or take a few hundred thousand on the purchase price.

That $1 million home is now worth $868,000, which represents a cash on equity loss of about 50 percent, factoring in deposit, stamp duty and legals. Their LVR, which started at 80 percent, is now at about 92 percent. If the current downward trend continues, these buyers are about eight months away from negative equity.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

So how much farther will house prices fall?

Based on the current trend and the state of affairs in the lending market, the likely best case scenarios for Sydney and Melbourne seem to be falls of around 20 percent from their peaks. That would amount to another twelve months or more of falling prices.

AMP Capital’s economist Shane Oliver says,

“For Sydney and Melbourne our base case has been that prices would have a top to bottom fall of around 20% out to 2020. However, the further plunge in auction clearance rates and acceleration in price falls late last year suggest a deeper fall possibly of around 25% (although it’s impossible to be precise).”

If AMP’s prediction plays out, we’ll have wiped out about two and a half years worth of rising property prices, taking us back to early 2015.

ANZ has been a little more optimistic, predicting falls from the peak of around 15 to 20 percent. UBS Bank is also on board with the 20 percent peak to trough forecast.

But let’s keep things in perspective. House price growth so dramatically outpacing wages and consumer price inflation was never going to be sustainable.

As RBA chief Philip Lowe has been quick to point out,

“Even after the recent declines in Sydney, prices are still 75 percent higher over the decade. In Melbourne, they are 70 percent higher… We recognise that this correction will have an effect on parts of the economy. But our economy should be able to handle this, and it will put the housing market on a more sustainable footing.”

Central bankers… like Lloyd Christmas, always the optimists.

Interest Rates – Holding Steady, For Now

Speaking of the RBA, Philip Lowe and company met yesterday and decided to leave the cash rate on hold for a record 31 consecutive months, at the record low of 1.5 percent.

Their monetary policy statement suggests they’re banking on a strengthening labour market bringing a boost to wages, which they hope will bring economic growth. The problem, however, is that household spending sucks at the moment, thanks to weak growth in household income and falling housing prices.

Unless the RBA gets that boost in wage growth soon (highly unlikely), expect one or two rate cuts by year-end. This could be the one thing that actually does breath some life back into the property market.

The problem though is that a rate cut does not automatically mean lower mortgage borrowing costs. Whether lenders choose to pass these rate cuts on to variable rate mortgage holders is another matter. APRA and the Government will need to come to the party to loosen bank capital requirements and lending restrictions.

The Lending Market – Show Me the Money!

I’ll need to mix film metaphors here because there’s not really much good news in the lending market at the moment. Housing credit growth just suffered its worst month since 1984, rising a meagre 0.2 percent in January. December looked just as bleak, with credit growth hardly better at 0.3 percent. The twelve-month growth figure now sits at about 4.4 percent, which is about as bad as it’s been since 2013.

In light of the expectation of more falls in house prices, such a decline in demand for mortgage lending should not be a surprise. In fact, until buyers are confident the worst is over, housing credit growth will likely continue to fall.

CoreLogic research analyst Cameron Kusher points to other psychological factors beyond supply and demand. Kusher says,

“I suspect that demand has certainly fallen, but possibly it has fallen a greater amount because people are talking to the bank lender or mortgage broker and the feedback they are given is that there is no point applying because with current credit conditions this just isn’t going to get approved.”

As I mentioned, before home prices can start rising again, the credit markets will need to loosen up. Post Royal Commission and with banks now facing the prospect of class action lawsuits from borrowers, it’s difficult to build a case for where this easy money will come from.

Building Approvals – A Glimmer of Hope?

Back to some good news…

After two months of the worst building approvals data since the GFC, new construction prospects were looking up in January, with a slight bounce in approvals of 2.5 percent.

Unfortunately, there’s little reason to celebrate yet. Total approvals are still down by 28.6% from January last year. Developers are not only hesitant to start new projects, but also finding it increasingly more difficult to access finance for new acquisitions.

 Source: Business Insider Australia  

With few approvals in the future pipeline, once we work our way through the existing jobs underway, we could soon see the building industry in decline. This doesn’t bode well for the labour market nor for consumer spending on home improvement items. Weak building approvals does however eventually lead to lower supply, which could bring the market back to equilibrium.

“So you’re telling me there’s a chance.”

What does it all mean for property investors? 

If you’re making offers in Sydney and Melbourne now, you’d be wise to do so under the assumption that there’s still more downside to come. You’ll need your renovation or subdivision to be able to absorb another 7 to 10 percent in price falls, just to be safe. That’s a tall order as vendors tend to be six months behind, no ahead, in their emotional property valuations.

If you’re entering the Sydney or Melbourne markets to buy and hold, be sure you have an opinion on how long it will take for the property market to start rising again (at a pace greater than inflation). Sydney house prices have historically tended to be flat periods (5 to 7+ years) before rising again. You’ll need to climb out of the negative cash flow hole before banking profits.

Thankfully, we have other markets in Australia where house prices are either very stable or rising. If you can’t get vendors to accept your offers in Sydney or Melbourne, then perhaps it’s time to look to Queensland, South Australia or Tasmania.

The post So You’re Telling Me There’s a Chance appeared first on PropertyInvesting.com.

Australian Property Market Update 
6 February, 2019 

The auction market just hit new lows, house prices are still falling, and we’re facing massive shifts in the lending market and uncertainty on the monetary policy front.

Amidst what may seem like chaos, there’s still money to be made in real estate if you know where to look and how to develop new investing skills.

The Auction Market

The eggnog may have been flowing a little more freely than normal this holiday season with vendors drowning their sorrows after one of the toughest selling seasons in over a decade.

Buyers in Melbourne and Sydney dragged down the combined capital city clearance rate in mid-December to a meagre 40 percent. This marked the lowest nationwide auction clearance rate on record, since CoreLogic began keeping tabs on auction statistics back in 2008.

Melbourne sellers managed to clear above 40 percent, but Sydney’s justifiably finicky buyers were only willing to meet seller reserves on 38.8 percent of properties. Last year over the same weekend, clearance rates in our two largest capitals were 65.9 percent and 52.7 percent respectively.

Not much seems to have changed in the new year, as the latest auction stats collected from the weekend just passed continue to show housing market weakness. The volume of listings is still quite low, so it wouldn’t be prudent to read too much into the numbers. That said, these early reports indicate that auction clearance rates remain twenty percentage points lower than the same weekend last year.

Here are the latest preliminary auction results:

Source: CoreLogic via Business Insider Australia

Once the final results are counted and reported this Thursday, expect the combined capital city clearance rate to sit around 42 or 43 percent, only marginally better than when the property market wound down in December.

Lower Still?

As referenced last month, auction clearance rates below 50 percent are generally consistent with falling dwelling prices. Until demand increases relative to supply, we should expect to see Melbourne and Sydney real estate values continue to correct. Our other capital city markets, namely Adelaide, Brisbane, Canberra and Hobart, remain more resilient.

According to the latest data from CoreLogic, Melbourne dwelling values fell 1.60 percent in January, and Sydney is down 1.35 percent for the month. Perth continues to show weakness with a 1.0 percent decline in January. Our other larger capital city are all looking pretty stable and seem ripe for quick cash deals, if you can get in and out relatively quickly.

While Melbourne and Sydney’s rolling twelve-month declines are 8.29 percent and 9.68 percent respectively, Adelaide, Canberra and Hobart all remain in positive territory for the year.

If you refer to CoreLogic’s back series of data, you can uncover just how far prices have fallen in Melbourne and Sydney since their peaks. Sydney house prices topped out first, back in July 2017, and have since fallen 12.35 percent. Melbourne was four months behind, with dwelling values there having now fallen a total of 8.70 percent since November 2017.

This means life is getting difficult for many who bought properties in the second half of 2017.

Property buyers in Sydney around winter 2017 on a 90 percent LVR is now in negative equity, having lost all their deposit (not to mention stamp duty and legals). Melbourne buyers who saddled up debt that spring are approaching a similar predicament.

Economist Martin North from Digital Finance Analytics recently posted a video explaining how he worked out which suburbs around the country are likely to have the greatest concentration of households in negative equity.

The hotspots for mortgage stress happen to be the suburbs with a large number of newly constructed homes, especially those that are higher density. These tend to be either land releases in the outer fringes of Sydney and Melbourne or postcodes with a significant number of recently constructed apartment buildings.

I seem to recall Steve McKnight saying something about not buying off the plan properties.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

In the News…

The U.S. Federal Reserve Just Signalled a Massive Shift

For the last few years, the Fed has been aggressively raising interest rates after a decade near 0 percent. Until last week, Fed Chairman Jerome Powell had been signalling an ongoing tightening policy, suggesting as many as four rate-rises through 2019.

That all changed last week with the Fed’s decision to leave rates on hold. After the monetary policy announcement, Jerome Powell shared a few words, signalling a more dovish outlook. Here are a few of the highlights from his speech:

“The case for raising rates has weakened somewhat.”

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

“I would want to see a need for further rate increases, and for me a big part of that would be inflation.”

Looking back at the last 62 years of interest rates in the United States, it appears that we may have now reached the top of a downward trend and are due for another series of rates cuts. Have a look at the chart below.

Federal Funds Rate – 62 Year Historial Chart

Unless inflation picks up considerably in the United States, more rate rises there seem unlikely. If the share market keeps falling, or bond prices fall, it wouldn’t surprise me to see the Fed cut rates again.

The RBA Still on Hold, But for How Long?

The RBA Board met yesterday and decided to leave the cash rate on hold for a 30th consecutive month.

If we have indeed seen a cycle peak in US interest rates (as indicated in the chart above), this policy shift has significant relevance for the Australian economy, the RBA, and property investors here in Australia.

As I’ve written in previous months, the Fed rate hikes have put increasing pressure on Aussie banks to lift variable mortgage interest rates, due to wholesale lending costs rising in line with the Fed funds rate.

Australian borrowers can now breathe a sigh of relief as the threat of rising interest rates seems to have abated for now.

On the other hand, higher borrowing costs in the US have benefited Australian exporters. When the Fed lifts rates, and the RBA holds (or cuts), the Aussie dollar tends to get weaker relative to the Greenback. This makes Aussie products less expensive for people overseas paying with US dollars. But for those of us buying goods from overseas, it means we fork out more cash.

Now that the Fed is no longer raising rates, we could see some upward pressure on the Aussie dollar. This increases the likelihood of an RBA rate cut aimed at devaluing our currency in hopes of spurring economic growth here at home.

In fact, the RBA has just downgraded its inflation forecast yet again, down to 2 percent this year from 2.25 percent. Philip Lowe is also coming across a little more concerned about the downturn in house prices. Could he be setting up a case for a rate cut?

In addition to improving the inflation data, an RBA rate cut or two would also bring some relief to variable rate mortgage holders, so long as the banks are kind enough to pass these savings along to consumers. In light of how the Royal Commission has dragged the names of the big banks through the mud, that may be just what bank executives need to rebuild some goodwill.

Building Approvals Haven’t Looked This Bad Since the GFC

Here’s another reason Philip Lowe may be nervous.

Australian building approvals just copped the biggest annual drop over back-to-back months in nearly ten years. It was bad enough that dwelling permits were down 22.5 percent in December from a year earlier, but that was after diving 33.5 percent in November from the previous twelve months.

The primary reason for this drop is because significantly fewer developers are willing or able to fund new projects. Either they’re nervous about future demand or they can’t get the money to acquire sites and break ground.

With less construction, that means less money flowing through the huge building and real estate industry as a whole, negatively impacting builders, tradies and suppliers. Even Bunnings could take a big hit. All of this could set off a chain reaction leading us into our next recession.

As much as investors in Brisbane, Adelaide, Canberra and Hobart hate to admit, they are not necessarily immune to the deflating housing bubbles in Sydney and Melbourne.

How Kenneth Hayne Threw Mortgage Brokers Under the Bus

Yesterday, the final report from the banking royal commission was made public. The highlight of the event was no doubt that awkward photo opp between Kenneth Hayne and Josh Frydenberg.

Here are a few of the more salient points from Kenneth Hayne’s report; the ones I found to be most relevant to property investors:

• The current laws relating to lending practices are for the most part sufficient and don’t need to be changed, but they do need to be more effectively enforced.
  
  
• Mortgage brokers should be held accountable for acting in the best interests of borrowers rather than enhancing personal profit.
  
  
• Trailing commissions and lender-paid commissions represent a conflict of interest for mortgage brokers. These broker commissions should stop being paid on new loans from 1 July 2020 and the decision should be reviewed again in three years.
  
  
• From 1 January 2021, all grandfathered commissions to mortgage brokers should cease and henceforth be rebated to clients.
  
  
• A standardized measure of borrowing expenses, like the Household Expenditure Measure (HEM), is not altogether inappropriate, but it needs to be based on a much more reasonable level so as not to underestimate expenses.
  
  
• Lenders should still be responsible to make some specific enquiries to verify actual household expenditures.

While there were plenty of smacks on the wrist for banks in the report, it seems that mortgage brokers have become the scapegoat for sins of the mortgage lending industry.

Lindsay David from LF Economics suggested this would be the case:

From an oped I wrote just before the #bankingRC started on how mortgage brokers would be thrown under a bus https://t.co/GkiyND0KBv pic.twitter.com/2x1zDAGDPy

— Lindsay David (@linzcom) February 4, 2019

It’s hard to see how the mortgage broker industry will survive if the government legislates these suggestions. It’s a shame. The way I see it, mortgage brokers have only been helping their clients get the best deals, and operate within the boundaries set by the banks. After all, a broker can’t help a client get a loan larger than what the bank will approve.

What does it all mean for property investors? 

Regarding the royal commission, I don’t see anything in Kenneth Hayne’s report to suggest that credit in the housing market will start to flow any more freely. The bar will be raised on any standardised measures of household expenses and lenders will continue to peer into borrower bank accounts to validate serviceability.

That means the current challenges borrowers are having proving their worth will likely continue. Unfortunately, at some point, you’ll be doing it without the help of an independent broker to get you the best deal – unless of course, you’re willing to pay for the service yourself.

But investors shouldn’t throw in the towel. While some may choose to sit on the sidelines seeing more risk than reward, many investors are still making money.

I have clients who recently finished or are currently working on profitable manufactured growth deals in Adelaide, Newcastle, Brisbane, Canberra, and even Geelong. If you know what to look for and you’re willing to develop new skills, there’s still money to be made in property.

The post Market Looks Bleak But Opportunities Abound appeared first on PropertyInvesting.com.

Australian Property Market Update 
5 December, 2018 

Doom and gloom in the media over falling house prices is escalating, with one media outlet headline warning, “Sydney housing downturn to eclipse 1989 recession.”

Wow, that sounds ominous! Is it fear porn, or are we truly headed toward a level of housing market pain equivalent to a 17 percent interest rate? Let’s breakdown the latest stats and assess what it would take for the market to devolve to such a low point.

The Auction Market

If our auction market is any indication, perhaps we are headed back to 1989.

At first glance, this week’s nationwide preliminary clearance rate of 47 percent seems to be an improvement on last week’s final result of 42 percent. However, last week’s preliminary result was essentially the same as this week (46.9 percent) on similar volume (around 2700) before being adjusted down a massive 499 basis points once all the results were counted.

This shows us that agents are still desperately trying to manage public sentiment amidst an ailing housing market by selectively reporting early auction results to soften the Monday morning headlines. It stands to reason then that this week’s final clearance rate will be back in the low-40s by the time Thursday rolls around.

They may fall even further in the Autumn. As you can see below in the chart from Corelogic , auction clearance rates are still trending down pretty hard, which means we may see auction clearance rates in the 30s before too long.

Source: CoreLogic

Sydney is currently sitting around the mid-40s, but according to an SQM Research report, there has only been three times in history when the clearance rate there fell into the 30s:

1. October/November 2008 during the GFC
2. May 2004 after the NSW vendor stamp duty was introduced
3. July 1989 when the RBA cash rate hit 17 percent

Just because we see auction clearance rates in the 30s does not mean we are headed to property investor purgatory. After all, the GFC was just a minor blip on the radar. But agents there will be doing everything they can to manage buyer sentiment amidst the dark headlines in the media.

Here are the latest preliminary auction results from CoreLogic:

Source: CoreLogic

Expect the final result to be reported on Thursday to look more like last week’s final result detailed below:

Source: CoreLogic

How Low Can We Go?

While there’s a lot of talk at the moment about auction clearance rates trending toward the 30s, all we really need for home prices in Sydney and Melbourne to be falling is an auction clearance rate in the 40’s. Anything below 50 percent has historically meant a downward trend.

In light of weak demand and burgeoning supply, the median dwelling price in Sydney has now fallen about 8 percent in the last twelve months, down 9.5 percent from the peak 17 months ago. Melbourne home prices have fallen nearly 6 percent.

How does that compare to the housing market woes during the 1989 recession? It just so happens Sydney’s record house price falls occurred during that time (between 1989 and 1991). The total decline was… wait for it… 9.6 percent (essentially where we are now). Give it another month, and we will have surpassed the Sydney dwelling price declines of our last recession.

But across the rest of the country, it’s not so bad. Here’s what house prices movements are looking like in our other capital cities, according to CoreLogic’s metric:

 Source: CoreLogic  

While anyone who bought in Sydney or Melbourne a year ago is likely feeling a little anxious, we need to keep in mind that after such rapid growth outpacing inflation, we were due for a pullback. Hopefully this will be a much-needed wake-call to investors to remember the fundamentals of affordability (wage growth vs. house price growth) and understand the role cheap credit plays in the housing market.

In the News…

RBA Cash Rate on Hold Though Lending Data Looks Bleak

The RBA Board met yesterday and decided to leave the cash rate on hold for a 28th consecutive month, despite some less than stellar credit growth statistics. The next monetary policy decision will be on the first Tuesday of February.

The RBA’s October Financial Aggregate data (the amount of credit provided by Aussie lenders) was released last week. It’s not good news for the housing market, but there are no surprises there. Total housing credit growth figures are at the weakest point since July 1984, increasing only 0.3 percent in October.

For a deep dive into the RBA’s housing credit data, check out Corelogic’s report.

Saxo Bank Imagines the Ultimate Armageddon Scenario

Back to the topic of doom and gloom headlines… Danish Saxo Bank wins the award for most creative economic hell-on-earth scenario for the Great Southland. It’s a fun read. The Aussie bit starts on page 15 of the Outrageous Prediction 2019 report.

Here are a few of the highlights…

“The confluence of dramatic restrictions in credit growth, oversupply, government filibusters and a slowdown in global growth delivering an exogenous shock cement the doom loop; property prices Down Under crashing by 50%.”

“Australia falls into recession for the first time in 27 years as the plunge in property prices destroys household wealth and consumer spending.”

“Governor Lowe’s hand is forced toward unconventional monetary policy and he implements QE1 Down Under.”

The crazy part about the report is that it doesn’t actually sound all that far-fetched! OK,  maybe the 50 percent price fall is a little extreme.

Bond Market Tipped to Push Interest Rates Higher

Whether we end up back in 1989 in terms of economic pain will likely depend on where variable mortgage rates go from here.

The Federal Open Market Committee (FOMC), that’s the Federal Reserve equivalent of the RBA Board, will be meeting in about two weeks to decide whether to raise its target funds rate. Most economists expect the Fed to hike rates at that meeting, which means the Fed will be buying fewer bonds.

This effectively causes bond prices to fall and bond yields to rise. The knock-on effect tends to be an increase in wholesale lending rates for Aussie banks, which in turn leads to rising borrowing costs for Aussie borrowers. As interest rates rise here at home – well – you know where that leads.

Is It Really Worse Than the 1989 Recession?

Earlier in the year, Steve McKnight and I sat in his office and worked out what it might take in the economy today for households to experience a similar level of pain as 1989.

Back then, the cash rate rose to 17 percent and variable mortgage rates spiked into the low-20 percent range. That seems completely out of the realm of possibility today, so no dramas, right?

Well, not exactly. Home prices have risen a lot since then, but wages haven’t quite kept pace. As Australians have taken on more and more debt, with less and less discretionary income to absorb increases in interest rates, our economy has become more fragile. This means that interest rates don’t actually need to rise to 17 percent for Aussies to experience a 1989-level of mortgage stress.

In the end, after Steve and I crunched the numbers, we worked out that the standard variable mortgage rate would only need to rise about two percent, to around 6.5 percent, for mortgage holders in Melbourne and Sydney to feel the same pain as borrowers felt in 1989, when interest rates were over 17 percent.

Just in case you missed that… 17+ percent in 1989 = 6.5 percent in 2019.

If you’re interested, here’s a screenshot of the numbers we came up with…

So is the housing market really looking worse than the 1989 recession? Nah; we’ve still got room for interest rates to move a little higher.

The post Worse Than the 1989 Recession? appeared first on PropertyInvesting.com.

Last Sunday night, the final episode of The Block aired. The winning couple sold their renovated unit for more than $3 million, over a half million above their reserve.

Viewing the clip felt a little like going back in time to 2016. Hordes of people were crowded in a room, with emotional buyers going to war to secure a winning bid.

Unfortunately, that’s not reality for the majority of sellers at the moment. According to CoreLogic’s latest figures, auction clearance rates have reached their lowest point since June 2012 when only 43.5 percent were successful.

The Auction Market

The Melbourne Cup put a big damper on auction volume in Victoria this weekend, dragging the the number of auction listings nationwide down to 1516.

Going back to the previous week, however, sellers offered up a total of 2,928, with a nationwide weighted average clearance rate of 47 percent. That marked the fifth week in a row where buyers failed to clear even half of all properties brought to auction. By the time all of this week’s results are counted, we’ll likely see an even lower result.

The downward trend continues.

Keep in mind, these auction clearance rates in the 40s include those properties sold both prior to and after the auction date. At the moment, we’re only seeing about one in three listings successfully drawing a winning bid through the auction itself.

Here are the latest preliminary auction results from CoreLogic:

Source: CoreLogic

The Bigger They Are the Harder They Fall

Auction clearance rates below 50 percent are generally consistent with falling home prices, so it’s no surprise to see the downward trend in prices continue.

According to the latest official data from CoreLogic, Sydney’s rolling twelve month decline is pushing 7.5 percent, and Melbourne is down almost 5 percent. Keep in mind that dwelling values have been falling for over twelve months now, so the year-on-year data will no longer reflect falls from the peak back in early-spring 2017.

The greatest fall in prices have been in the more expensive segment of the market. The top 25 percent in terms of price have seen falls of around 9 percent for the year in both Sydney and Melbourne. Interestingly, in the bottom segment of Melbourne’s market, prices have actually risen nearly 3 percent, while in Sydney, the least expensive homes have still fallen about 4 percent.

Of course, there are some suburbs where the declines have been much greater than the metro average.

if this downward trend continues, Strathfield has likely crashed well below the $2m mark for a median priced property by now which is roughly a 25%+ fall in just 1 year. Dec and Jan had just 2 sales I think each of those months. 1 big and 1 small house. pic.twitter.com/zcw6CsopZ4

— Lindsay David (@linzcom) November 2, 2018

On the bright side, Hobart continues to boom, up nearly 10 percent over the past twelve months, and still rising. Canberra and Adelaide are also looking solid, while Brisbane seems to be flattening out.

Here’s snapshot of CoreLogic’s latest median house price data from across the country:

 Source: CoreLogic  

In the News…

RBA Still on Hold, But Is a Rate-Cut Looming?

The race that stops the nation didn’t stop the RBA Board from meeting today. They decided to leave the cash rate on hold at 1.50 percent for a 27th consecutive month.

Our central bank’s primary stated goal is to keep the inflation rate somewhere between 2 to 3 percent per annum, and ideally at this time on the upper end of that range.

The latest Consumer Price Index data (September quarter) showed headline inflation of 0.4% quarter on quarter or 1.9% year on year. Retail sales tumbled sharply in the third quarter, likely in response to falling house prices as Australians feel less wealthy and choose to save rather than spend. With our economy limping along and real wage growth stagnant, the likelihood of an RBA rate hike anytime in the next two years is extremely low. 

If house prices fall far enough, the next move from the RBA may very well be to cut the target cash rate. At 1.5 percent, our central bank’s overnight lending rate is one of the lowest of developed countries.  Philip Lowe has said he doesn’t believe a cash rate below 1 percent would be helpful for the Australian economy, so that leaves perhaps two more moves down on the cards.

The FED Squeeze on Aussie Property Investors

The Fed raised borrowing costs in September for a third time this year, and thanks to a booming US economy, another rate-rise in December is likely. The US economy added 250,000 jobs in October, year-on-year wage growth is higher than it’s been in almost a decade, and the unemployment rate is holding steady at a 49-year low of 3.7 percent.

The Fed committee will meet later this week, and although they are likely to keep their funds rate on hold, investors will be looking for clues to whether the most powerful central bank in the world may be raising rates faster than expected. If with the expected Fed rate rises on the cards for 2019, higher borrowing costs will put Aussie lenders (and borrowers) in a precarious place.

Unless the RBA intervenes, expect variable mortgage rates here in Australia to rise in pace with higher interest rates overseas.

Morgan Stanley Sounds the Alarm

American investment bank Morgan Stanley has placed Australia at the top of a list of developed countries most at risk of an economic downturn. Falling house prices, potential tax changes diminishing the attractiveness of property investment, tightening credit conditions, and a decrease in spending due to the burdens of debt repayment are all reasons the bank cited for giving Australia the top honour.

AMP Forecasting 20 Percent Falls in Sydney and Melbourne

AMP Capital recently revised down its forecasts for the Australian property market from 15 percent to 20 percent price falls by 2020. Here’s what AMP’s chief economist wrote in a note to clients:

“The risks are starting to skew to the downside — particularly around tighter credit and falling capital growth expectations made worse by fears of a change in tax arrangements… Auction clearances in recent weeks have been running around levels roughly consistent with 7-8 per cent per annum price declines.”

Twenty percent falls would be a rough outcome for those who happen to buy twelve months ago. That would mean that those buyers who borrowed 80 percent would have zero equity in their homes. Their entire deposit, not to mention stamp duty, would be gone.

The News Isn’t All Bad!

Let’s keep in mind, things aren’t looking bad at all in Tassie, Regional Victoria, Canberra, Adelaide and Brisbane. Several of my clients are finding great deals and making money in these markets.

Source: CoreLogic

What’s your strategy for securing property investing profits in the current market?

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Australian Property Market Update 
2 October, 2018 

In this month’s update, I’ll highlight the 5000-year history of interest rates, yesterday’s uneventful RBA monetary policy decision, and seller reticence in light of waning demand.

But first, here are the latest property market stats…

The Auction Market

Thanks to the AFL and NRL Grand Finals, sellers were hesitant to bring their properties to market over the weekend. This is especially true in Melbourne, where only 67 homes were presented at auction. Across the country, only 889 properties went under the hammer, with a meagre auction clearance rate of 49.1 percent. This is the lowest combined capital city result since December 2012.

Keep in mind that this is just the preliminary result, which tends to be rosier than reality as agents are selective with their reporting for the sake of Monday morning headlines. The weekly pattern is for Sydney’s final result to be 4 to 5 percentage points lower, and Melbourne’s 2 to 3 percentage points lower. Expect to see the final national clearance rate closer to 47 percent after all results are counted.

Regardless where the final tally ends up, auction clearance rates are clearly trending down as supply is swelling and fewer credit-worthy buyers can be found (watch Steve McKnight’s micro-training on absorption if you missed it).

Here are the latest preliminary auction results from CoreLogic:

Source: CoreLogic

A Full Year Into the Housing Slump

We’re now a full year into Australia’s housing slump, with September marking the twelfth consecutive month of falling home prices. The aggregate dwelling price of our five largest capitals has fallen 3.91 percent, with Sydney leading the way at 6.09 percent.

Brisbane, Adelaide, Canberra and Hobart continue to be the bright spots for property investors over the past twelve months. That said, looking at the September results, Adelaide moved backwards. South Australian investors should keep a close eye on what happens there in October. It stands to reason that tougher lending criteria will to some degree impact markets across Australia, not just Sydney and Melbourne.

Here’s a snapshot from CoreLogic’s latest median house price data:

 Source: CoreLogic  

In the News…

So Long 5000-Year Low Interest Rates

Until a few months ago when the Federal Reserve lifted interest rates for the seventh time in three years, borrowing costs were lower than they had been in 5000 years of recorded history.

Source: Business Insider Australia

The trend toward higher borrowing costs continues. Again last week, the Fed lifted its overnight lending rate for the eighth time in three years, and signaled yet another hike before year end, plus a few more rate rises in 2019. But anyone in the USA who locked in a 30-year fixed rate mortgage three years ago isn’t too concerned.

Unfortunately for us here in Australia, there are no 30-year fixed rate mortgages. Also unfortunately for us, we do not live in an economic vacuum. As interest rates rise overseas, everyone with a variable rate mortgage in Australia could feel the cash flow squeeze within months as Aussie lenders pass their borrowing costs on to consumers in the form of higher mortgage rates.

As household discretionary income falls, this will make economic growth even more of a challenge for the RBA.

RBA: “She’ll Be Right, Mate”

Speaking of, the RBA decided yesterday to leave the cash rate on hold for a record 26 consecutive months. The board expects the current level of monetary easing to be sufficient to spur a healthy rate of inflation. Reserve Bank governor Philip Lowe also said he’s not too concerned about the housing price downturn in Sydney and Melbourne.

“Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high-credit quality.”

While most economists expect the next interest rate move by the RBA to be up, the consensus is it will be 2020 before our central bank is able to lift the cost of money. But if interest rates continue to rise overseas, the next move could be down. That would be a risky move though, as it could provide temporary relief to households but at the expense of a weaker dollar and higher inflation down the road. 

“Hail No, I Ain’t Sellin’”

Sellers are pretty relaxed this Spring, maybe a little too much so. This is normally the time of year when the market is flooded with new listings. In years past, there’s been plenty of demand to mop up supply; in fact, more than enough.

But this year, as demand is notably weaker, very few sellers seem keen to brave the market, choosing instead to hold out in hopes that the market will turn around. Listings usually increase by 3 to 5 percent heading into the spring. This year, however, listings were up only about 1 percent by September.

This seller reticence seems to indicate an optimism that the recent correction in property prices will be minor and short-lived. The perception is, come autumn, it will be a better time to list. In fact, I’ve been walking several of my clients through this very question – “Do I list now or in the new year?”

My advice has been to list now. The market is trending down, and barring an unlikely  RBA rate-cut, there’s nothing indicating the market will be any better six months from now.

Is There More Downside to Come?

The Sydney morning herald sounded the alarm of a possible credit crunch for borrowers, indicating there could be more downside for the housing market after the banking royal commission’s damning interim report.

According to Capital Economics chief economist Paul Dales, “…house prices may eventually fall by 12 percent, which would be the longest and deepest housing downturn in at least three decades.”

If he’s right, the future seems pretty bright to me. If a 12 percent decline is all we get after a 70 percent rise over five years, I’d say we are indeed the Lucky Country.

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Australian Property Market Update 
4th September, 2018 

The Auction Market

Saturday marked the first day of the Spring selling season, but someone apparently forgot to let both the buyers and sellers know.

The nationwide preliminary clearance rate of 58.2 percent was essentially on par with (only slightly higher than) the previous week’s preliminary result. Auction volume was 8.5 percent lower, with only 1,752 homes presented at auction.

When the clearance rate remains essentially the same and auction volume (supply) falls, it points to a decrease in demand, or fewer buyers in the market.

Expect the final clearance rate for this week (released Thursday after all results are tallied) to be about three basis points lower, in the mid-50s. This time last year, just before home prices began to fall, the nationwide auction clearance rate was near the mid-60s.

Here’s the latest preliminary auction data for our capital cities, as reported by CoreLogic:

Source: CoreLogic

Home Prices Still Trending Down

Home prices have now fallen for eleven consecutive months, bringing the year on year aggregate decline to just over 2 percent. Sydney has led the way, with dwelling values there falling by 5.64 percent, followed by Darwin at 4.02 percent and Perth at 2.05 percent.

Of our five largest capitals, only Adelaide saw prices rise in August.

Here is all of CoreLogic’s latest median house price data:

 Source: CoreLogic 

As traders like to say, “the trend is your friend,” so odds are the 5 capital city aggregate decline will continue, with Melbourne and Sydney leading the way. 

The Spring Headwinds

As we get deeper into Spring, sellers will be hoping that with warm weather will come more buyers. Unfortunately, there are some headwinds that will continue to put a damper on demand.

Tight Credit

What began over the past few years with APRA lifting bank capital requirements and capping lending to investors turned this year into a full inquisition into bank lending practices. Unless you’ve been living under a rock, you know that banks have now significantly raised the bar for property investors (and owner-occupiers for that matter) trying to borrow money.

The following chart shows the total numbers of loans rejected over the past year:

 Source: Digital Finance Analytics

When you dig a little deeper into the numbers, you learn that only 60 percent of refinance applications are now being approved. That figure was 95 percent this time last year. That means that people who once qualified for a loan to buy their property no longer meet the standard under the new criteria, to borrow for the exact same asset.

That seems to indicate that 35 percent of the population has a loan that they can’t really afford to pay back. They’ve borrowed too much relative to their income, and if interest rates rise or the economy hits some turbulence, these loans could unwind in a not-so-orderly fashion.

Referring back to the chart above, the upward trend of rejections remains steep and doesn’t appear to be levelling off. Many would-be-buyers who would like to get a loan to purchase a property this Spring will not qualify, which will lead to disappointment for quite a few sellers.

Increasing Supply

We tend to think about supply of properties primarily in terms of auction volume and new listings. Spring is generally the time of year when many sellers present their properties in the market, so supply usually increases through September and October. With the warmer months have also come in years past a slew of new buyers.

But there’s another factor that leads to increasing supply, which Steve McKnight will be highlighting in his article scheduled to post tomorrow. With fewer people able to qualify for loans (fewer buyers), homes tend to stay on the market for longer. With every new home listed for sale, if a large percentage of last month’s properties are not selling, then the overall supply in the market begins to increase each month at an exponential rate.

According to CoreLogic, the level of advertised supply is already 7.6 percent higher than it was this time last year. As more properties are listed for sale later this month and next, expect the downward trends in Melbourne and Sydney to continue, leading to further price falls as a growing number of sellers compete for a limited number of buyers.   

Rising Mortgage Rates

Although the RBA decided today to leave the cash rate on hold today (for a record 25 consecutive months), banks have started raising rates out-of-cycle.

I’ve been beating the drum for the last few years that the RBA has a much smaller impact on mortgage rates than we might think. The greater influence is global bond yields. The reason is that banks must borrow from overseas wholesale money markets. This where they get most of their capital to lend to out to homebuyers. Bank deposits are not an adequate source of capital to meet demand, nor to hit bank profitability targets.

As the Federal Reserve is raising rates in the United States, bond yields are rising, which means it becomes more expensive for our banks to borrow money. In order to continue propping up their share prices, banks must pass their higher borrowing costs on to consumers.

Westpac just announced a 0.14 percent increase in its variable interest rates for both owner-occupier and investor loans. Suncorp sooned followed with a 0.17 percent hike. Word on the street is ANZ, Commonwealth and NAB aren’t far behind.

Where mortgage interest rates go from here is mostly out of our control. The RBA may be able to provide short-term relief through further cash rate cuts, but factors overseas will have the greatest impact. Because households have chosen to increase our collective debt-to-discretionary-income level to over 200 percent, the financial destiny of anyone carrying debt is in the hands of bankers overseas.

A few practical tips…

So what does all of this mean for investors?

If you’re a buyer, be selective and manage your risk. In some places around Australia home prices are likely to continue falling.

If you’re a seller, be realistic and meet the market, unless of course you don’t really need to sell and can hold out and hope for a higher price.

If you’re on the sidelines, cash up, focus on your education, and figure out how to get returns on your cash that exceed the loss in buying power you will face while you wait.

Anything else you would add?

What are your practical tips for investors in light of the current market conditions?

The post Spring Headwinds a Threat to Sellers appeared first on PropertyInvesting.com.

With the exception of Hobart, where property prices continue on their bull run, elsewhere around Australia, and in Melbourne and Sydney in particular, real estate has an unpleasant stink about it at the moment.

Depending on how pessimistic you are, and from where you get your news, we are either in the early stages of a mild property hiccup, and feeling the effects of an inevitable correction, or at the dawn of a cataclysmic crash.

My own opinion, for what it’s worth, is that the property market is like a volcano. For much of the time, it can be happily climbed and the view from the top is spectacular. However, infrequently there can be an eruption, and when that happens, you don’t want to be anywhere near it.

Keeping the analogy going, after a long period of calm and peace, the Aussie property volcano has recently ‘come alive’ and can now be seen venting a plume of ash, steam, and a fair bit of rotten egg gas – hence the stink.

It’s presently no cause for panic, but it might be if things get worse.

A Dose Of Reality

Unless you paid a silly price for something recently, I wouldn’t call what we’re experiencing in the property market right now as anything other than mild and normal turbulence.

Take Sydney for example, where median house prices in March 2018 (latest data available from the REIA) have retreated a little over 4% from their peak in June 2017.

Sure, that’s unpleasant, but when you take into account that between September 2016 and March 2017 (nine months) Sydney house values rose by 11.2%, it follows that giving back just over a third of the recent gain isn’t cause for alarm.

And even if there were a property crash and values across the board declined by a substantial 25%, which is enough to mean that any 80% LVR loan taken out recently would be against a property that is now in negative equity, the table below reveals how many years of growth we would be ‘giving up’ by indicating the approximate date that property values were last at that price:

Source: REIA, PropertyInvesting.com

For Melbourne, Sydney and Hobart, the price retreat would just be handing back the recent round of appreciation. It would be more severe in other cities that did not experience a price boom in the past three or so years.

Even a 50% decrease would see us return to values as they were more or less a decade ago, and hardly affordable in the sense of property prices pre-2000 (when the median house in Sydney was around $300,000 – which was considered expensive in its day!).

Rumbles

Can anyone predict what the property volcano will do next with complete certainty? No. Like volcanoes, in real estate, there is a fair amount of theory about what should happen, but no one knows for sure because mother nature (or the herd mentality) cannot be tamed.

That said, I’m seeing some signs that have me feeling like there is more downside risk of further price falls, as opposed to upside optimism that prices will quickly recover, including:

Falling Rents

I saw a report in the Financial Review last weekend indicating that rents are now falling in Sydney. If rents fall, prices will eventually follow because real estate will become less affordable and the amount purchasers can borrow will decrease.

Since so much of the nation’s media is based in Sydney, journalists tend to report what is happening there as if it is happening everywhere, and so the Sydney prices sniffles can mean other areas catch a property cold.

Less Liquidity

It’s getting a lot harder to borrow as much money as even a few months ago, with valuations being squeezed to the low side, and at the same time lenders now want to know whether or not you had sauce on your pie at lunch, and if you did, how did you pay for it?

Okay, perhaps that’s a bit dramatic, but it is not far off the level of inquisition some borrowers are enduring today, where previously there was none. Don’t expect things to get better anytime soon. As the Royal Commission winds up, I predict it will take even longer to get a loan, and harder to borrow as much money as before.

Fewer borrowers with less cash at their disposal will put downward pressure on property prices.

Increasing Interest Rates

Even though the RBA is sitting pat on their benchmark cash rate, and despite some lenders actually reducing their headline interest rates to attract customers, the general trend is now set for interest rates to increase because the cost of borrowing on world markets has risen. Faced with a choice of lower profits or higher interest rates, it’s no surprise that more and more lenders (starting with the smaller ones) are choosing the latter option.

As I’ve written not long ago, interest rates won’t have to rise too much for there to be a profound impact on Australian households. We’re so hocked up to the eyeballs in debt, just a half-to-one percent increase is going to tip a considerable number of mortgage holders into mortgage stress. As more people have to sell, there will be even more downward pressure on property prices.

Contagion

When (not if) interest rates increase by that half-to-one per cent, households will have less discretionary money to spend on everyday goods – from coffee to holidays, and the economy will increasingly groan under the weight of our debt burden.

Dare I say it? At that time we will enter the recession that will be the inevitable consequence of so much debt-fuelled consumption. It will be the late 1980’s all over again, except that interest rates at circa 7 to 8% today will have the same impact as interest rates at 17 to 18% did back then (because we have so much more debt today).

What Am I Doing?

Well, exactly what I’ve been telling you to do for quite a while now.

• I’ve sold some property I don’t think is helpful to own in less optimistic times.
  
  
• I’m critically analysing my property portfolio to ensure it is being managed well
  
  
• I’m making offers on good deals if I see them come up (there aren’t many, but they are starting to be more prevalent), and otherwise, I’m being patient and boosting my cash reserves.
  
  
• I’m actually not holding any ‘net debt’ right now because the name of the game is to maintain my borrowing ability so that I can jump on the next great deal.

Takeaways

Wrapping up, here is a summary in the form of five takeaways:

1. The possibility of financial loss is increasing, and that means investment risk is increasing too. The correct response is to be more prudent, cautious and diligent. Now is not the time for wild, or super speculative, property investing.
   
   
2. Debt is getting harder to get. In my case, even though it is a little more expensive than the headline interest rates being advertised, I’m happy to hang on to an existing debt facility that was written under more favourable conditions than what might be offered today.
   
   
3. It doesn’t quite carry the same punch as the Game Of Thrones catchcry, but Spring is coming, and with it, the peak time to sell. If supply increases without demand picking up, expect prices to fall.
   
   
4. A little price slippage isn’t panic stations. Property prices would have to fall by more than 10 to 15% off their peaks to get me nervous, and we are a long way away from that just yet. Still, if a price fall of that magnitude would cause financial heartburn for you, then maybe you should consider cutting your losses so you can live to fight another day. Don’t assume you will get today’s price tomorrow, in a soft or down market.
   
   
5. Better and better deals are coming on the market, but vendors are still hoping for more or less top dollar. Presently it is development and renovation opportunities that have become more prolific, but often these are still being marketed at inflated prices by vendors who have just realised they won’t make their expected profit, or can’t get the finance to proceed with construction. Be patient. Give it time.

That’s it from me. See you in September.

Until then, remember that success comes from doing things differently.

– Steve

P.S. If you’re interested in watching one of the development projects in my USA Property Fund get built then check out the webcam feed at the bottom of the left-hand menu at www.PassiveIncomeFund.com

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The post The Property Volcano appeared first on PropertyInvesting.com.