Residential Roulette

Residential Roulette
March 7, 2019 Tony Lenord

The residential markets around Australia are now feeling the most turbulence since the GFC, but investing in, or lending on residential real estate right now needn’t feel like you’re playing roulette.

In recent years, the capital cities and the majority of Australia has experienced significant growth in all real estate markets, especially residential.

There are a number of factors at play that have influenced price growth which include historically low interest rates, levels of immigration, low supplies of new and established housing, lack of land releases, high servicing costs and foreign investment.

Around June 2017, the market started to slow and by November 2018 the Sydney median dwelling prices sat 9.5% below June 2017 (8.1% decline on an annual basis). Last year, the Melbourne market decreased 5.8% while Canberra increased by 4% and Brisbane increased by a negligible 0.3%, and Melbourne and Sydney have since declined further.

In previous housing cycles, the catalysts for change were generally changes to interest rates or changes in economic conditions (the Dot com crash or the sub prime mortgage crisis resulted in weaker economic conditions).

This time the slowdown is in part due to a number of factors such as low wages growth, tightening credit policies (the Banking Royal Commission commenced in December 2017), low rental returns, a potential of rolling back negative gearing and price point issues (the limit purchasers are prepared to pay for a certain style of accommodation in a particular area) has led to weaker consumer sentiment towards residential property in general.

Many forecasters and reporters contend that if the market isn’t increasing, it is decreasing. Boom or bust. The reality is, there is always an adjustment after an extended period of growth, followed by a relatively static period of slow or no growth.

Commentators and forecasters generally point to the auction clearance rate as an indicator of a slowing market. Although auction clearance rates do provide an indicator as to the level of activity in the market, there are more factors that need to be considered.

For instance, in Sydney, recent auction clearance rates are lower than they were in 2012. Although the number of sales was similar, the number of properties on the market is significantly more. In a buyers market, (as opposed to a sellers market) auctions are not the preferred sale method, especially for a typical house or unit.

Therefore a fall in auction clearance rates tends to exaggerate the real story.

In relation to new units and subdivisions, the level of interest in “off the plan” purchases has declined significantly, with purchasers waiting to see the final product and investors no longer willing to speculate on buying “off the plan” and then selling once constructed, to try and turn a quick capital gain.

Some of these investors will incur a loss, particularly if their purchase was within say the last two years and now find themselves having to sell.

Conditions over the next twelve months are expected to remain relatively static and there may be some more price declines in oversupplied and overpriced areas, creating some great buying opportunities for prepared investors.

And we may see some slight price increases in tightly held areas with low numbers of sales.