OPPORTUNITY KNOCKS...HOWEVER IT IS UNLIKELY TO LAST
There’s a great deal of chatter about Sydney’s cooling market and reported price drops. Plainly it’s terrific ‘click bait’ and the RBA is delighted to have focus on borrowing factors other than its’ own cash rate – the reality is that our market is both short-term sentimental and segmented.
Considering the eastern suburbs – we are seeing two very distinct segments: buyers heavily dependent upon gearing and struggling for serviceability (very loan focused) versus buyers imbued with solid equity (cash).
On the back of recent APRA changes and the Royal Commission into banking (combined with the lingering shadow of the toxic lending which precipitated the GFC) – the banks have jerked immediately into tighter lending assessment. The result of which is that buyers are likely to require higher deposits and may indeed be approved for lower overall loan values – meaning a certain drop off in market participants along with other buyers simply being able to spend less. Our market is at the needle point of the APRA/Royal Commission effects and it is my view that over the next 6 – 12 months we will see the banks ‘relax’ a little and the buyer market will settle into the new realm of borrowing criteria.
Historically banks are constantly shifting their lending criteria across their various loan books. Once a bank feels it is heavy on industrial lending; it will close that book and focus on drumming up business in another sector. Once that sector is full; the bank will move to the next ‘light’ book. At the moment, we are feeling the banks close their book on heavily geared lending. We’ve seen this before and in time, whilst I am sure the Royal Commission's findings will maintain resonance, we’ll see competitive friction and a desire to maintain profit levels result in a softening of lending assessment and an increase in Loan to Value Ratios (LVR’s). Of note – both the CBA and ANZ have just dropped their variable loan rates as they seek to protect market share against both other bank and non-bank lenders.
Meanwhile, cash – once again – is king. And there is plenty of it around. Cash buyers are still in the market and they maintain an interest in securing quality property – either as their home or as an investment which likely stills yields above cash and retains long term capital appreciation. Across the eastern suburbs demand remains high for superior residences…both in apartments and house.
Downsizers continue to cash in their existing family homes in order to transition into medium to high-end apartments. Despite this phenomena, there is a dearth of appealing family homes and despite recent press – demand in the east outweighs supply.
Be this as it all may – our market is a sentimental one. Australians, against all of Warren Buffett’s best advice (“Be fearful when others are greedy and greedy when others are fearful”), love to chase the peak. As soon as there appears to be some level of balance and value entering the market place – we tend to back away very quickly. This trend is always on short-cycle display with the stock market. Each time there is a Sunday evening news announcement such as “Greek banks disintegrate” – we see Monday’s bank stocks take a dive as ‘mums and dads’ knee-jerk to that ‘Terror Alert’. Meanwhile, the particularly market-savvy, institutional investors rub their hands together and snap up those delicious ‘10% off bargains’ until Friday when the market closes and banking stock ship is righted again.
Our property market is a long term game and yet sentiment in Australia does shift quite suddenly at times. The shifts can be fuelled by the current APRA considerations or a pending/actual change of government or rumours of a change in tax laws and so on…and yet our fundamentals largely remain static and ultimately property values continue to escalate. It was only a relatively short time ago that the world experienced the single greatest economic melt-down since The Depression and yet the resulting property-value downturn lasted (depending on your choice of index) around 24 months. Currently, we are experiencing more of a slow-down in annual growth as opposed to any significant fall in actual values.
Another consideration is the talk of a “glut” of new apartment stock…this should be juxtaposed against the dramatic drop in new development applications and approvals. There may be some additional current supply; however this is not being backed up by an abundance of follow up stock – meaning, in the not too distant future, supply will be short once again and upward pricing pressure will result.
We return specifically to the Sydney’s eastern suburbs where sentiment may be a little softer and there may be additional supply of price-point, investor apartment stock. As outlined above - both scenarios may well be short lived. For sophisticated buyers with access to equity and holding a mid to long-term view on property - it would appear to be the perfect time to be negotiating and making acquisitions.
This lending-lead lull is unlikely to last.
These are the writer’s own views and do not constitute investment advice. Parties must make and rely upon their own enquiries
Brad Caldwell-Eyles - Managing Director of 1st City Real Estate Group
0414 246 625