Article by Daniel Gold
From October 2017 demand for property in Australia declined as boom-time conditions in Sydney and Melbourne made way for a very substantial correction.
As reported in The Adviser, Residential property prices hit their peak in October 2017, when, according to data from CoreLogic, the national median home value sat at $543,251.
What followed was an 8.4% slide in dwelling values, which bottomed out in August 2019 – taking the national median home value down to $521,157.
Sydney and Melbourne recorded peak-to-trough declines of 14.9% and 11.1% respectively.
The housing market downturn was primarily driven by lending restrictions.
They major lending restrictions were as follows:
- We had a loan ‘serviceability floor’ introduced whereby no matter what actual interest rate you were getting, banks were made to assess your loan application based on an inflated interest rate of 7% or higher over the principal & interest term.
- There was an ‘interest-only cap’, where banks were restricted to having interest-only loans represent no more than 30% of all new loans
- There was an ‘investor cap’, where banks were restricted to growing their investment lending activities by no more than 10% p.a.
- And lastly, there was much more focus on responsible lending (this was intensified by the banking royal commission), and this led to heightened conservatism amongst all lenders
The slump now appears all but over.
The first signs of a recovery in the housing market were home value increases in Sydney and Melbourne over the months of June and July 2019, which eventually spurred a rise in national home values in August (0.8 per cent) – the first monthly national increase since the downturn commenced.
In terms of online search activity for housing Nerida Conisbee chief economist at REA Group (realestate.com.au) reported a 25% increase from the year prior.
The auction clearance rates in Melbourne and Sydney also began to spike consistently reaching around the 70% level during the second half of the year.
What sparked the recovery?
Market analysts largely agree that the recovery was sparked by the stars aligning so to speak in each of the political, economic and regulatory environments.
The Coalition’s surprise victory in the federal election signalled defeat of the Labor opposition’s proposed changes to negative gearing and the capital gains tax which many predicted would further exacerbate the housing market downturn by disincentivising investment.
Then in June, just a few weeks after the federal election, the RBA announced its first cut to the cash rate in almost three years, and that was followed by further cuts in July and October, taking the cash rate down to a historic low of just 0.75%.
From a regulatory standpoint, with interest rates hitting new lows, the banking regulator (APRA) had no choice but to scrap its 7% interest rate floor for mortgage serviceability assessments.
Lenders responded to APRA’s changes by lowering their interest rate floors to as low as 5.25%, and that resulted in borrowers being able to access loans 10-15% higher, nearly overnight.
All of these things contributed to the turnaround. Loan activity is now strong (signalling high demand), and more properties are expected to be brought to market now that selling conditions have improved.
So what’s in store for 2020?
You’ll have to listen to our podcast next week to find out!
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