‘May you live in interesting times.” – Chinese curse.
These are definitely interesting times.
I thought I’d spend today thinking about some of the down-side risks to Aussie property right now.
And look, I’m no chicken little. I’m not one to start panicking at the first falling nut job in the press.
But I also know that markets move in cycles. And so 2 to 3 years into the current boom phase, it’s probably worth taking stock of where things are at.
And right now, I guess I’m seeing enough factors to make me pause a bit and take a wait-and-see approach.
I don’t think that any one factor will be enough to take the wind out of our sails. The only danger is that the factors combine, joining rings, and summoning a power far greater than their combined individual strength.
In short, Australia faces a triple threat.
Each of these factors on their own wouldn’t faze me much normally. But if they all bit at the same time… that could be a different story.
So let me step through it:
Threat 1: credit rationing
This process is already under-way. APRA has been coming down hard on the banks in recent months to get their investor mortgage books under control. It started with increases in LVRs, and reweighting rental income in the eligibility calculations. But it went next level a couple of weeks ago when APRA announced extra capital requirements, which forced the big banks to raise rates for investors.
Now, other banks and even a few non-bank lenders have followed suit. So far we’re looking at about 25 basis points of hikes, with potentially 60-80 bps on the cards.
And there’s reports it’s getting into SMSF lending as well…
Will it have an impact on mortgage lending? How could it not? The question though it, how much?
It’s way too early to tell in the data yet, but the CoreLogic RPData Mortgage activity index, which is an early warning barometer, had a tick down in the latest month…
Remember this is all about taking investor lending, which was running hot, and putting a cool towel to its forehead. So in that sense I wouldn’t expect it to be a major market mover.
But combine it with a couple of other factors…
Threat 2: Over-supplied markets
Construction is booming.
While that’s great news for the economy and all the unemployed tradies coming back from the mines, it raises the prospect of some over-supplied markets.
It’s tricky to untangle how this will play out. Because we’re not talking nationally. We’re talking individual cities, even individual segments.
Like Melbourne apartment construction. Melbourne has been building high-rise apartments like there’s no tomorrow, and there’s massive supply already on train and due to hit the market over the next three years.
The reason that this segment worries me, as I’ve written before, is that a lot of it seems targeted at foreign investors, who don’t seem to get what Aussie standards are.
(Most Aussies aren’t inclined to live in tiny shoeboxes. Even our students are fussy.)
So I’m not sure we’ll see a direct impact on prices across the city. But if there’s a glut in rentals, and some people take them up, that could suppress rental prices. That in turn, will compress yields (already tiny), and make housing less attractive to investors at the margin.
Again, probably not a huge effect on its own…
And if you look around the country, Perth has got to catch your eye. The median price for houses and units fell a thudding $20K in the June quarter.
A lot of this is demand driven, as interstate migration flows reverse with the unwinding of the mining boom. And with the collapse in commodity prices, State Final Demand has fallen for 10 consecutive quarters (hat tip to MB), and so everyone’s going to be feeling the pinch.
Trouble is that this collapsing demand comes at exactly the same time as the fruits of a mini construction boom are coming on line. Perth is starting to look over-supplied, and has got to be looking at some of the softest market conditions in a while.
The question is going to be how contagious any shakeout in Perth or Melbourne might be. How many investors headed west with the mining boom? How many local investors bought into high-rises?
I wouldn’t normally be worried, but you can’t take anything in isolation right now.
Threat 3: Chinese Buyer Exodus
The final threat is a turn around in Chinese money. There’s been a lot of ambiguity around just how much Chinese buyers are spending in Australia, and a lot of public angst.
That finally led the government getting off its bum and doing something about it, and that doing something involves enforcing the rule that foreign nationals can’t purchase existing property.
That’s a good thing. Rules are rules and markets work when people have faith in the system.
But let’s say the government completely eliminates foreign national purchases of existing property. Will that have a big impact?
So many questions…
The Triple Threat
As I said, any factor in isolation wouldn’t faze me much, but if they all kick into gear at exactly the same time, it will be enough to consolidate a peak in the current cycle.
In that sense, I’m attacking the market from a few different angles right now. This isn’t a time just to buy anything you can get your hands on.
So I’m looking to add value to my existing properties, with renovations, DA’s that sort of thing. I’ve also got about $15m worth of developments in the pipeline at various stages of completion. I plan to keep about 80% of them anyway, so I’m not too fussed about the market stalling.
And of course I’ve got my eye on other markets. I’m very fussy in Melbourne, but Brisbane still has potential. I’m also taking extra interest in the US.
So still busy, still investing. I’m just putting the wallet away for a bit. See what happens.
They're my thoughts. What do people reckon? Am I being a bit too ‘glass half empty’?