‘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?
Well, Maybe. But we don’t know because we don’t know how much they were buying in the first place.
And could it discourage Chinese investors all together?
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’?
Paul says
Hey Jon,
Thanks for your insightful comments. I have experienced first hand the tightening up of the banks on investment borrowing. Trying to extend our property portfolio has suddenly come to a screaming halt and based on your commentary I think that it is probably a good time to chill and see what happens over the next year or so. I have found most of the comments that you have made in the past to be fairly positive and optimistic. I don’t think it hurts occasionally to try to take a measure of how much liquid is in the glass objectively as possible without regards for how close to the top that may be. Keep up the good work.
Ken says
Hi Jon, I have heard from good advice that some of the coal mines in Queensland, even though they are laying off employees now, are spending up big now, believing that there will be a boom in 2016. Have you heard anything, or better still, are you in a position to evaluate the enormity of this. Thanks, Ken.
Glenda says
Regarding threat number 1, and the new APRA regulations, I wonder if there is any hard proof that house prices are driven up by investors. I would think that emotional owner occupiers are the ones who pay the high prices! So my guess is that the property market will still chug along as before, with owner occupiers bidding against each other to increase the prices. The lenders will write less loans, if investors are squeezed out, and this will affect their bottom line. Developers will make less sales, due to less investors. Who wins?
Kash says
Great comments!! however I am more optimistic: firstly, I never go near Melbourne, it is too much of a risk for me. secondly, NSW is spending big on infrastructure here, and they say 1 million people will move in about 10 years time from now. they are all pretty positive to me. last but not the least, I think with interest rate going up, it is our tenant will get hurt a little, if we are going through the phase like post 02-03 boom, people will fight over an apartment by putting in half yearly rent in advance. I had been through that and I didn’t enjoy it.
Byron Scott says
Agree with your comments. Regarding Brisbane, I am worried about the apartment market here, too. There is an enormous amount of new projects under construction now, and this is not a huge city, plus the immigration rate here is not what it used to be, from the south. On the other hand I would be fairly confident of the townhouse and small lot housing market.
As an aside, why is it that guys (and girls) doing financial graphs cannot use the spectrum of colors to differentiate the lines. When there are 3 series to display, why use 3 close shades of blue when there are so many more options available. Not singling these guys out, but it is a common failing.
ron says
hi jon, interesting stuff indeed! my take on australia and aussies generally..and i am one of them..is that we have been living in ‘lotus land’ too long..and the headaches are just starting….you see none of us under the age of 90 years or so have been through a depression. and those over 90 ..well we can’t go there. technically we are in a depression right now but the signs are just emerging…it won’t happen overnight….it only ‘happens’ when it is obvious to everyone and things start going dramatically wrong here and there. collectively we have grown up to everything being just dandy…growth, growth, growth..then comes down the tree..and we start all over again. from 1953..when i was getting 5 pounds a week.(there is no blasted pound sign on this keyboard!:-) to now when my income is anywhere between here and the moon…money is a thing of fantasy…figures become meaningless..and we have to invent new words to encase the amount into understanding…a quadrillion anybody? and thats the problem…too much moneyprinting..the entire world has printing presses running wild with enthusiasam. ..but…it can’t last..the balloon has to go ‘pop’ ..leaders the world over are anguishing over all of this..they are figuring ways to look after themselves…when it all crashes…look, the derivative debt is over US$800 trillion ..and the top 4 american banks are swimming in derivative debt as are the euro banks…and it is sad indeed that out ‘big 4’ banks are inextricibly (good word?) tied up with them. words fail me. i gotta go now…good luck everybody:-) ron from w.a.
peter sun says
Great article John . . . my take is that Melbourne and Sydney are to be treated with caution, however Gold Coast and Brisbane have not moved much yet. That’s where the next opportunity lies. I have seen this before. Gold Coast is quiet for 10 years and then BOOM up it goes and doubles in 2-3 years. History repeats itself. And this market looks cheap as now compared to Melbourne and Sydney. Just bought a Huge townhouse double garage, 3 bathroom, amazing views, 3 bedrooms and HUGE granny flat, all for $425,000 . . . it’s 15 minutes to the beach and in a really upmarket area. There are others like a one bedroom unit 100 metres from beach for $189,000. Right next to the most expensive street in Australia (Hedges ave) Mermaid Beach. Look it up if you don’t believe me. So in a nutshell, look at where the market has not moved, high yields . . . and good population growth. There are plenty of opportunities out there still . . .
Sanders Payne says
Hi John,
I agree with half empty and as you pointed out there is too many factors to consider. Un chartered waters in my opinion but with 18 million on the line you must be prepared to become a negative million aire at any stage.
If your over 35 there is good chance you may get taken out by a social entrepreneur. Batten the hatches or look at safer waters.
peter says
Hi John
Ive read many of your articles and always find them informative . I perhaps have a different take on the price ‘boom’ in Sydney. Not sure if it applies elsewhere but it may .
there are a number of issues which have impacted the sydney market .
1. Small investors have been spurred on by the ‘power’ of the granny flat . over 450 sq m block and you can build one and increase your return from 2 sources . Ive seen properties increase in value $100,000 to $150,000 overnight . If you live next door you want the same price even if its a smaller block ..You wont get it but will get more than before .
2. large parts of sydney have been rezoned for higher density (either town houses,low rise or high rise). Lots of developers paying low interest to borrow have forked out a fortune for this land and given otherwise ordinary home owners a fortune to spend on new homes and investment properties .
3. the aging population means that higher prices from estate sales flows through to the next generation . They now have extra funds to buy a 2nd or 3rd property
Sorry but a bit long winded