This recovery will favour some properties over others…
So the property recovery is on. No one has any doubt about that now.
But there’s an interesting question about which segments will see the most price action first.
CoreLogic’s Cameron Kusher reckons we’ll see it in the Premium Property segment.
He’s just released a new report examining price growth across the three broad market segments – bottom 25%, middle 50% and top 25%. It shows that the most expensive 25% properties have shown the most improvement recently, and are likely to lead any recovery:
Nationally, from the market peak to the end of May ’19, the most affordable quarter has seen values fall by -1.4%, the middle of the market has seen values fall -6.6% and the top quarter has fallen by -11.6%…
Over the past year, most capital cities and regional markets have been recording value declines. While values are broadly continuing to fall, the rate of these falls on a monthly basis has been slowing.
After having seen much larger corrections than the other two segments (following a larger growth phase), the most expensive segment of the market is seeing its rate of decline slow.
This is a trend that has played out before whereby premium housing values fall the fastest initially but also sees the falls cease earlier than other market segments. It is still early days but with the housing market expected to trough in late 2019, the premium housing sector may find a floor first and start to show some level of recovery before the other segments.
Maybe. It is true that the Premium market is more volatile and reacts to price stimulus more quickly. This would be true to form.
However, we’re also seeing a lot of stimulus aimed at the bottom of the market right now.
First, and most obviously is the government’s First Home Buyer Deposit Scheme. We’re still to see exact details, but we know it will be restricted to lower income earners, and restricted to cheaper properties (on a region by region basis).
And like all schemes that effectively just give first home buyers more cash, we know it is likely to push up prices in those entry-level segments.
That’s what Fidelity International investment specialist Anthony Doyle reckons:
Mr Doyle said that introducing subsidies on the buy side doesn’t address housing affordability. He said the result of such schemes is to drive up demand…
That’s good for people who want to sell their current property and upgrade, but it’s not so helpful for those struggling to enter the property market in the first place.
“It’s not going to address housing affordability, but it may have some role in stabilising house prices,” he said…
Albert Edwards from Societe Generale dubbed the UK equivalent a “moronic policy”. Mr Doyle said that he wouldn’t go that far, but he was highly sceptical.
Of course it will. Everyone one in the market knows these things push up prices. It’s just that everyone’s too polite to mention it.
So that’s going to give the entry-level segment a boost.
At the same time, tweaks to how banks assess serviceability, and particularly how they use the Household Expenditure Measure (HEM) to assess living expenses, is also biased to the cheaper end of the market.
Basically, the HEM was something of a poverty-line measure. It was an estimate of the bare minimum a household needed to get by.
The trouble was that banks were applying the HEM measure to calculate the serviceability of all households, even if they were earning $500K a year, and had no possible way of surviving on HEM.
So by removing HEM and forcing banks to look at actual expenses, APRA is cutting back the credit available to higher-income households.
And the further away from the poverty line you actually are, the more impact it has on your serviceability.
So if you’re a higher-income earner, and someone likely to buy a premium property, your serviceability will be more affected, relatively, than a lower-income earner and someone looking to buy an entry-level property.
So the move away from HEM will have more impact on the premium market than the cheaper market.
So put these two factors together, and current market conditions clearly favour cheaper properties.
Premium properties might be leading the recovery for now, but I don’t expect it to last.
Momentum is with the entry-level segment.