Two headlines caught my eye this morning.
The first one from The Sydney Morning Herald: ‘Sydney, Melbourne bear brunt of fall in housing market confidence.’
The headline refers to the ANZ/Property Council survey, which tracks Australian confidence in the housing market.
Needless to say, with recent pricing drops, people are less confident on property prices, especially in NSW and Victoria as you can see below.
Source: ANZ/Property Council
Sentiment has soured on the property market. Mainly because there is less credit available and there are expectations that the market will keep falling.
The property market has been seeing falls for the last 12 months, with Sydney (6.1%) and Melbourne (3.4%) suffering the largest drops. These two cities make up 60% of the Australian property market by value, which means they are dragging down the whole market with them.
These two Australian capitals have seen large growth in recent years, as you can see in the graph below.
While these two Australian capitals have seen large growth, salary growth has been low. With salaries barely growing, property increases at that rate are very much unsustainable.
It is true that much of that growth has been pushed by foreign investments.
Foreign investor’s interest in Aussie property is sizzling down
This from Domain:
‘Chinese tourists taking advantage of the national Golden Week holiday used to flock to Melbourne at this time of year, looking to invest in Australian property.
‘But agents and industry insiders say Chinese investors just aren’t arriving in the same numbers they once did.
‘“Last year for instance, there were loads of tourists getting out of cars with cameras and looking at the houses,” RT Edgar Toorak director Jeremy Fox said. “I had a property in Hopetoun Road. A minibus pulled up and about 30 people got out to look at the house.
‘“We’re not seeing too many coming out here at the moment.”
‘Chinese demand for property has been falling since last year when market conditions sharply pivoted, locking many foreign buyers out of the picture.
‘During the 2015-16 financial year, Chinese investors got approval for nearly $32 billion in loans. In the next financial year, it fell to just above $15 billion.’
As reported by Yahoo Finance, Chinese investment in real estate sector saw a high influx in 2015–16, but has since dropped from its peak as you can see in the graph below.
Source: Yahoo Finance
You see, Chinese investors are getting hit with a double whammy. For one they are struggling to get their money out of China, and Australia has also been cracking down on investment financing.
Digital Finance Analytics (DFA) recently published an interesting chart on the property investor intentions for the next 12 months.
As you can see below, investors looking to transact over the next 12 months has plummeted from about 50% a year ago, to 20% today. The main difference is that most of those 50% a year ago were looking at buying, while the majority of the 20% now are looking at selling.
And, notice that the amount of people looking to trade down on property (green line) is also rising.
Source: Digital Finance Analytics
Plus, there is the question of increasing interest rates.
US bond rates are rising, which could mean higher interest rates coming.
Get ready for higher rates and less credit
Since 2008, central banks have been keeping rates low. Yet now, with the US Federal Reserve looking to normalise rates, the tide could be changing. Higher rates and less credit will put pressure on highly indebted property owners.
And, there is a lot of supply about to hit the market too. You can even see it if you walk around Melbourne. There are a lot of apartments on the verge of competition.
Obviously, this is all good news for people who are priced out of the market, but not for sellers.
Yet, even with the recent 6% drop in value in Sydney, UBS is still classifying Sydney’s property market as overvalued, as you can see in the graph below.
You see, the falls are mild compared to how much property has grown in the last 10 years. To make property more affordable, you still need to see either property prices fall farther or salaries to increase.
With investor activity retreating, increasing rates and people struggling to get finance we could see even more falls in property prices.
Oh, before I forget. What’s the second headline that caught my attention?
From ABC: ‘Avocado growers say prices have hit their peak while supply continues to skyrocket.’
More good news for those looking to get into housing…
Editor, Markets & Money
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