Property Insight from a Sydney Cabbie

This has been Sydney for the last 16 years. Construction, construction and more construction.

This is what my taxi driver said to me as we were leaving the airport.

The evidence was hard to miss.

We passed by lots of large construction sites during our 20 minute ride…

…cranes peppered Sydney’s skyline…

In fact, according to the RLB Crane Index, Sydney has over half of all the cranes in the country. 436 to be exact.

I asked: ‘How do you think the housing market is doing in Sydney?

Here is the gist of his answer:

Not well. Property prices have dropped a lot.

‘If the government keeps putting more rules on mortgages, then they will keep going down.

‘Before, you wanted a million, two million? No problem, here you go.

‘Now, banks ask for lots and lots of papers. It’s very hard to get a mortgage.

That’s what happens when you cut credit.

Sydney’s property market may have been fuelled by population growth. But also, by access to cheap and easy credit.

Now banks are cutting back credit and increasing scrutiny on mortgage applications.

This is from The Australian Financial Review:

The big four banks, which are responsible for 70 per cent of loans, are moving to tighten underwriting standards by much more forensic analysis of expenses, particularly around the standard Household Expenditure Model (HEM) which has been critically discussed by the royal commission.

‘For example, Westpac, the nation’s second largest lender, which includes Bank of Melbourne, BankSA and St George Bank, said it will drill much more deeply into borrowers’ spending to better understand their living expenses, commitments, capacity to repay and verify documents. It has increased the number of criteria from six to 13.

Cut off access to credit and demand will fall.

As you can see in the chart below from Corelogic, Hobart is the only capital city registering increases this quarter. Sydney has seen prices fall by 4% this year already.

Quarterly change in home values 04-05-2018

Source: CoreLogic
[Click to enlarge]

Less access to credit also means less sales. 

Supply is increasing

According to SQM Research there are over 30% more listings than last year in Sydney:

In Sydney, listing fell by 4.4% from March but are up 34.9% from a year earlier as some homeowners seek to take profits on their homes before any sustained drop in prices.

And, according to the RLB index, 253 of the 436 cranes in Sydney (or 73%) are in the residential sector. That is, there is still new property in the pipeline that will hit the market.

We could see even more home owners rushing to sell before prices fall even further.

With less access to credit, it is not surprising to see a rise in lending from the bank of mum and dad. That is, parents lending to their children the money to buy a property.

As Domain reports, parent lending has increased 25% since last year:

The majority of first home buyers now borrow from the so-called “Bank of Mum and Dad”, which accounts for more than $20 billion in property loans after shooting 25 per cent higher in the past year.

‘The shift toward family lending has sped up in the wake of immense pressure on the traditional banking sector, which has been forced to lift rates and minimum deposit requirements as it scrambles to adhere to new regulations and expected future tightening.

‘The Bank of Mum and Dad now ranks as the 10th largest lender in the country, behind Bank of Queensland and ahead of ME Bank, research carried out by Digital Finance Analytics show.

Supply increasing and access to credit declining means that we could see even more steep falls on property prices.

If people are having a hard time accessing a mortgage, then it doesn’t really matter how much population is growing or how low interest rates are. Less people will have access to the capital needed to buy a home, which will likely damper demand.

The Royal Banking Commission has recently shown some irregularities in bank loans and financial advice. So, it sure looks like lending could continue tightening.

Tougher lending rules will also mean it will be harder to refinance on existing mortgages.

This is from the AFR:

The number of struggling borrowers seeking mortgage refinance has doubled to more than 30 per cent as lenders increase rates and fees, and toughen scrutiny of borrower income and expenses, according to a new analysis.  

‘Mortgage brokers, who act as intermediaries between lenders and borrowers, claim lenders are “throttling back” amid increased pressure from regulators and fear of exposure by the Hayne royal commission…

‘There are estimated to be 550,000 households seeking to refinance in the next three years, an increase from 480,000 from last year, DFA analysis reveals. Of those nearly one-in-three are having difficulty finding alternative finance.

The fact is that when home prices fall, it is harder to refinance. And it is not only credit tightening, interest rates are also rising.

As the article continued:

Lenders, including ME Bank and MyState, are increasing lending rates in response to higher compliance and funding costs with more expected to follow despite the Reserve Bank of Australia holding the cash rates at record lows.

Which could mean, more properties could hit the market if things get tough.

If cheap and easy credit has fuelled huge property price increases in Sydney, what do you think the opposite conditions will do to Sydney’s property market?


Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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