Property Market Incentives are Drying Up

With all of the talk of threats to trade last week, you may have missed this.

From The Australian Financial Review (AFR):

Developers are offering commission payments of $30,000 and trebling apartment sizes in a bid to attract new buyers as investor demand slides and prices begin to fall, analysis of deals reveals.

Luxury fixtures interest on deposits, part payment of stamp duty and cash rebates are also being offered “free” to encourage buyers squeezed by tougher lending conditions and lower expectations of price growth, it reveals.

Financial advisers and mortgage brokers are being offered a share of $30,000 commission plus GST by developers and builders, with half paid on exchange of a property and the balance on settlement.

That is in addition to the average upfront broking commissions from lenders of about 0.6 per cent of the loan value and a trailing commission of just under 0.2 per cent of the loan outstanding per year over the life of the loan, according to the Australian Productivity Commission.

Offering incentives to buy property is another sign that the property market is slowing…

Check out the latest property data from Corelogic:

Source: Corelogic
[Click to enlarge]

Among all the negatives, the only positives are in Hobart and the regional area. The market driver, Sydney, has fallen 2.4% for the quarter.

Another developer in Brisbane is giving buyers five years to settle on purchases. As long as the buyer pay a ‘reasonable deposit’, they can then pay monthly leasing fees and settle then.

Why five years?

As Reed Property Group told AFR, financing is getting tough:

The world has changed. There is no doubt the availability of debt for home owner-occupiers and investors has changed. Purchasers will find it easier to refinance or get finance in five years’ time.

We think there may be some downside left but probably not a lot. We’re very comfortable that in the next three to five years there is upside in those prices.

That is, they expect that property prices will rise, and credit will loosen again in the next five years.

Ahem…forgive me for being sceptical.

I mean, during the property bubble in Spain, credit was flowing freely. You could borrow up to 100% of the value of the home.

And since you were borrowing, you could also get a bit extra for a new car…renovations…or even for new furniture…you name it.

After all, properties were increasing in value very quickly.

We all know how that ended…

Australia’s current property market situation

In Australia, property prices are now falling, and credit growth is slowing.

When things start getting hard, banks usually get worried and start cutting credit.

Investors are now facing tighter restrictions.

According to Corelogic, the share of credit to investors is at its lowest since May 2013, when it was at 38.7% of total housing credit. It is currently at $587 billion, which is 34% of total housing credit.

As you can see in the chart below, interest-only loans have plummeted. Banks are also starting to cut down on mortgages with loan valuation ratio over 90%.

Mortgage lending standars Chart 06-03-2018

Source: Domain
[Click to enlarge]

The result is that, as Corelogic reports, credit growth is now driven by owner occupiers.

Residential housing credit now accounts for 62% of total outstanding debt to lenders, a record high. Much higher than just before the Global Financial Crisis in 2007, when housing credit made 51.9% of total debt.

Debt is at record highs…wages are stagnant…expenses are rising…

With household debt at a whopping 200% to income ratio, we are testing the debt limits.

And with housing debt to income ratios at record highs, how long can owner occupier credit keep driving the housing market?

I mean, you can only stretch salaries so much to take on debt — even at record low interest rates.

A recent survey by Morgan Stanley found that most households are already struggling to save. As you can see in the chart below, around 40% of participants had zero or negative savings over the past year.

40% zero or negative savings Chart 06-03-2018

Source: Business Insider
[Click to enlarge]

And the thing is, credit is tightening for everyone, not just investors.

As reported by the AFR:

National Australia Bank, which has about 15 per cent of the mortgage market, is tightening credit assessment of borrowers amid growing regulatory concern about household debt and loan serviceability across the industry.

The bank has reduced loan-to-income ratios from eight-times to seven, a full percentage point change following the introduction of the benchmark last September.

It means the bank will “automatically decline” or refer for more assessment applications that exceed the threshold, depending.

What can we expect from the property market?

Even with the recent tightening, household debt is still growing faster than income.

For it to fall, we will need to tighten credit much more. That’s why, in my opinion, we are just at the beginning of credit tightening.

Easy credit and low interest rates have meant a booming housing market. What do you think a cut on credit and higher interest rates will mean for the housing market?

With high debt, stagnating wages and the threat of higher interest rates, Australia is vulnerable to a correction in house prices…

According to many economic analysts, housing prices will slow gradually.

But let me tell you, in my experience there is nothing gradual about a property market crash.

The same way prices have increased quickly, fuelled by debt, they can also drop, even quicker.

And with less credit, the prospect of rising interest rates and already high debt, how many people will still be keen — or willing — to jump into property?

Kind regards,

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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