The Switch to a Buyer’s Market

A family in Cammeray, NSW recently put up their duplex apartment for sale.

The apartment sold, before auction and close to the estimate. Yet here are some of the impressions from the real estate agent. From The Australian Financial Review:

It was surprising that buyers were being very, very loose [with] their interest. And even if they told you they were interested and had all their ducks lined up, they didn’t and that was quite shocking.

‘Previously buyers were very transparent with their interest and at the moment they’re wearing their costume. They’re not really telling you the whole truth. They’re shifting back and forth with what they want, where they’re looking and what the market’s doing. They haven’t got any clarity on what their plans are…

‘But I was shocked to see some buyers put in offers subject to finance or even have to withdraw…

‘It would have been less stressful going to auction. You know whoever turns up has finance. If it was 13 months ago, I would have said to my vendors “Let’s just get it to auction. It’s guaranteed”. But [in this market] it was too risky for them.

The property market is changing

The housing market is very different from a few months ago. Back then, buyers were getting into frenzied auctions, spending more than what they had budgeted for and properties were going above the reserve.

It looks like buyers are wary.

In other words, we could be seeing the switch from a seller’s to a buyer’s market.

According to Real Estate, interest in properties listed for buyers or renters has been winding down, especially in NSW. As you can see in the map below, views per advertising have dropped by 25.4% since last year for one of the main property drivers.

Australian real estate by capital city 17-04-2018

[Click to enlarge]

Clearance rates have also dropped since last year. Clearance rates homes in Victoria (red) and NSW (yellow) were at 81% back then. The results for last weekend’s auctions were at a much lower 62% for NSW and 68% for Victoria.

Clearance rates chart 17-04-2018

[Click to enlarge]

Banks are cracking down on lenders

According to Corelogic, prices for the combined capitals have fallen 0.9% for the quarter and 1.7% for Sydney.

Much of it could be because there has been a crackdown on investor lending and financing is getting tougher.

Yet, as Bloomberg reports, getting a mortgage could get even more difficult for buyers in the future:

A toughening of lax lending standards in Australia is threatening an already-cooling property market.

‘An inquiry into misconduct in the financial industry is likely to lead to greater regulation of the nation’s A$1.6 trillion ($1.2 trillion) mortgage market. Banks have routinely relied on an unrealistically low estimate of homebuyers’ living expenses, and a more genuine assessment of spending could reduce borrowing power by as much as 35 percent, according to UBS Group AG analysts.

‘That would mean many new buyers simply couldn’t afford current prices — a further drag on home prices that are already falling as a seven-year property boom tails off.

Banks usually use the Household Expenditure Measure (HEM). But according to UBS, this benchmark could be underestimating living expenses.

Yet, as Bloomberg continued, this could all be changing.

Many of the big lenders relied on a basic household expenditure benchmark to estimate living costs when determining how much someone could borrow. According to UBS analysts, banks assumed the same A$32,400 annual expenses for households earning A$80,000 or A$500,000, in a country where private school fees can run to more than A$30,000 a child.

‘The lax spending checks inflated the amount homebuyers could borrow, saddling them with mortgages they may struggle to repay if interest rates rise.

This isn’t surprising news.

Many of my friends have walked away surprised at how much money the bank was willing to lend them to get the home they wanted.

How much could things change if benchmark indicators tighten?

Well, here is an estimate from UBS.

Housing borrowing limit chart 17-04-2018

Source: Domain
[Click to enlarge]

Housing has been booming, fuelled by high immigration and cheap credit.

Fast dwelling price growth over the last years has meant that Australian households have become some of the most indebted in the world.

But if people have less access to credit to buy a home then demand could fall. Credit tightening is already starting to affect property prices.

For home owners who were looking for prices to keep appreciating at the same rate as previous years, slow wage growth and unmanageable debt could make things much worse.

A recent survey by KPMG, showed that 61% of those surveyed renegotiate their home loans or switch banks at least once every 5 years.

Yet if home values fall, renegotiating that loan will be much harder.

As we told you last week, according to Digital Finance Analytics (DFA) about 30% of Australian households are suffering from mortgage stress…that’s quite a number.

And the RBA has not even started to raise rates yet…

Kind regards,

Selva Freigedo,
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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