The critical insight every property investor needs to know for 2019
By Matthew Hyder, CEO Legacy Property
News headlines aren’t painting a pretty picture of the Sydney property market right now. Price declines, failed settlements, credit restrictions. With so much negative hype, you can be forgiven for feeling a little worried that your recent property purchase is going to come back to bite you.
But, for most people, you don’t need to panic. Our view – a view that is shared by others in the industry – is that the current decline will be short lived. We think the market will make a full recovery and it will do it sooner than you might think.
The reason for this is that the current downturn in property is being driven by a policy change brought about the Australian Prudential Regulation Authority (APRA). It has not come about because of any fundamental economic failure or change in buyer demand. And it’s critical you understand this.
The fundamentals for Sydney property remain good. Really good. And so, when the policy impacts ease, the strong fundamentals will kick back into gear and things will recover.
The good news for anyone who bought a property recently is that the price of your home should be fine in time. And for people with access to credit – lucky you – because if you ask us, now could be a good time to buy.
Key takeaways from this article:
- The current decline in property prices has, in our view, been driven by APRA policy changes.
- Two fundamental drivers – population growth and a housing supply shortage – will continue to support property prices in the medium term.
- Now could be a good time to buy if you have access to capital.
A 2 minute overview of the APRA policy change that hit Sydney property
Sydney property prices have taken a hit because of APRA’s 2017 lending policy changes that were aimed at reducing the amount of risk lenders were taking on. There were a few key outcomes:
- Lenders had to limit the volume of interest-only loans they wrote along with the number of loans issued to investors (versus owner occupiers).
- Lenders had to get tougher when it came to assessing a borrower’s expenses. This means lenders are now paying closer attention to your bank and credit card statements so they can get a clearer picture of how much your life costs you and, in turn, whether you can afford the loan you are applying for.
- Lenders have had to increase their interest rate sensitivity to as much as 50%. Interest rate sensitivity is a stress testing method that helps lenders work out whether you would be able to continue paying for your mortgage if interest rates go up. Since APRA, banks are applying harder tests.
The impact of these changes is that banks can’t lend as much money to as many people. One of the big four banks recently told me that their analysis shows that borrower capacity has been reduced by about 20% as a result of APRA’s decision. APRA has since lifted some of its criteria, however longer and more difficult loan approval processes still apply. And less people with less money means less competition for property.
APRA’s decision has had a far bigger and much quicker impact on property prices than anyone anticipated. The reason is twofold – tougher borrower scrutiny AND greater interest rate sensitivity. With banks applying greater scrutiny to its borrowers and therefore knowing them better, then perhaps there might have been less need for a big buffer on interest rates.
I’m not criticising APRA, I fundamentally agree with what they did. There should be greater understanding of a borrower’s capacity to buy. You only have to look to my home country of the United States to see what happens when you lend too much money to too many people who can’t afford the repayments. These sorts of measures are critical for keeping the system healthy and in balance.
The fundamental reason prices will recover
You only need to look at the simple laws of supply and demand to understand why the market will recover from the current downturn when the policy impacts are fully lifted.
Naturally, property prices go up when there is strong demand. And one of the biggest drivers of demand is a growing population. According to the Australian Bureau of Statistics (ABS), another 1 million to 1.3 million people are expected to call Sydney home in the ten years to 20271.
That’s a lot of extra people needing somewhere to live. And why not choose Sydney? It’s an outstanding place to live with a safe society, a stable economy, sound political system and a great climate.
Some people may worry about government moves to dampen immigration but given population growth is so closely tied to GDP growth, I’d be very surprised if the government cuts back on immigration.
Sydney, however, faces a key issue when it comes to population growth – and that is where to put everyone. The city has a long-standing net housing shortage. According to the Urban Development Institute of Australia (UDIA), 2017 was one of the biggest years in terms of construction volume with 37,740 new homes and apartments built in Sydney, but even this fell short of the 41,250 needed to meet demand2.
This gap will likely widen in the coming years with approvals for new dwellings in NSW falling almost 33% in the 12 months to December 20183. This is in part being driven by developers who are bringing less properties to market as there isn’t enough buyer demand to deliver the required pre-sales.
Put all these ingredients together – a growing population, existing shortage supply and fewer new-build commencements – and you’ve got a recipe for ongoing price growth.
The trigger for price stability
Of course, the market will need a trigger to start growing again. And my belief is that stimulus will come from the banks themselves.
Tighter lending criteria can’t last forever. Banks are a critical part of our economy, and home lending is a critical part of their business. Slowly, over time, as risk is removed from the system, lending restrictions will loosen up again and we’ll start to see more people with more money back in the market shopping for property.
So, what should you do?
I can’t tell you what to do with your money or your property. But, if I had access to capital, I’d be using it to take advantage of the largest property price drop in recorded history.
Sure, there is less stock as people who don’t have to sell sit tight and wait for prices to recover, but there will still be good opportunities around.
In particular, look for projects under construction or recently completed developments as most would have available stock and might be offering discounts.
One word of caution is to remember that Sydney is a market of markets. The performance dynamics of one suburb can be very different to the next suburb so don’t assume all prices are down. Also have a look around at how many other developments are due to finish soon in the area as this could put further downward pressure on prices. In a nutshell, be sure to do your homework.