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Fundamental reasons for property downturn

There’s no doubt that Sydney and Melbourne properties are facing a downturn after a high swing over the last couple of years. A lot of highly leveraged investors couldn’t cope with the cost of money for their investments and were forced to sell them at a loss. There are several factors that contributed to triggering the current fall in property prices:

1. Tighter lending criteria

It’s no secret that the big four banks have received some pressure from APRA for investment property loans. Due to the loose monitoring for lending that has been practiced over the years, some lenders were not complying with regulations and were taking advantage of loopholes in the system. In December 2015, APRA began to mount a solid case and started to apply pressure to the banks from April 2016.

2. Overseas lending reduced significantly

Australia is a country with a population of about 26 million people and is located in the Asia Pacific region. We have a strong relationship with the Asian economy, China in particular. Australian real estate attracts a lot of overseas investors due to the fact that our government has created a safe environment for overseas investments. But, with the pressure from APRA, overseas investment lending dropped significantly. This issue saw a fall of over 30% in off-the-plan sales down to about 8% of total off-the-plan transactions.

3. Our economy is not in the best shape

Something that people should realise is that there are fundamental reasons behind every market boom. For instance, the last real estate market boom (2012-2017) was due to the thriving mining industry that grew rapidly in Australia from 2009. The effect of this mining boom increased wage growth in the work force as higher pay gave buyers larger purchasing power. At the moment, Australia is not experiencing another boom to trigger the increase of inflation and wage growth. Our view is that infrastructure will be the next boom to feed wage growth, but this could take about 4 -5 years to come into effect.

4. Property cycle factor

Unlike any other sector, the property market cycle is slow and quite recognisable in the cycle itself. The appreciation or depreciation of value is slow. Unlike shares which can go up more than 40% in one day, property takes about two to three years to see that kind of growth, and we see that (technically) property is now at about 5pm on the property clock. It is also evident that this recent fall in property prices is due to human intervention (APRA). The soft market is not a natural condition and more intervention will continue to cool down the hot uprising of prices across Australia’s biggest capital cities. We think once the “plug” was pulled, investors were preparing to dive in the market for different reasons. It’s just that the restrictions have made our economy suffer across the nation.

We hope this information has helped you to stay informed. If we can assist with any of your real estate needs please get in touch so we can discuss a strategy that is perfect for you. We believe that every market shows its own opportunity. Great investors know how to benefit from any market cycle.

 

Chandra Leonardi

Principal

Capital Value International Group

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