At present there is a lot of conjecture about the state of the Australian property market and as usual, in our Great Ocean Report we will do our best to break down what is really happening.
As we have mentioned previously in our Great Ocean Report, there are hundreds of small property markets in Australia but the two largest, Sydney and Melbourne, generally set the sentiment for the rest. Together they contain approximately 60% of the total value of the Australian property market, so they are important barometers to watch.
So what’s been happening? After 5 years of consistent and substantial growth in capital values, we have seen both cities record some modest losses over the past 12 months. If we focus on Melbourne as a whole, according to Corelogic data, we see that values have fallen 3.5% since their peak in September 2017 after increasing 43% over the past 5 years. In many ways this correction was due. Interestingly, if we refer back to our comment on there being hundreds of smaller markets, and you break down the different sectors of the Melbourne market you will find that the losses are not uniform. You will find most of the losses have occurred in the more premium sector of the market, with the more affordable suburbs actually continuing to rise.
This links back into the main reason for the overall declines and that is difficult access to credit. Tighter lending standards imposed on and by the banks are making it harder for potential buyers to get loans, with serviceability now being as important as security. Applicants now have to provide detailed financial records, such as credit card statements, to prove they have the capacity to service the loan whereas previously a general assumption was applied which has proven at the Banking Royal Commission to be completely inadequate. This process has not only ruled out many applicants, it has also slowed down the process considerably for the applicants that are ultimately successful.
Serviceability is essentially assessing the applicant’s debt to income ratio. This has mostly affected two particularly overlapping buying demographics, property investors and premium property buyers. In the past both of these buying demographics have been given credit mainly on the basis of security (the properties and other assets that they own) and less on their ability to service the debt. Their incomes are usually above average but so are their obligations such as private school fees, flash cars, annual overseas holidays, etc. As already mentioned, previously the cost of raising a family of 4 was just given a general dollar assumption, now they have to provide evidence, and many are not qualifying.
Therefore, the market performance within Melbourne is segmented. Those on middle and lower incomes must be more disciplined with their money if they want to be a home owner and that great Australian dream of home ownership is their main focus. There is also by volume, more of them. That is why areas and suburbs with more affordable price points continue to perform well. This includes regional towns like Geelong, which is currently one of the hottest property markets in Australia. It looks cheap compared to Melbourne but has a desirable infrastructure and access to Melbourne if needed.
First home owners are now in favour with the banks rather than property investors simply because their risk is lower on an individual basis. First home owners are generally buying lower valued assets, they get government and often family assistance, the mortgage is often insured and as mentioned they have had to demonstrate significant monetary discipline to qualify the loan. This contrasts with the risk associated with a leveraged property investor buying their 4th property on the back of the equity of the other 3.
So, what does this mean for our coastal markets? Firstly, those lifestyle property buyers who were sitting on the fence as to whether to buy or not will look at the negative sentiment coming out of Melbourne and Sydney and use that as a reason not to do anything. This has always been the case at the end of a buoyant cycle. But mostly it depends on how they are accessing their finance. Much of the buying demographic we are currently dealing with in Anglesea, Aireys Inlet, Lorne and Apollo Bay are cashed up Baby Boomers who are setting up their later in life lifestyle plans. They are essentially asset swapping. They are typically funding their purchases by downsizing in Melbourne and buying or upsizing on the coast (we have seen a lot of trading up in the past few years). They are not interested in timing the market as they are running out of life and want what they want.
In Torquay and Jan Juc, we are seeing more owner occupiers and they come from all wealth demographics, from average wage earners to highly paid medical and legal practitioners (usually working in Geelong). These towns have seen significant capital growth and are very popular for the permanent lifestyle they offer. Torquay and Jan Juc differ from towns further down the Great Ocean Road because property owners are generally occupying their prime residence. This means that they are typically only funding one mortgage (or own outright) and are not over leveraged with debt relative to their income. Although the median house prices have risen significantly into the $800 – $900,000’s they are still cheap compared to much of Melbourne, especially the upper end suburbs that have seen softening prices.
In a macro sense, this credit tightening is a welcome occurrence because it heightens the probability of a sustainable property market. In the past, we have seen cycles close with a bang caused by rising interest rates or a negative economic event like the GFC (which was caused by poor credit allocation). Although the banks are nibbling away with interest rate rises, for a variety of reasons there will not be any significant movements from the Reserve Bank anytime soon. The Australian economy, despite the suicidal tendencies of the Liberal party, remains well placed by world standards. Our biggest threat is an overheated and unsustainable property market and although some international commentators are suggesting the end is nigh, they always underestimate Australians love affair with property and that they tend to pay their mortgage first before anything else. This credit tightening just stops those property Cupids, who cannot afford it, from shooting themselves in the feet and then making us all pay to fix the wounds.