In light of a stronger labour market, significant population growth and close to zero residential vacancies, Melbourne’s residential property prices are falling.
Some of the price declines can be attributed to a correction in the market, but the rest is a combination of other factors.
Jack Brukarz, Motion Property CEO, considers these factors and ponders when the current cycle will likely end.
Where to from here?
The release of the most recent employment data indicates the robust nature of our economy. The forecast for January was a rise of 15,000 and the actual result more than doubled that figure at 39,000 Australia-wide. The more positive news was the 26,000 decrease in part-time positions and an increase in full-time roles. The total number of full-time jobs rose by 65,000, with an uptick in the participation rate and a decrease to 5% in the unemployment number. An impressive set of numbers by any reckoning.
In addition, Victoria’s population continues to grow at a steady pace with over 2,000 new migrants every week. This is creating enormous demand for accommodation, both short and long term. The rental market is almost at full capacity with vacancy rates well under 2% as demand continues to rise. Rents have increased in metro Melbourne by close to 5% in the past 12 months providing gross yields for units of 4.5% to 5.5% on average.
So why are residential prices falling and when will the current cycle end?
In my view, the main contributor to current market sentiment seems to be financial liquidity resulting from the onerous lending criteria of the Big Four. Our past lending policies have ensured that mortgage defaults have been kept to a minimum over a very long period. At no time previously did the lending institutions find it necessary to analyse the daily spending habits of its borrowers. Do they not realise that maintaining mortgage payments up to date is ingrained in the Australian psyche? Homeowners will do everything to avoid defaulting and losing their property. Spending patterns change after the obligation of a mortgage is commenced.
Expensive dinners, extensive travel, new cars and clothes are all put on hold. So what does it matter how intending borrowers spend their hard earned cash prior to taking a home loan as long as they adapt their habits to ensure serviceability of the loan?
APRA has recently eased its banking regulations by lifting the restriction on investor lending and interest only loans. Loan serviceability is still assessed using a benchmark of 7% interest when in reality that level is not likely to occur in the next few years.
So why are we experiencing a property price decline in light of a stronger labour market, significant population growth and close to zero residential vacancies?
The Royal Commission into the banking sector has contributed in part to the problem. Banks are running scared and do not want to be seen as irresponsible in loan approvals. Their previous misbehaviour has made them timid, which in turn led to the current credit squeeze.
Adding further fuel to an already out of control bushfire is the media, which thrives on bad news. Do they fail to realise that bushfires often get out of control? It reminds me of a pyromaniac revelling in the havoc after lighting the initial flame.
Another element of concern is the pending Federal Election with the ALP firmly focussed on bringing down the ‘tall poppies’. Changes to negative gearing and capital gains tax together with a raft of other unnecessary measures all designed to make it easier for the younger generation to buy a property. What the Labour cronies don’t disclose, is that their policies were formulated at a time when the property markets in Sydney and Melbourne were on the rise. Will the young buyers of tomorrow be able to secure a mortgage if they are unemployed due to a contraction of the workforce resulting from the property decline? It seems to me, it is simply populist policy to achieve nothing more than an election victory.
The RBA stated last week that it is clearly concerned about a slump in property values and the ultimate effect on the economy. It even implied that rates may fall. The solution to the situation is not a lowering of rates rather an easing of lending criteria.
At some point, the supply of property will shrink as more and more property owners refuse to accept the prices on offer. With an inevitable rise in buying interest and less choice to satisfy the demand, prices will ultimately plateau and then rise like in every historical economic cycle.
The savvy buyer/investor is buying now and in some cases making ‘ridiculous’ offers. Sales are being transacted daily and life goes on. Despite the musings of certain ‘gurus’ and the cries of Chicken Little, the sky will not fall. Many prospective buyers are waiting for a signal to buy. Nobody will ring the bell when the market bottoms. By the time property buyers wake up, it will be too late and they will miss a golden opportunity.