Winter is Coming

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Regular readers of our site know that we have been warning of a substantial correction in the Sydney property market for the last 18 months. And unless you have been living on a deserted island, you know we are well into this readjustment process. Let’s just review the state of the market and try to anticipate what is ahead as Winter is coming.

A fair assessment of the Sydney property market is that prices have declined around 15% across the broad market. In some suburbs where new apartments and townhouses have just finished completion those price declines have been recorded to be around 25-30% according to some valuers. The high end has been quite robust against this back drop but with many of the Chinese buyers under intense scrutiny this market too is finally falling back hard.

As we look back in time, the tighter lending guidelines introduced by the Reserve Bank and APRA for domestic banks combined with the Royal Commission into Banking, created an almost perfect storm for home borrowers. Make no mistake, we are in a credit crunch and although it’s been reported that new loan approvals from banks is running at 50%, I suspect it is much lower than that. Combined with existing high loans on properties that if sold would be 20% lower in value, it’s no wonder that the Reserve Bank in their last two meeting minutes have flagged concern with the current property market. Reading between the lines, when property values decline, mums and dads feel less wealthy, tighten their belts and spend less, which has a dire effect across the broader economy.

So looking forward what should we expect? It would seem we will have a change in government at a Federal level and Labour under Bill Shorten will in all likelihood abolish negative gearing. This will have a negative impact on the property sector and probably see a new wave of forced selling prior to and just after the election. Credit will remain tight over the coming months but inevitably the major banks make 65-70% of their profits from home lending so expect them to re-enter the market in late Spring. I believe the slowdown in sentiment will be enough to see the Reserve Bank lower interest rates later in the year. How much this will flow on to mortgage interest rates will depend on how global funding costs effect the major banks’ margins.

All in all we have a bleak Winter ahead. But remember corrections in asset prices, homes included, are just part of a normal economic cycle. Every year over 100,000 new people make Sydney their home and eventually this demand turns prices and our new bullish cycle resumes.