Great Ocean Report – February 2020

This is our first Great Ocean Report for 2020 and it is being written at a time of high activity and a generally buoyant real estate market. There is always plenty of property market commentary and as usual we will do our best to demystify what is happening for you.

A quick recap for context. The two biggest property markets in Australia are Melbourne and Sydney. They get most of the press, provide most of the sentiment for other Australian property markets and are also the most closely watched. Most other Australian property markets are a reflection of these major centres. The top of the previous cycle was considered to be in Spring 2017. It was a long build up to this peak of approximately 5 years and most commentators believed that the prices had overshot what was believed to be sustainable. In a response to this, tighter lending standards were introduced by APRA and the investors were mostly removed from the market, which saw prices soften roughly 10% in Melbourne and Sydney. This fall was also caused by the potential prospect of a Labor government changing taxation laws around Capital gains and Negative gearing if they were elected in the next election. This is all relatively well known.

With the Coalition re-elected on May 19 and no change to taxation, sentiment picked up almost immediately which translated into action, which signalled the bottom of that cycle and a new upward trend starting. No one was sure how quickly the market would respond, however we can quite confidently say that it has been the fastest turn around in history and that although there is a lag in price reporting, some sources, including the REIV, are saying that we have now surpassed the price point at the top of the previous peak in September 2017, with the median Melbourne price point sitting at $860,000 for the first time.

Why has it recovered so quickly? It’s really a convergence of several favourable financial factors and then one of pure psychology. Three financial factors have been interest rates continuing to be lowered, an easing of lending restrictions and also positive sentiment from a record high share market.

The cash rate now sits at a record low of .75% and as RBA Governor Lowe said during the week, interest rates will likely stay low “for decades”. With interest rates, it is much about the trend as it is the amount. Those looking to transact in property love a stable environment to transact in. The more certainty, the more likely they are to transact. With some commentators predicting interest rates may go to zero, there is little to be concerned about on the interest rate front.

In regard to the easing of lending standards, the banks are definitely very actively lending again, however it appears from what we are seeing at the real estate coal face it is still more difficult to get money than it previously was. In the past if you had a good asset base as security you were very likely to be given a loan. Assessments about the serviceability of the loan were less important and often assumptions were made about this based on averages. Now proof of serviceability is crucial to securing the loan. This has meant that it takes longer to get through the application process and it also means that they are now lending less money to individual buyers. Although this can be frustrating for some buyers, from a macro level it may make the real estate markets more sustainable in the future.

The share market, when it performs well, provides positive sentiment and often funding to the property market. Given that we are  all so heavily invested in the share market through our superannuation, it is not surprising that when it performs well, we are and feel wealthier and are therefore more likely to consider transacting in the property market if that is our inclination. As we know the share market is flying.

The easiest way to understand the psychology of asset market behaviour, particularly in Australian property, is to understand a concept that we have spoken about many times in this report – everyone does what everyone else does. It’s why sentiment generally acts in a snowball affect. It picks up momentum as people see other people acting and this has a multiplying affect. Add to this Australians well documented affliction of FOMO (fear of missing out), a 24/7 news cycle that is hungry for content and real estate as a regularly discussed subject at Australian dinner parties and social gatherings, all fuelling the recipe for a fast recovery.

How far and high in terms of price this cycle will push forward is difficult to estimate. There are some factors that will create a natural ceiling that could see a plateau in prices. The serviceability of loans will be a major factor moving forward with wages stagnant. It is highly probable that if prices continue to race forward that APRA may again step in to restrict the banks lending. Also supply in metropolitan areas should start to increase as developers bring more supply online. It takes them a while to get going after a downturn. Firstly for the banks to see that the recovery is sustainable enough to lend them the money, for them to get planning and building approvals and then actually produce the products to sell.

For the coastal markets, it has been an active spring and summer period. The positive sentiment from the metropolitan markets has certainly seen buyers out in force compared to the previous spring/summer period of 18/19. Lack of quality supply under $1m has caused frustration for many buyers constrained by budget. This has seen some significant competition for properties and above expected results being the outcome. Above $1.5m the buyers start to thin out and this has been more pronounced than previous cycles. We believe that loan serviceability constraints by banks maybe contributing to this.

Another factor is that many of the buyers in the lifestyle towns are essentially asset swapping. A very typical story that we see is a downsizing in Melbourne baby boomer empty nester couple selling the family home, buying a nice apartment in Melbourne somewhere and buying (or upgrading) a property on the coast. They are generally not moving to the coast permanently so will only allocate so many much budget to this and $1.5m seems to catch most of these buyers in this situation. It is a different situation if they are moving to the coast permanently where they are happy to spend more and places like “Old Torquay” and Barwon Heads has certainly benefited from this. The attraction of these areas is infrastructure, both lifestyle and medical due to their proximity to Geelong.

 

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