Has the property market bottomed?

There has been a lot of conjecture recently as to whether Sydney and Melbourne’s property market has bottomed. It seems like there has been a huge change of sentiment in the last month as a confluence of factors have come together that are broadly supportive of higher property prices. Whilst anyone that tells you that they can accurately pick the bottom of a market cycle with certainty is lying to you here we’ll discuss some of the factors that are driving increased confidence in the property market.

The federal election

In what was a largely unexpected result the Coalition was returned to office for another three years. Unusually for an opposition, Labor went to the election promising to scale back negative gearing on existing properties and halve the capital gains discount to 25%. Whilst we don’t have a view as to whether this would have been positive or negative for the economy as a whole, what is clear is that such huge regulatory changes crimped enthusiasm for property and would have reduced some of the tax benefits of property investment.

Given how Labor was punished it’s likely that neither parties will attempt to make major negative changes impacting property for the foreseeable future (in much the same way industrial relations reform hasn’t been attempted since Howard’s resounding defeat following WorkChoices in 2007). Moreover, the Coalition announced incentives for first home buyers that involve partially guaranteeing their mortgages and effectively reducing the amount they need to save for a deposit. The Coalition’s tax cuts that were recently legislated are also providing a fiscal boost even if they are just a reversal of the bracket creep of recent years. It’s fair to say that the property market is enjoying a post-election confidence boost.

Lending

It seems like an age ago since APRA felt the need to cap the growth of interest-only loans at 10% annually to prevent runaway prices in the property market (the cap was officially scrapped in December 2018). Rather the last 18 months has seen peak-to-trough price falls of more than 15% in both Sydney and Melbourne largely as banks began more heavily scrutinising loan applications in the wake of the Banking Royal Commission. APRA has also come to the party, announcing that it has scrapped it’s 7.25% loan buffer which essentially forced banks to assume an applicant would pay an interest rate of 7.25% when considering their application. This has dramatically increased the borrowing potential of many property investors.

The RBA is also doing its part in stimulating the property market. Back to back interest rate cuts in June and July have brought the cash rate down to a record low 1%, with banks passing on most of the cuts to borrowers. The futures market is pricing in at least one further rate cut before the end of the year, with an additional rate cut a further possibility. In fact, there is talk of Quantitative Easing (QE) by the RBA which would see the central bank purchasing securities to push interest rates down further.

In a sign of where things could be heading, the ASX announced it was making technical changes to its systems for a world of negative yields (as is currently the case in Europe and Japan). The issue with interest rates being cut is that they are being cut in response to an incredibly weak economy that is at serious risk of recession. On a per-capita basis the economy is barely growing, and whilst interest rate cuts can boost the property market as money gets cheaper any rally in prices can be fragile if wage cuts are contingent on a sputtering economy.

The market

It was reported that auction clearance rates in Sydney hit a two year high of 78% over the weekend. Whilst this is positive news, it’s important to consider that available stock is down by 25% compared to this time last year. That means buyers need to be cautious when evaluating auction clearance rates as a leading indicator of market sentiment. In other words, auction clearance rates could be picking up simply because there are so few properties on the market. Anecdotally, many developers are advising that they are finding it much easier to sell apartments in recent weeks amid increased investor interest which had until recently been moribund. We’ve also heard from a number of mortgage brokers that loan applications have been rising, and a quick scan of the mainstream papers shows a raft of positive stories on the broader market that were difficult to find only a year ago.

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