Property close to peak?

12th Aug 2015By: Tim Lawless

Investors have been in the spotlight since December last year when APRA advised all Australian Authorised Deposit Institutions (ADI’s) that credit growth for investment housing should remain under 10% per annum. Since that time, the annual pace of investment growth has failed to fall below that benchmark, with the latest RBA figures showing investment growth at 10.7% compared with a 5.5% growth figure for owner-occupier housing.

Based on the June housing finance figures from the ABS, investors comprised 52% of all new mortgage originations (excluding refinanced loans) which is close to a record high. Importantly though, we have now seen two consecutive months where investor related housing finance commitments have fallen in value. This is the first time since late 2012, where there have been consecutive falls in the monthly value of investment commitments read and may indicate that investors are starting to wind down their exposure to the housing market.

Other trends

The drop in investment numbers comes at a time when auction clearance rates have been slipping and the number of homes available for sale have been increasing across the most active markets of Sydney and Melbourne.

Clearance rates remain high, but have slipped below the 80% mark in Sydney since the second week of July and in Melbourne, clearance rates have been below 80% since the second week of June.

New listing numbers across Sydney and Melbourne are also ramping up earlier than normal, with the number of newly advertised properties hitting the Sydney market now 20% higher than a year ago and 19% than a year ago in Melbourne.

Stepping into Spring

The upcoming Spring season, when listing numbers generally surge higher, will provide a timely test for these markets. If buyer activity fails to rise in line with the number of newly advertised properties entering the market, it is a likely sign that value growth will diminish as buyers have more stock to choose from and less urgency in their decision making.

This scenario is already playing out in Perth and Darwin, where total advertised stock levels are 17% and 23% higher respectively than a year ago, despite a slowdown in new listing activity. Perth dwelling values have fallen by 0.3% over the past year and Darwin values are down by 5.3%. The slowdown in these markets has coincided with a sharp rise in average selling time and larger rates of vendor discounting as buyers are able to negotiate harder on their purchase.

Looking back at Sydney and Melbourne, considering investors are the primary driver of market demand in these cities, if demand from this segment of the market continues to drift lower it is likely this will dampen the rapid rate of value growth in these markets. Sydney values moved 18.2% higher over the past twelve months, which is the fastest rate of growth since 2002. Melbourne values were 11.5% higher over the year.

With Australian ADI’s announcing changes to their lending policies, particularly investor loans, it is likely investment activity will continue to moderate. Many banks have applied premiums to investor related interest rates, tightened serviceability measures and insisted on larger deposits. Add to this the fact that rental yields in Sydney and Melbourne are plumbing new record lows and housing affordability is worsening, and it makes sense these markets must be close to a peak in growth.