Property Market Runs Hot, but Buyers Should Remain Cautious

Photo: Mark Micallef

A 78 per cent clearance rate was recorded this weekend, which is a robust result based on 837 reported auctions.

The current heat in the market is unlikely to dissipate in the near term, as it is being driven by investors who are dominating the playing field at the median price point, and upgraders enjoying increased leverage from existing sales.

Auctions Are Going Strong

Most auctions are attracting competition from at least 3 or 4 bidders and in the typical furore that accompanies a bidding war, it’s not unusual to see results overstretching valuations by no marginal amount.

“Being an illiquid asset, property is essentially only worth what a buyer is willing to pay.”

Being an illiquid asset, property is essentially only worth what a buyer is willing to pay. Currently, increased confidence, low rates, and news of continued projected short-term gains in market prices are having the desired effect on vendors hoping to “ride the wave of optimism” – though caution should not be thrown to the wind.

Caution Should Not be Thrown to the Wind

A number of well-respected economists have come to the fore to warn that the rate of growth – currently outpacing both wages and inflation – cannot be sustained.

Australia’s banks have the highest exposure to residential mortgages in the world. Despite the significant headwinds they weathered during the GFC, a long period of low rates and the dependency it invokes can be potentially dangerous in inelastic areas of limited supply. It risks increasing prices disproportionately against a challenging macro environment, projecting higher unemployment and lower long-term wage growth.

A third of all new loans currently being taken out have loan-to-value ratios of more than 80 per cent. They demonstrated the heightened level of investor activity. Forty per cent are on interest-only terms. 

“The current boom has certainly been a point of concern for the RBA…”

Whilst interest rates on their own can have little impact on price rises or falls in the near term, the current boom has certainly been a point of concern for the RBA who caution “it [is] especially important banks maintain prudent lending standards.”

This is why we’re seeing talk of “precautionary policy activism.” The suggested restrictions on value ratios are an attempt to cool asset inflation without hampering the broader economy by raising rates.

Should this policy be implemented, approximately one third of the new home loan market would be affected – no doubt having a roll on effect in reducing competition.

It’s a Challenge to Secure a Good Property Without Overpaying

With heated activity running at near peak time levels, it remains a challenge to secure a good property without overpaying. 

However, those keeping a sensible head on their shoulders, setting limitations on their budget and having the patience to step back emotionally – possibly missing out on a few along the way –  will find opportunities are still available, though you need a prior knowledge of market values in order to negotiate.

I purchased properties for two first home buyers over the weekend at prices below pre-estimates of market value.

Nonetheless, I would once again caution all purchasers to keep a long-term perspective on any acquisition. When the current rally does pull up, it is expected growth will stall for a period of time to balance out recent gains.