The Slowdown We’re Going to Have
By Louis Christopher on 29 Jul 2015
No Comments yet, your thoughts are very welcome
Over the last three weeks and in the last week in particular, there have been some key announcements that will likely have a meaningful impact upon the housing market. The screws have been further tightened and this time we think they will have an impact. To recap, the major changes include:
- A requirement for banks to hold 2% more capital (compared to risk weighted assets).
- A requirement for banks to lift risk weights on home loans, meaning the banks will not be able to leverage as much from their home loan assets as they were before.
Banks have responded by:
- Announcing capital raises.
- Lifting interest rates on investment property loans.
- Reducing loan to value ratios on investment property loans and locations considered higher risk.
- Increasing the servicing requirements (e.g A loan service test on a higher theoretical interest rate).
- Not allowing tax benefits from negative gearing to be used as income.
Clearly the changes will knock out most of the weaker borrowers, which is what the changes are designed to do, besides strengthening the balance sheets of the banks. But will it move existing property investors to the exits?
The cumulative effect of these changes will now most likely dampen demand from property investors. The announcement last week of interest rate increases was probably the final nail. Indeed trusted sources on the ground including agents and mortgage brokers in Sydney are informing me of would-be-buyers now holding back.
We also note the recent decline in Sydney auction clearance rates to just back below 80%. Nevertheless clearance rates in the mid to high 70’s is still suggestive of strong market.
It should also be noted that SQM expects total residential property listings to have surged in July, though the final result will not be known until early August.
As we know the recovery in the housing market, particularly for Sydney, has been investor driven. It’s a good time to re-publish the following chart which clearly illustrates how investors have dominated this recovery.
Image Source: SQM Research, ABS 5609, Seasonally Adjusted.
The problem is, property investors can be a fickle bunch. A number of them are momentum driven. Buy when the market is moving higher and sell when the market is heading lower. Forget about the fundamentals and the emotional attachment. It is the capital gain and preservation of that gain that counts. Contrast this with first home buyers and owner occupiers who tend to not care (as much) for the market’s ups and downs. They tend to be longer term holders. They tend to sell and buy on an upgrade/downgrade or when servicing improves/deteriorates.This makes for a market that may well be more volatile than previous cycles.
Even so, is there enough here to create a full blown crash? No way. We would still need to see a lot more action from the banking sector than these initiatives before that happens. I believe rates would need to go up by at least 1.5% and at a time when there is some type of massive supply overhang on new stock. Neither seems likely at this point in time.
Needless to say the probabilities have now rapidly increased of a housing market slowdown which could be commencing now.
