Strong Property Results are Surprising & Could Pose Problems

The much dreaded Federal Budget has been presented and from a housing market perspective it is of little consequence. There was nothing that directly, or for that matter indirectly, impacted on property prices.

However, the reduction in the corporate tax rate to 28.5 per cent from July 2015 adds a pressure to consider investing under a corporate structure where an investment property is not negatively geared.

This is particularly so where the investment is going to be held for a considerable period. The difference between the discounted (50 per cent) capital gains tax (CGT) personal marginal rate and the corporate tax rate is now minimal and over time the benefit of the lower corporate tax rate on income could relatively quickly absorb the positive CGT discount benefit.

Growth in Sydney has continued, which is good news for long standing existing property owners, and the median value of Sydney houses has now passed the $800,000 mark.

Sydney house price growth has not been seen for the same period of time since September 1988, when Sydney saw the last large property price boom.

Growth in the Melbourne house market was also strong, at 10.85 per cent for the year and 1.42 per cent for the month of April. Brisbane also produced a strong result in April with house price growth of 1.36 per cent.

The strong results are surprising as the data until April was indicting that the markets were cooling. This cooling was justified given the difficult affordability conditions that exist.

Continued strong growth at this time could pose problems. The Sydney market in particular could well be moving into some dangerous ground on a couple of fronts:

  • The growth in real terms (after inflation) for the last 12 months is about 17.25 per cent for houses and 10.78 per cent for units. It is reasonable to suggest that this market is approaching a boom mentality and this situation is dangerous, particularly for those who are borrowing heavily to get into the market. Interest rates are more likely than not to increase now as we move forward.
  • The current median value of Sydney houses is $821,500. This would require the median Sydney family to pay around 52 p er cent of their after tax income (Affordability Ratio) to support home loan repayments on the median property, assuming a 20% deposit. This leaves just $812 per week available cash following home loan repayments, which certainly does not provide margins for emergencies and interest rate increases.
  • The high rate of growth will cause the Reserve Bank of Australia (RBA) some level of anxiety and potentially ensure there are no further interest rate decreases, and possibly bring forward interest rate increases.
  • Historically, once the Affordability Ratio breaches 50 per cent, the market usually adjusts.
  • All are expecting unemployment levels to increase and this situation, coupled will all of the above, could be a recipe for some significant adjustments later this year or, more likely, early next year.

The growth in the market, as one would expect, is larger for the properties that are valued below $600,000. This suggests that it is now middle to lower income groups that are currently driving the market.[sam id=43 codes=’true’]

Unfortunately, this group will be those who are potentially the largest borrowers and will have lower capacity to absorb interest rate increases as they occur in a few months.

The magnitude of growth over the next few months will be important. If growth continues on its current upward path then there could potentially be some problems in the medium term as interest rates are increased.

All of this suggests that bankers need to take care and not decrease lending standards to grow their businesses in a competitive market that is showing signs of getting overheated.

At the end of the day, a market that is being driven by middle income Australians can’t grow excessively in a situation where lenders are exercising lending constraints.

Table 1 presents the monthly outcomes for all of Australia.

Table 1

Until next month, happy investing and property searching.

[post_ender]



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John Edwards

About

John is Consulting Analyst for Onthehouse, Australia’s most comprehensive real estate portal, and Founder of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and the general public. Visit www.OnTheHouse.com.au/


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