Behavioural changes of investors have had a marked impact on the market as prices continue to slump and lenders keep a firm grip on borrowing.
A reduction in investor activity has weakened the property market with the flow-on effect of upgraders and potential owner-occupiers abandoning thoughts of buying.
The effect of all this uncertainty, especially leading into an election year, has also affected developer sentiment and, of course, lenders are being much more cautious in their lending practices.
Credit restrictions, the Banking Royal Commission, difficulties borrowing against self-managed super funds (SMSFs), less foreign investors and fears of changes to negative gearing and capital gains tax should Labor win the next Federal election, which was highly likely, were having a major impact on the property market.
And this has had a very material impact on the residential property market, particularly in Sydney and Melbourne, where auction clearance rates have fallen below 50 per cent.
Dwelling prices in Sydney and Melbourne have been steadily falling, according to CoreLogic, with the annual rate of reductions in Sydney at 8.9 per cent and in Melbourne 7 per cent over the past 12 months.
Meanwhile, Westpac’s Melbourne Institute Consumer Sentiment Index December report shows consumer confidence on residential property continues to deteriorate, falling 3.9 per cent despite a jump the previous month.
Key risk indicators include failure to meet pre-sales and sales targets by developers; lower sales volume; low developer confidence, based on this year’s DFP Market Sentiment Survey; more conservative approaches and thorough risk-management practices by developers; very low risk appetite and conservative risk-management practices by lenders; lending restrictions and ‘black list’ areas by lenders for both residential lending and construction loans; the ‘pipeline’ of available funds shrinking; significantly lower LVR (i.e. higher deposit) for property developments; a very high rate of pre-sales as a condition to proceed to commencements; and difficulties getting finance from alternative financiers.
The three-month aggregate of dwelling approvals of 49,090 for the current period was the lowest since July 2014, which was 49,561. This is in contrast to its peak which was 60,345 in June 2016.
In the current market conditions, with many areas having high levels of stock (there are 258,938 units in the pipeline in the next 24 months in Australia equating to 10 per cent of current stock), many developers are struggling to meet targets, whether that be hitting pre-sale requirements, selling stock or settling stock.
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Also, according to the ABS, the number of new homes approved for construction in the month of November 2018, dropped by 2.2 per cent from the previous month and 18.3 per cent from November 2017.
As the retail banks are pushing investors with interest-only loans off their portfolio or having them convert to principal and interest, many developers believe it is not a good time to develop and from this we can expect further reductions in commencements.
Property marketers who in the past were easily able to shift a large number of off-the-plan units in high-risk areas with a large concentration of new units, are struggling to do so now, and despite significant marketing and sales efforts, such as heavy discounting and incentives as we’ve seen in inner-city Brisbane, it often results in a small number of transactions.
It means many of them have shifted their focus from off-the-plan units to house-and-land packages which are easier to sell.
Getting finance from the major banks, however, is the biggest problem for developers – as well as investors.
Banks are applying greater scrutiny to the living expenses declared by customers in loan applications.
In fact, Westpac now requires brokers to supply more details about customer spending when applying for a mortgage, breaking it down into 13 different categories, up from six.
In the short term, at least, this is likely to result in a lower volume of loans, as seen in the UK which had a 9 per cent drop in volume as a result of the 2014 Mortgage Market Review (MMR) to address lax lending standards.
It is also likely that the duration to approve loans will significantly increase, and a significant reduction is projected in borrowing capacity (according to UBS, housing borrowing capacity could be cut by 21-41 per cent, depending on the borrowers’ income).
For property developers, major lenders were also applying very tight credit standards for construction loans and had also set lower LVRs, i.e. higher equity from the developer as a non-negotiable condition to apply for finance, and required a high rate of pre-sales, in many cases of 90 per cent of the dwellings in the project, in order to commence construction.