Great Ocean Report – March 2018

WELCOME to our March Great Ocean Report.

The main objective of our Great Ocean Reports is to explain, in language that most can understand, what is happening in the Australian property markets. Every day there are media reports on the state of the property markets and they vary in quality mainly because they are written by human beings (just like this one) and can only be subjective from the writer’s viewpoint. They vary from the doomsday view (we are in a bubble and the end is nigh) to those advocating getting rich through property investment. All have their subjective views. Let’s try to take the middle path and see if we can try what is happening.

The most publicised data that provides a snapshot of the state of the Australian property markets is the auction clearance rates.

In reality there are only two sets of auction clearance rates that are worth noting and that is the Melbourne and Sydney clearance rates.

Melbourne has always had a strong auction culture and over the past 15 years Sydney has followed suit. They only provide a snapshot, not the whole story, because agents and property owners will vary their methods of sale depending on the state of the market, but it is the auction results that get most of the headlines.

A general rule of thumb in interpreting these results is this: if the clearance rates are in the 50-60 per cent range, we have a subdued market, often described as a “buyers’ market”. In the 60-70 per cent range it is regarded as a normal market, where the results can be mixed. There are some spectacular individual results and some areas that flourish, while there are other auctions that get no attention, especially in a cooling market. Consistently above 70 per cent and the market is seen as buoyant with FOMO (fear of missing out) being the most common prevailing emotion from buyers.

The auction clearance rates for both Melbourne and Sydney are in the high 60 per cent range at the moment after an extended period of above 70 per cent clearance rates in 2016-2017. The volumes of auctions are substantially higher in Melbourne than Sydney and this is mainly due to the fact that market conditions are less subdued in the southern capital and the stronger auction culture.

Despite mainly overseas commentators continuing to predict that the “bubble is about to burst” for Australia property and in the absence of an international trigger event, Australia seems well placed in a macro sense.

As we have said many times in our reports, Australia has hundreds of local property markets affected by local factors but there are only two that really matter – Melbourne and Sydney. They are by far the largest and all the other markets are affected by their health in some way, particularly in terms of market sentiment.

What many overseas commentators overlook when making their bubble calls is the strong prudential regulation and banking oversight that Australia has. The present banking royal commission is strong tangible proof of this. However, the real hero of this story is a man called Wayne Byers.

Mr Byers is the head of APRA, the Australian Prudential Regulation Authority. APRA’s job is to regulate the Australian finance industry on behalf of the government.

In 2014, Mr Byers and his team at APRA recognised that there was too much annual growth in rental investor loans by the banks and recognised that if this continued it would all end in tears. So he limited the annual growth in investor loans to 10 per cent pa and this was very effective (it is now running at a sustainable 5 per cent pa), but he wasn’t finished.

In April 2017, APRA introduced a cap on interest-only loans to 30 per cent of all new loans issued by the banks. Interest-only loans are popular with investors.

These measures have had a significant impact in taking the heat out of the market and look like guiding these two large metropolitan markets to a sustainable soft landing.

In previous years it would have been the blunt instrument of interest rate rises by the RBA but that has not been needed and the economy will be better for it.

There will be a change in the interest rate trend at some point by the Reserve Bank, most likely in 2019, but it is likely to be minor movement due the level of household debt which the RBA is acutely aware of.

In the meantime, with interest rates rising in the US due to their very strong economy, you will start to see local lending institutions needling up their lending rates in very small percentage points where they can and wheeling out the “rising cost of wholesale funding” line to justify it.

The other aspect that protects these two engine rooms of the Australian property market is population growth. Regardless of whether you are for or against population growth, it underwrites the property markets simply because people need somewhere to live. Melbourne and Sydney are highly desirable destinations for skilled migrants, international students and in many cases the ultra-wealthy.

With the recent substantial price rises in Melbourne and Sydney there has been significant flow-on affects, both positive and negative. The negative effects on those trying to enter the property market has been significant, and without family assistance (including inheritance), many simply cannot afford to buy where they would like to. The positive flow-on effect for regional and coastal areas, including other capital cities such as Hobart for example has been significant. Equity created in Melbourne and Sydney is being utilised to facilitate property purchases in cheaper locations, often debt free.

On the Surf Coast, we have seen this firsthand as both young couples attracted by affordability and baby boomers attracted by the lifestyle are actively engaged. The number of properties available for sale on the Surf Coast are at all-time lows and competition for properties is common.

Great Ocean Properties has recently facilitated record house prices in both Anglesea and Jan Juc, with the $3 million and $4 million price points being broken respectively for the first time. This is all a reflection and caused by the strong performance of the Melbourne property market.

Moving forward we will see some ebbs and flows in sentiment, which is common when previously hot property markets cool, but the fundamentals remain solid for the reasons previously mentioned.

If we can ever be of any assistance in any real estate matter, please do not hesitate to call.