Victoria’s Property Market.
Doom and Gloom or Optimism & Opportunity?
It seems every time you turn on the TV or open a paper someone is reporting something negative about the Property Market in Victoria. Many of the people presenting these stories do not work in the industry and report on very specific case studies and generalise across the entire market.
Unfortunately, this type of reporting misleads the consumer and does not accurately represent the true state of "the market." In turn, consumers in fear of making a bad decision make no decision at all, thus compounding the issue.
After almost 20 years of buying, selling developing and commentating on the Melbourne property market I will be the first to say there has been a big shift in some parts of the market and buyer confidence is down. However, it isn't all doom and gloom, a shifting market can often present great opportunity if you just break it down to the facts.
Firstly, there is no one "Property Market" in Melbourne. There are a series of sub markets that often get merged together to support a specific argument, whether it is rising or falling property markets. The CBD, Inner Central, North, South, East and West all have different property offerings and different drivers that affect property values and rental returns. Therefore, when people talk about the market dropping by 10% this is an average, meaning some markets may have actually dropped by 20% and others have remained stable.
This is exactly what is happening in Melbourne right now. Areas like Box Hill that had seen unprecedented growth due to a huge amount of off shore (predominantly Chinese) investment have now dropped by around 20%. At the same time surrounding areas that experienced rapid growth due to the off-shore investment trend have also had a significant decline in prices of around 8-12%. Some of these suburbs include Doncaster, Templestowe, Ringwood and Ringwood North, Mt Waverly and Glen Waverly. While prices have declined in some areas, other suburbs remain unchanged or have actually grown in value over the same period.
To get a good gauge on the future market is important to understand some of the major factors that have affected the market over the last few years:
ASIC and APRA’s lending reforms:
About three years ago, ASIC and APRA pushed back on the banks with a focus on responsible lending. Some of what resulted from this was a tightening in the bank’s lending policies. Introducing changes such as no more high LVR interest only owner occupier loans. No more 95% LVR investment loans and the big one was buffering rates applied to the banks servicing calculators. For example, you can borrow money for around 4% depending on your circumstances. However, when the bank is working out your ability to repay the loan, they apply a “buffering rate” of between 2.75 and 3.25% (depending on the bank). What this means is that even though your rate is 4 % if you can’t service the loan at 6.75% or 7.25% you will not meet their new serviceability criteria, and therefore will not be approved.
Changes in the off-plan stamp duty savings for investors:
At the end of June 2017, the State Government abolished the off-plan stamp duty savings for investors. Until this time anyone who purchased off plan in Victoria would only pay stamp duty on the land plus and improvements. The abolishment of the saving for investors added $15,000-$25,000 to entry costs for investors. The announcement of this saw investors rush to the market to ensure their saving prior to June 30. Adding even more pressure to an already hot market.
Changes in stamp duty for first homebuyers:
On July 1st 2017 the government introduced significant stamp duty savings for first home buyers. Now first home buyers would pay no stamp duty for purchases up to $600,000 and reduced rates between $600,000 and $750,000. This opened the flood gates. First home buyers who had been consistently priced out of the market by investors now had a greater incentive and a reduced amount of competition from investors. Further to this, now that the first home buyers did not have to pay stamp duty, they had an additional $20,000 plus to put towards their deposit - giving them a greater borrowing capacity. At this point after being conditioned by the market some first home buyers were simply paying what they could borrow and not necessarily what the property was worth. Again, adding to the pressure on property prices and superheating the market. The last 6 months have seen the backlog of first home buyers subside somewhat and the buying frenzy gone.
Population growth:
“Economics 101” it does not matter whether you are selling potatoes or property, supply and demand will dictate the market. So, when you have a shortage of housing and a massive influx of people into a marketplace, prices will only go up until the demand is satisfied. This was a massive factor for price growth especially in the fringe suburbs and growth corridors.
The Banking Royal Commission:
On 14 December 2017 The Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry was established. After years of the banks behaving badly, they finally had their dirty laundry aired. Public hearings have now concluded. The final report is due to be submitted to the Governor-General by 1 February 2019. But what has already come out of the Royal Commission is further tightening of banks’ lending policies and procedures. While this process was completely necessary it has not affected most home owners with mortgages in place one bit. This has been a constant source for media stories for over 12 months and has added to the negative sentiment around the property market.
Changes in the government’s foreign investment policies:
2017 budget changes that saw a 50 per cent cap on the total amount of dwellings a developer can sell to foreign persons. The Government will introduce an annual vacancy charge on new foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months each year. Application fees for foreign purchases of residential properties valued at less than $10 million will increase by 10 per cent on the current fees.
The tightening of the governments foreign investment policies has seen a huge decline on the numbers of residential dwellings sold to overseas investors.
The financial year of 2013/14 saw the value of FIRB application at $35bn, the 2014/15-year jumped to $61bn and the 2015/16-year increased to a staggering $71bn. Then in the 2016/17 financial year the brakes came on with FIRB residential real estate applications dropping to only $25bn. On top of the changes in our own foreign investment policy the Chinese government has also cracked down on the volume of money exiting their own economy for foreign investment. The reduction in numbers of foreign investors has significantly affected the values in the areas spiked by a concentration of foreign investment.
Negative Media:
Your home or investment property, is the single biggest asset that you own. When perceived values are up their confidence is at a high and when people talk negatively about property values, they start running scared. It is a natural reaction as for a majority of us the home is “The Nest”. It is where we live and feel secure. Anything that threatens “The Nest” is met with tremendous resistance and the media outlets rely on this fear to sell their stock. The constant negative reports on the property market seriously affect buyer confidence and further compound issues in the market and even create issues in marketplaces that remain unaffected.
So all that being said, the question still remains what is happening in the future?
Well no one has a crystal ball so there is no definitive answer but I always go with the odds. There has already been a correction in marketplaces that are heavily influenced by off-shore investment. Our own economy is ticking along well with unemployment sitting at around 5%. Remember “Economics 101” the Victorian population is still set to grow by around 100,000 people, who all need somewhere to live. Unlike shares that you trade daily, weekly or monthly, property is a much longer-term investment, traditionally 5-10 years plus. So weekly auction clearance rates are just a barometer for market sentiment and not an indication of long-term performance. With the tightening of lending criteria being seen as a bad thing by many, I believe it’s not all doom and gloom and should be considered a great safety blanket. The tightening of the lending criteria actually protects the buyer from fluctuation in the market and rates.
Also consider that a downturn in the market can be a great time to buy, if you listen to the property tycoons like Warren Buffett and the late Kerry Packer. Both have spoken about the gains that can be made from countercyclical investment. Buy when others lack confidence, sell when they get their confidence back for a premium. Simply put- buy low and sell high. If you are looking at a property purchase definitely consider the specific market you are buying and what it offers in the short medium and long term. Look past the hype and just get on with it.
David Brewster
Managing Director
Brewsters Property Group
To view our current available projects, click the link below.