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Knowledge Portal Articles Property, now the question is what happens after the boom

Property, now the question is what happens after the boom

Larry Schlesinger| Australian Financial Review| 15 September 2017

http://www.afr.com/real-estate/residential/property-now-the-question-is-what-happens-after-the-boom-20170914-gyhjk2

After a five-year bull run, in which house prices have surged 75 per cent in Sydney and 56 per cent in Melbourne, the party may be over for those who have bet big on the property boom.

A combination of tougher APRA lending rules, rising unaffordability, new taxes on foreign buyers, and shrinking rental yields have all combined to take the heat out of the investor-led market.

The latest August Corelogic figures show capital city house prices rose just 0.5 per cent over the past three months, compared with peak quarterly growth of 3.7 per cent in the November 2016 quarter, with Sydney prices up just 0.3 per cent.

Other indicators like falling auction clearance rates, shrinking investor lending, more home selling prior to auction and rising numbers of auction listings in spring all point to a further cooling over the coming months and years.

With less competition from investors, first-home buyers like Melbourne RMIT economics student Jayk Gunton are brushing aside fears of buying after the boom and instead taking advantage of lucrative stamp duty concessions and cheap home loan deals to fearlessly plunge into the market.

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According to the latest Australian Bureau of Statistics figures, first-home buyers' share of the market rose to 16.6 per cent in July from a historic low of 13.4 per cent at the start of the year.

Gunton, who still lives at home, intends to rent out the Frankston townhouse he has bought recently for $590,000. He believes that over the long-term property in good locations will continue to rise.

The part-time economics and finance student, who earns about $70,000 a year working in IT, is already thinking about buying his next property.

"I'm not worried about capital gains," he says. "I intend to hold this property for 10 years. I'm not looking to flip it."

First-home buyers agent Julie DeBondt-Barker, who helped Gunton negotiate his townhouse purchase, says most of her clients are desperate to get into the housing market and will do so with a small deposit if necessary.

"Most want what mum and dad have, they want it now, and they are willing to go into debt to achieve. It's risky for them if the market ever bursts or turns dramatically, or if interest rates go up and they don't have enough of their loan locked in at a fixed rate," she says.

DeBondt-Barker says many first-home buyers could face trouble if house prices were to fall as much as 10 per cent, leaving them in negative equity where their mortgages are worth more than their homes.

That's just the quantum of price fall Corelogic analyst Cameron Kusher believes could occur over the coming years.

"The most likely scenario is for about a 10 per cent drop in prices and then for the market to go sideways for the next five or eight years," says Kusher.

"That's how things have played after booms in the last 15 to 20 years and there is no good reason to think it will play out any differently this time.

"People buying now need to take a long-term view," he says.

But he says the risk of a house price crash is highly unlikely, and would take something like a second GFC, an implosion in the Chinese economy or another major global event to trigger such a scenario.

HSBC Australia and NZ chief economist Paul Bloxham also discounts the threat of a house price crash, saying the boom in house prices has not created bubble conditions.

Bloxham says strong house price growth in Sydney and Melbourne in recent years largely reflects "fundamentals" with strong price growth in areas of high demand and weaker growth in areas where demand has been weak.

"The key question is whether the rise is in line with fundamentals? In our view, to a large degree, it has been."

He also believes that while household debt has surged – among the OECD countries Australia is second only to Switzerland on a ratio of household debt to GDP – the key is how this debt had been allocated, not its aggregate level.

"If the lending that has driven the housing boom has been to households that may be unable to service it when interest rates rise, then this could cause a sharper fall in housing prices than otherwise, much as the sub-prime crisis did in the US last decade.

"Although Australia has high household debt levels, in our view, they are high for fundamental reasons. There is also strong evidence that the distribution of debt is fairly favourable and the institutional features of the mortgage market should help to ensure financial stability," he said.

ANZ economists Daniel Gradwell and Joanne Masters are more bullish and are forecasting nationwide prices to finish the year 5.8 per cent higher – an upward revision of earlier forecasts due mainly to recent resilience in Melbourne house prices – but expect growth of just 2.2 per cent in 2018.

"Note that while we expect price growth will slow, there is no suggestion that prices will fall outright," Gladwell and Masters say.

Key to the outlook for house prices is what happens to interest rates.

While the Reserve Bank has talked of returning to a "neutral nominal cash rate" of 3.5 per cent – a rise of 200 basis points from the current record-low 1.5 per cent cash rate – AMP Capital chief economist Shane Oliver says that's unlikely.

He expects the RBA won't touch interest rates until the end of next year, but even when it does start lifting them the rises will be "very gradual" and likely to only be up to  2 to 2.5 per cent.

But he does expect an easing in house prices over time, with falls of between 5 to 10 per cent sometime over the next couple years as part of a likely "soft landing" scenario.

Falls could be steeper for apartments in areas where there have been high levels of supply – in  the order of 15-20 per cent he says.

While he has a relatively benign view on the coming housing downturn, Oliver believes the risks are greater this time round in Sydney and Melbourne, principally because of the greater role investors, many with interest-only loans, have played in the current boom.

"Personally, I wouldn't be investing in housing at the moment and would especially be staying away from Sydney and Melbourne," Oliver says.

The rental yields currently are atrocious. "For houses in Sydney and Melbourne you are looking at almost a zero net return and around one to 1.5 per cent for apartments so investors are almost entirely dependent on capital gain.

"I don't see there being much capital gain in those markets for a few years."

If you invest on the basis of "buy low, sell high", Oliver says better options may be available in markets like Perth or Darwin, where prices are still falling, or in parts of Tasmania.

Domain senior economist Andrew Wilson says the best prospects of capital growth are in the middle and outer suburbs of Melbourne, with median prices well below those of Sydney.

He expects a "benign" housing market going forward with no justification for rate increases while wages growth is low.

"I expect prices will rise 3 to 4 per cent going forward. There is still plenty of growth to come from Melbourne and still some potential for growth in Sydney, Canberra and Hobart. Brisbane, I think will continue to disappoint."

CoreLogic's Cameron Kusher says the established inner and middle suburbs of Melbourne offer the best prospects for capital growth.

One and two-bedroom apartments in Brisbane and Melbourne are unlikely to deliver much capital growth, because there is so much stock to choose from, he says.


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