What the numbers are telling us…

I have written a number of times over the last few months about the key data in the finance and construction industry. The particularly areas I have reviewed have been clearance rates for property and what is happening to the Property Investor market. Without going over those articles (you can read them again here and here) I talked about the falling clearance rates at auction and declining investor approvals in the finance sector.

Whilst I am a believer that skilled investors can thrive in all markets it does not take away from the need for vigilance and the need to be across the brief of the prevailing trends in the industry. All investors have to be avid readers of what the numbers are telling us. Here are my thoughts on those numbers....

Sydney House Price data

The first point we must start with is the data released by Domain about house prices which caused such a litany of headlines. Domain reported that for last quarter prices had fallen 2% in Sydney. Naturally such a number caused some alarm bells to ring however what was not reported was that Coredata also reported a drop in house prices of 2.2% in first quarter of 2016. Since then house prices in Sydney have risen 10.5%. To me this says it is too early to be making judgement calls on this data as many pundits jumped to.

There are two points I think in the report however we should consider. Firstly the report showed that property prices in the East and Inner West had fallen. This is the first we have seen in the more established suburbs. Secondly, and supporting my arguments over the previous two articles, the reason why house prices had stagnated was something we need to look at. Coredata reported that this stagnation was largely due to the investor market tightening primarily due to the big four reducing their lending exposure to this market. This is an area we need to keep an eye on. The investor is currently the largest market for property purchases, particularly new and off the plan purchases.

Clearance rates

Sydney clearance rates have continued to decline year on year. The last few weeks have shown clearance rates of 67.2% and 69%. A fall of 12% from last year. This is again an area we need to dig deeper into. The market shows that while second hand property continues to perform solidly (the market most likely to attract owner occupiers and what is left of the First Home buyer market) the ten year or less aged bracket of property is an area of concern.

Reports also say clearance rates are “patchy”. I referred to this in a previous article showing that whilst the areas like the Eastern suburbs and the inner west continue to perform Western Sydney is a much harder market.

Also whilst we have no specific reports for Sydney, talk of apartment and unit gluts are increasingly being heard in Melbourne and Brisbane. Remember Sydney plans to add 100,000 new units to the market in the next 12 months.

The ability of investors to access finance will be an increasingly important issue.

Investor Finance

As we have discussed, understanding the investor market is key for obvious reasons in our industry. They are also significant for the whole market now accounting for about 32% of the ownership in the market as a whole (source: ABS). I found the above chart interesting (sourced from UBS’s recent report). Remember Investors by a enormous majority do not want to make principal payments on loans due to their tax strategy. We see from the chart above that the cost of Interest Only loans have risen aggressively since the beginning of the year. As the cost of credit increases the number of borrowers decreases.

That is before we add to the equation government and regulator action to prudently manage investor lending at a macro level and, flowing from that, the micro policies being implemented at a bank level.

Conclusion

As I have stated over previous articles the investor market is being squeezed. The data we have discussed in this article (and previous articles) is now starting to reflect that squeeze. The question is where to from here. Will the investor market calibrate and start again as it did post APRA in 2016 or have we seen a permanent reshaping of the market? If so, how much of the reducing investor lending will be absorbed by the owner occupier market? As I have stated previously now is the time to be vigilant.

About the Author

Simon Arraj is a Commercial Finance Broker specialising in funding construction projects. We provide advisory services to real estate investors and developers. We are a diversified financial services and investment group with specialised skills in structured debt origination, finance advisory assignments and project co-development.

We operate under the brands of www.modenacapital.com.au (Advisory & Project Finance) and www.cpfinance.com.au (Residential Lending).

Please feel free to connect with me on 0414 457 922 or [email protected]