Economics & Markets

The property market recovery has begun, but the road could be long

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

After a period of sharp falls in the Australian property market, including upwards of 10 per cent value drops for Sydney and Melbourne properties, the tide looks to be turning for investors.

What’s going on in the Australian property market often reflects patterns in the Australian economy and political landscape. With that in mind, it’s not really a mystery as to why the property market started to improve in the second half of this year.

The election and rate cuts

One of the biggest changes occurred back in May, with the Federal Election. The re-election of the Coalition government eliminated threats to reform negative gearing and capital gains tax, as proposed by the Labor party. This saw a tone shift among buyers, sparking confidence to return to the market.

Shortly thereafter, we had consecutive cash rate cuts. The Reserve Bank of Australia (RBA) cut the official cash rate by 0.25 per cent in June and another 0.25 per cent in July, and the banks passed most of those cuts onto borrowers in the form of lower interest rates. This made mortgages more affordable and increased the purchasing power of buyers.

Regulator’s rules relaxed

As flagged in May and confirmed in July this year, the Australian Prudential Regulation Authority (APRA) changed the regulation which required lenders to base their serviceability buffers on a minimum interest rate of 7 per cent. This meant a lender would measure a customer’s ability to service their loan on the basis that their interest rate increased to at least 7 per cent. In practice, most lenders were assuming a 7.25 per cent interest rate in their serviceability assessments.

Given the forecast prolonged period of low interest rates, APRA said lenders could set their own interest rate floors, with a minimum buffer of 2.5 per cent. Arguably, measures like this can make access to finance easier.

Sentiment swings

Those three changes have led to a change in sentiment in the property market. Since May, prices have started to stabilise, and more recently we’ve seen prices starting to lift.

According to Core Logic’s month-on-month figures, in August prices in Sydney were up 1.6 per cent, and Melbourne was up 1.4 per cent, while Brisbane, Hobart and Canberra posted more modest gains. Adelaide, Perth and Darwin saw prices decline for the month.

Brakes on the rebound

However, there are still a few constraints on prices. The unemployment rate in Australia has been drifting upwards, as has underemployment.

There’s also ongoing uncertainty about the global economy thanks to the trade war between the US and China, and the impact that might have on the Australian economy.

We’ve also still got relatively tough lending conditions. Further, new apartments coming to market in Sydney and Melbourne raise the risk of pockets of oversupply.

Finally, the heavily mining influenced economies of Western Australia and the Northern Territory remain fairly subdued, putting the brakes on those property markets, although they may soon start to improve as mining investment starts to pick up again

So, it’s still a somewhat constrained picture compared to past cycles and it’s possible property prices may bounce around a bit, with further falls in Sydney and Melbourne possible. While things are looking brighter, it’s unlikely that this is the beginning of another property boom. If prices do take off too much, we can expect the RBA and APRA to intervene to slow things down with another round of macro-prudential controls to slow lending.

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Dr Shane Oliver, Head of Investment Strategy & Chief Economist
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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