Jun 29, 2017
The month of May 2017 saw a drop in Australian home prices that hasn't been seen in a year and a half sending a significant message to property investors, writes Calder Wealth Management's Ben Calder.
Australian state and territory capital housing prices are up a good 8.3% from where they were at a year ago today. But in just the month of May alone the prices saw a steep drop of 1.1%.
True, we've only seen a month of this economic behaviour and the market season must also be taken into account.
But it seems very likely that strict new lending patterns have been putting the brakes on the market.
A lull in home purchasing seems to have led to a fall in prices. The reduced interest in buying could have something to do with the increased lending constraints of late. When it's tougher to borrow money, no one wants to buy.
Why It's Happening
Under pressure from regulators, banks and lending institutions have upped their interest rates to target property investors.
You see, investors tend to rely on interest-only loans to pick up property with. These loans offer a lot in the way of tax breaks. For a time, these loans tempted virtually everyone who wanted to break into the property market. Australia offered some prime opportunities to do so with record-low interest rates.
But couple low interest with high property demand and a relatively limited supply, and the threat of a deadly housing bubble is very real.
Most economists agree that it was time to take the market down a notch to avoid a crash. The goal of cracking down was to reduce risk-taking and discourage accruing debt, thereby stabilising the housing market.
What This Means For You
A lot of property investors probably feel the bite. It's harder to get the loans needed to start up an investment property, despite the drop in prices. The biggest impact will likely be seen in Sydney and Melbourne, places where the bulk of buyers are investors.
In Sydney, for example, an estimated 60% of the market is driven by investor demand. So when the market is slowed down, this is going to show in prices all over the city.
At this point, would-be investors should exercise some caution and be patient. Investing in property right now isn't guaranteed to be more lucrative than investing in shares or other assets. If you are interested in breaking into the housing market, brace yourself for further jumps in interest rates over the next year as things level out.
It is disappointing that these changes in lending patterns seem to be hard-hitting to the regional areas of Australia. But overall, the goal is to balance out the market, correcting it to avoid an uncontrolled crash. The changes we've seen could be a very hopeful sign of that.
All eyes are on the housing market from here on out! Stay up-to-date on the latest trends in investment and property with the Calder Wealth Management team.
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