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What's Moving Our Market Today?
Picture: Blue Collar Agents
Most of our Capital Cities have now peaked and are going through a period of adjustment. One of the indicators being pointed to, which has more relevance to Sydney or Melbourne, is Auction Clearance rates.
Understanding Clearance Rates
If you look at auction clearance rates you see a view of the market that people find easy to track and report on and discuss.
It's not to say that clearance rates don't matter but if you think about what they are purported to represent they are inaccurate.
It doesn't mean the market is terrible because there may well have been strong bidding for the property, the clearance rate is just the number of sellers who are prepared to accept market conditions at the time.
We all know that clearance rates go up when the market is rising and strong, because sellers are happy with the prices that buyers are prepared to pay for their properties but when the market is soft, clearance rates fall because sellers have yet to catch up with the reality of the current market conditions. They are still hoping for yesterday's prices today.
Regulatory Changes
The other factor affecting markets is regulatory changes on several levels that in totality is creating a credit squeeze. The result is not as pervasive on the Gold Coast as some other parts of Australia perhaps because property is more affordable here. Nevertheless, in the past few months we have come across every scenario I have described below.
It has been estimated that nationally about 40% of homeowners cannot shift their place of residence because they borrowed sums to buy dwelling that they cannot borrow today.
If they sell their home and move to a different location looking to buy a similarly priced house or apartment they will find their loan availability level slashed. So they must stay where they are until APRA allows banks to relax lending's or add more deposit.
Most of these people will be paying their mortgages and may be ahead of their repayments so they are not aware they have a problem and don't show up in bank problem statistics.
The data on the bank loan shortfall comes not from conventional economic sources but from Digital Finance Analytics who combine data from 52,000 household surveys, data from the Reserve Bank, the ABS and APRA plus private data from lenders and aggregators. Their data was updated in July.
The group analyses cash flow based on real incomes, outgoings and mortgage repayments. Employment periods in current jobs has also been extended. Digital Finance says 31,000 applications for credit were rejected in July. In August last year 2,300 were rejected (Reference: The Definitive Guide To Our Lastest Mortage Street Research BLOG).
The credit squeeze comes because of APRA’s new lending standards on the banks while the Royal Commission has underlined to the banks that if they loan irresponsibly they can become liable for any losses.
Household expense estimates have been raised substantially. We keep hearing about three page detailed questionnaires of expenditure with borrowers being required to provide three months bank and card statements of every account they have for full analysis. There are some 37 expense categories that are now measured to make the lending calculations including alcohol, haircare, childminding, shoes, pets and doctor's visits.
As a result of this minimum outgoings and average household expenditure are now assumed to be about 30% higher than the numbers that were being applied last year on loans that were being approved.
According to UBS (Union Bank of Switzerland) a household with a pre-tax income of $150,000 would now be loaned 34% less money than it would have been loaned last year.
And, this clamp in residential home loans is in addition to the Reserve Bank mandated interest only investor loans being replaced as they mature by loans where principle must be paid.
Good brokers can put borrowers with lenders that are not tied up in the new environment to the same extent as the Tier 1 banks seem to be.
One has to observe that if the ALP win the next election and deliver on their promises regarding negative gearing then all bets are off.
by David Hamilton
What's Moving Our Market Today?
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