While many predicted the housing bubble will burst, others were taken by surprise when the market that had left plenty of opportunity in the last few years for profit began to tumble.
Certainly, one of the leading events that eventually resulted in the crash of the real estate market is the crumble of the subprime market. As a result an unfathomable amount of companies suddenly would facing foreclosure. Even those companies that were not forced to declare foreclosure found they had suddenly lost billions of dollars.
The news has been filled with reports regarding the subprime market crash; however, while it has affected most property owners to some degree there remain many of remain uncertain exactly how this came to be.
Just a few years ago subprime mortgages were a great advantage to many property buyers. Buyers who were interested in taking advantage of the hot real estate market but who lacked good credit histories were able to take advantage of subprime mortgages in order to obtain loans. The underwriting guidelines for these loans were generally more lax than traditional mortgages. This allowed even buyers with poor credit to obtain a loan. In exchange for making a loan to buyer with less than stellar credit, lenders were able to charge a higher rate of interest. In addition, so the theory went, lenders relied on the belief that they would be able to foreclose on property and sell it for a profit in the event the borrower defaulted on the loan.
The money which funded these loans came from a variety of sources. Low interest rates made it possible in many instances for lenders to actually borrow money and then loan out those funds to home buyers. In other cases, the money was obtained from more complicated sources. As you may or may not be aware, it is not uncommon for governments to borrow money from central banks. This practice is particularly common in Australia.
At the time the housing market was stable. In fact, the housing market was experiencing a high that had not been seen in quite some time. Beyond the fact that many home buyers were taking on massive amounts of debt there also existed another problem. Due to the health of the real estate market at the time, in many cases there were expectations regarding future growth that in hindsight now appear to have been unrealistic.
We had experienced the real estate boom occurred in 2014-2017. During that time period lenders did not hesitate in the least to lend money to borrowers regardless of their credit profile. These loans represented a tremendous money-making opportunity for lenders. Problems really began to occur; however, when interest rates began to rise from their previous lows. Historically, rising interest rates have always had a negative effect on the real estate market. When rates are low they help to produce demand; however, when they are high they ultimately cause prices to fall. Until mid-2006 home builders could not build new homes fast enough to meet the growing demand. During mid-year; however, the demand began to slow. It was also about this time that the rate of defaults on loans began to increase.
Before long many mortgage lenders began to find it difficult to obtain money from their previous sources of funding. As a result, would-be buyers discovered that loans were no longer as easy to obtain due to the fact that money was no longer as widely available. Additionally, investors suddenly became wary of taking on risk and underwriting guidelines grew stricter. Homeowners who had taken out loans with adjustable rates began to find it difficult to meet their mortgage payments as interest rates continued to rise. More stringent underwriting guidelines meant they were unable to refinance to fixed rate mortgages in some cases. As a result, defaults continued to rise; fuelling the massive rash of foreclosures.
Since peaking in October 2017, the nation’s property prices have fallen 6.1 per cent, with the median price now sitting at $528,553, according to property analyst CoreLogic’s most recent figures.
The current downturn is now worse than the peak-to-trough decline of the global financial crisis (GFC) a decade ago — during which national prices fell about 5 per cent.
UBS economist George Tharenou has gone as far as calling it the “equal worst in 36 years [since] around the 1982/3 recession”.
Stricter lending standards and “a further dent to confidence” are expected ahead of the federal election and banking royal commission’s final report — to be released publicly next Monday.
“This is the new normal,” Tim Lawless, CoreLogic’s head of research, told ABC News.
“For prospective borrowers, it’s become much harder to obtain finance if they’re on high debt-to-income ratios, or have a track record of large expenses.”
There are about eight reasons why the housing market is in a downward spiral, according to AMP Capital’s chief economist Shane Oliver.
“The decline in property prices is continuing to be driven by a perfect storm combination of tighter lending conditions, poor affordability, surging unit supply, reduced foreign demand, the switch from interest-only to principle and interest mortgages for a significant number of borrowers, fears that negative gearing and capital gains tax concessions will be made less favourable if there is a change of government, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors.”
Falls in almost every capital city
Sydney and Melbourne experienced the weakest conditions once again, with values falling by at least 1 per cent each month since November 2018.
The latest results take Sydney’s median home value back to where it was two-and-a-half years ago (July 2016), and Melbourne dwellings have reverted to their January 2017 values.
Hobart remains the best performing market (from a seller’s perspective) with prices rising 7.4 per cent in the last year to a median of $457,785.
But Tasmania’s capital is showing signs of slowing down, recording a 0.2 per cent fall in values in January.
Every capital city, except for Canberra, saw a fall in their median values last month.
There was a silver lining (for landlords) as every capital city — except for Hobart and Darwin — saw a lift in rental yields over the last 12 months as prices fell but rents remained relatively steady.
Taking longer to sell … with bigger discounts
CoreLogic observed that, across capital cities, vendors are now having to offer bigger discounts to sell their properties.
The median discount was 6.1 per cent in the last three months — a significant jump from the 4.7 per cent recorded in the quarter ended January 2018.
Furthermore, buyers are not in a rush as the time it took to sell a property had increased from 37 days (a year ago) to 44 days.
The most expensive quartile of the housing market experienced the biggest fall in values.
In particular, CoreLogic said the most expensive 25 per cent of housing stock in the Melbourne and Sydney markets dropped 12.4 and 10.8 per cent in value in the last year.
“The lower valuation brackets have benefitted from higher demand from first home buyers as well as tighter lending conditions for borrowers with higher debt-to-income ratios,” Mr Lawless said.
He noted this was “likely supporting a shift of demand towards lower price points”.
“Although the more affordable valuation brackets across Sydney and Melbourne have seen some resilience to falls early in the decline phase, it’s clear that all segments of the market in Australia’s two largest cities are losing value.”
How much worse could it get for owners?
“The peak-to-trough decline in home prices is still ‘only’ 6 per cent’,” Mr Tharenou said.
“We have long expected a 10 per cent drop, or more if regulators don’t ease [restrictions on lending].
“But now that APRA [the Australian Prudential Regulation Authority] has effectively ruled out further macroprudential easing, the risk of an even larger fall has increased.”
Capital Economics’ Ben Udy’s outlook was equally pessimistic, as he expects the nation’s housing market to drop 15 per cent (from peak to trough).
If that were to happen, it may prompt the Reserve Bank to cut interest rates — despite its desire to hike rates like its US counterpart, the Federal Reserve, over the past year.
Australia’s official cash rate is currently at a record low 1.5 per cent — and has remained at that level for well over two years.
If the RBA were to announce another rate cut, borrowing costs would fall to an even lower “record” low.
“We believe that the downturn will result in weaker dwelling investment and slower consumer spending, which would drive a slowdown in GDP growth from 2.9 per cent in 2018 to 2 per cent this year,” Mr Udy said.
“To combat that economic slowdown we think the RBA may need to cut rates before the end of 2019.”
AMP’s Shane Oliver is also expecting the RBA to cut interest rates.
“Ongoing home price falls in Sydney and Melbourne will depress consumer spending as the wealth effect goes in reverse and so homeowners will be less inclined to allow their savings rate to decline further,” he said.
“It’s also a negative for banks and is consistent with our view that the RBA will cut the cash rate to 1 per cent by year end.”
You might have jumped for joy when you heard house prices were falling by $1,000 a week in Sydney and Melbourne.
That means sellers are under pressure, and now’s the time to dust off that deposit you’ve been diligently saving, right?
Not so fast. While analysts say the tide has turned and we’re now entering a “buyer’s market”, many young people may not see the benefits just yet.
Let’s look at what a buyer’s market actually is
The term “buyer’s market” refers to when buyers have more power in the housing market.
That’s usually when there are more houses for sale than there are people willing and able to buy them, giving the buyer the upper hand when negotiating the final price for a home.
Alternatively, a “seller’s market” is when sellers have more sway and buyers are willing to meet their asking price or even go above, bidding against other buyers.
Louis Christopher, a property analyst from SQM Research, believes we are now “well and truly” in a buyer’s market.
“The market started to change about midway 2017 for Sydney and from about December 2017 for Melbourne,” he said.
“Before then it was a very strong seller’s market, with many more buyers than sellers. But then the market started to change and progressively it became a situation where there were more sellers than buyers, putting downward pressure on prices.”
But that doesn’t necessarily mean it’s a great time to buy…
House prices are falling, but analysts expect they will fall much further.
Earlier this week, AMP’s chief economist Shane Oliver told 7.30 he believed prices would continue to fall for another two years.
“At the moment it’s quite controlled, quite gradual. It looks quite healthy but by the same token, we’ve got a lot further to go yet in Sydney and Melbourne,” he said.
Mr Christopher agreed, saying it was hard to see the market turning around any time soon.
“Our view is that for 2019, it’s likely prices will keep falling in Sydney and Melbourne,” he said.
So he said buyers were advised to consider their options.
“Buyers need to be careful that they do not overpay in this market, because if prices do keep falling they could face a situation of being in negative equity,” he said.
Then there’s the banks to consider
The banking royal commission has put pressure on the banks to be more responsible when lending money to prospective home buyers.
They are now doing more checks to make sure borrowers can really afford to repay their home loan, even if interest rates start rising.
As a result, it is now harder to get a loan in Australia than it has been for years, especially for young people who are more likely to have smaller deposits.
So, while the power may be shifting in your favour, it may not be any easier for you to secure a home loan. And it could get even harder.
“Our view is the restrictions we’ve seen in the lending markets will stay next year. Potentially there could be further restrictions,” Mr Christopher said.
So is anyone benefitting from these falling house prices?
Deloitte says this is the “house price fall we had to have”.
“Our house prices here in Australia had streaked past anything sensible by way of valuation,” partner Chris Richardson said.
“Now, finally gravity has caught up with that stupidity and prices are falling.”
But Mr Christopher said he believed buyers didn’t need to rush.
“While it’s a buyer’s market, buyers certainly do not need to rush into buying. There’s plenty of time and the market is not about to suddenly change,” he said.
