November 2018

This is the 7th in a series of articles summarising monthly news and happenings in Sydney real estate, and more broadly.

Looking ahead to the future

Although over the last few months, analysts have blamed a range of contributing factors for the state of the property market, in this month’s Core Logic Monthly Sydney update, Tim Lawless squarely points the finger at the credit squeeze. He says:

“… it’s clear that tighter credit availability is acting as a drag on housing demand and impacting adversely on the performance of housing values across most areas of the country.”

Similarly, the ABC reports the Reserve Bank’s assistant governor Christopher Kent, has discussed that the market is entering a second phase of the downturn initially brought on by the combination of changes to investor lending, and the reduction in interest-only lending. According to the RBA, these two factors were beginning to have a positive effect on the market, however then the Financial Services Royal Commission dropped its bombshells, and as a result credit availability has dropped significantly across the board.

6 Months later, an increasing pressure on regulators is to actually ease the legal adherance of lenders to, if not to the same extent as the banks wilful disregard of lending practices prior to the Financial Services Royal Commission, then at least to somewhere in between. A happy median that only puts home buyers in a slightly more precarious financial position than they should be.

Who is this APRA entity anyway?

In the Real Estate Conversation, REIA President Malcolm Gunning describes adherance to APRA restrictions as “probably excessive” and predicts deeper woes for the market should Labor take Government in the next Federal election before May 2019. With a strongly worded warning, Mr Gunning says, “Government and regulators should be very mindful of the impact that a lack of confidence in the housing market can have on the economy.”

In the same story Geordan Murray of HIA and Simon Pressley of Propertyology also cite APRA’s regulations as contributory towards the housing downturn. Despite the lack of acknowledgement of the findings of the Royal Commission and subsequent fallout, Mr Pressley claims Australia has “always had very prudent lending standards. APRA’s decision to tighten credit makes no sense.”

However, as an independent statutory authority, taking responsibility for the economy is not part of APRA’s focus. From the APRA website:

“Under the legislation that APRA administers, APRA is tasked with protecting the interests of depositors, policyholders and superannuation fund members.

“APRA promotes financial system stability by working closely with the Australian Treasury, the Reserve Bank of Australia (RBA), and the Australian Securities and Investments Commission (ASIC).”

In other words, if the state of the economy is truly the overall concern here, taking aim at APRA for the state of the housing market is a wasted shot.

The Federal Government, on the other hand, is a much larger target.

In a recent article, The Real Estate Conversation discussed SQM Research’s annual Boom and Bust report, who “have warned falling house prices and changes to negative gearing could spark a recession.”

In the same article, SQM Research’s Louis Christopher, asserts, “The looming changes of Negative Gearing and Capital Gains Tax are increasingly weighing on investor sentiment. Quite frankly implementing these changes during a housing downtown is very risky and may trip the economy into a recession.”

They also show a number of scenarios taken from the SQM research, most of which anticipate a Labor victory at the next Federal election. For Sydney, all scenarios show a continued decline in housing prices, although despite Malcolm Gunning’s misgivings, a Federal Labor Government and a rate cut of 0.5% seems to be the ‘least worst’ situation.

Of course, there is much more to it than a simple table can transmit.

For example, Richard Holden, the architect of the 2015 report for the McKell Institute, which informed Federal Labor’s policy on the matter, says that updating negative gearing so it is only permitted for new constructions would actually benefit the economy, wage growth and employment. Mr Holden says that currently, “… more than 90% of [negative gearing] is used for existing properties, so it does nothing to boost construction. Our plan on the other hand allows negative gearing to be used for new properties.”

Having said all of that, at a broader scale, the ABC reports the IMF (International Monetary Fund) has said the Australian economy is in relatively good shape, all things considered.

  • Australia is on the ‘final leg’ of economic recovery since the end of the mining boom
  • The IMF expects the federal budget to return to surplus by 2020
  • Housing prices are falling at an ‘orderly rate’

With these things in consideration, and any anxiety removed from the equation, perhaps things aren’t that bad!