Is the Aussie property crunch finally upon us?
In this piece written by Ben Griffith from Crestone, Ben highlights the impact and outcomes the Royal Commission into banking may have on Aussie property values across the country.
By Ben Griffith.
Like any thesis, a catalyst is usually present for it to be fully realised. Perhaps we’ve arrived at that moment for the bears of the Australian property market.
Recent regulation and now the Royal Commission into banking seems to be aimed squarely at a material tightening of credit. There’s now some well-respected commentators picking up on this emerging theme and suggesting that mortgage borrowing limits may fall by as much as 40%. At risk of pointing out the obvious, it’s also not too difficult to establish where we are in the housing cycle across the Eastern seaboard and in key markets of Metropolitan Melbourne and Sydney.
Notable observations are:
- Our major banks are responding rapidly to regulatory and political pressures to improve responsible lending practices. They make up the lion’s share of Australian mortgages.
- If income assessment is tightened materially & Household Expenditure Measure (HEM) benchmark for living expenses is increased to more realistic levels, this will likely have a significant impact on credit availability, especially for lower income households.
- Despite net inflows of population growth to Melbourne and Sydney and intentions for purchase, if you can’t access credit, you’re not part of the demand equation and we shouldn’t underestimate this relationship.
- If demand softens and supply remains constant, we may well see a significant continuation of downside pressure on house prices.
- If things got too negative, expect consumer spending and broader sentiment to suffer, which then starts to affect the broader economy.
- Regulators might be forced to wind back some of the recent controls and the RBA could reluctantly move interest rates lower.
UBS base case is now that a tightening in supply of credit will naturally lead to weaker sentiment and prices in the residential markets of Melbourne and Sydney. A small correction of <10% probably wouldn’t be all that alarming after recent gains but any more will likely be a problem. Regardless of the outcome, once again we are reminded that having all your investment eggs in the same basket is a poor decision. A little portfolio diversification will improve risk adjusted returns and help you sleep at night.
Ben is an Investment Adviser at Crestone Wealth Management.
Ben’s main focus is to cultivate meaningful relationships through listening and enjoys solving problems with logical planning, strategic implementation and tactical response.
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