Expert Advice by Todd Hunter

The Sydney real estate market is nothing short of idiotic…

So-called experts, along with the media, are hyping up the situation, stating that Sydney is still affordable to the average punter.

What a load of bollocks…

The median income being around $75,000 does not equate to being able to afford the Sydney median house price now, at over $900k.

Even if a couple were earning $75,000 each, it still doesn’t mathematically work.

Unless my calculator is broken?

So, when does all this mayhem start to correct itself?

Well, today I stand-alone and say the change started from last week…

But wHy you ask?

There was a fundamental bank policy change that took affect on April 24th. The change in policy affects non-residents trying to borrow in Australia.

Where Non-Residents were able to borrow up to 80% of the purchase price, this has now been reduced by 2 major banks down to 70%.

The statistic’s published by the FIRB this week show that the Chinese have taken over as the major buyers of real estate in our country – no surprise there!

But how much are they actually buying? Well we can only work out these numbers based on the approvals they have. I say that as many are buying properties without approval.

Joe Hockey forced the sale of the $39 million Sydney mansion recently that has now been sold… but this is happening on a much larger scale. We recently had a client call us who wanted to invest. This lady had a large home mortgage on a property already but wanted to buy an investment property with cash that she was receiving from her mother from overseas.

We rightly refused the business, but I am sure they managed to buy a property using another property company.

By using the approval figures published, let’s number out the volume of purchases. The stats say that the Chinese have spent 27.7 Billion on property this year alone. The majority of these sales would be in Melbourne and Sydney.

Using the new median in Sydney of $900k, this would equate to 30,777 property transactions.

Monthly this equates to 2,564 deals per month.

If we say that one third were in Sydney, one third in Melbourne and one third for the remainder of Australia, then the number now looks more like 855 sales per month in Sydney.

That number doesn’t look that big now does it???

But, we need to add in the other major players too. The US spent $17 Billion, Canada $15 Billion and Malaysia $7.2 Billion.

So the volume now becomes more substantial…

Everybody is saying though that the Chinese are paying cash for all these houses?

Are they? – I think not!

If they were, why have 2 banks reduced their LVR for those borrowers?

  • Could be that they are over exposed to overseas borrowers.
  • Could be APRA now have a close eye on them.
  • Overseas borrowers are much harder to chase, should the properties go into mortgagee in possession.

But think about it like this… wHy would these two banks broadcast this through a major announcement for no reason?

Simply because they want to curb the volume of mortgage applications that come in!

Even the banks' Business Development Managers (BDM’s) are nervous as they know the exact volume of loans that do come in from Non-Residents. They are nervous as they are paid on volume and they know the volume will now reduce.

The effective date of this change was April 24th and it was effective immediately as well. Now usually banks will allow a grace period for those loans already pre approved to still proceed under the old policy, for a period of around 2 months. That didn’t happen here. Any loans that had not found a property within 24 hours of the notice would now fall under the new policy.

Now call me skeptical, but that seems very definite to me!!!

So what does all that have to do with the Sydney Property Market?

Consumer confidence…

What Sydney has at the moment is a massive consumer confidence problem. This is fuelled by the media and the hype of overseas buyers, along with investors paying more for houses than what owner occupiers can afford. There is a huge fear of missing out and consequently people are paying way too much for a property.

After two solid years of capital growth in Sydney, not only do overseas buyers now have to pay another $200k more for the same property, but they now must also put another 10% – $90k cash towards the purchase. The new extra $5k tax they pay won’t affect things but it all adds up.

So, if you take the sting out of the market, you take away consumer confidence and markets begin to turn…

Why would this occur when we have the lowest interest rates we have ever seen? Even after interest rates were cut this week?

Low interest rates will not save the market. They may prolong it a little, but not save it.

APRA have stopped the banks and consumers hanging themselves for a while. When you apply for a loan, the bank will assess the deal at 7.1% even though interest rates are almost hitting 4%, after this week’s announcement.

APRA forced them to do this to stop potential future mortgagee possessions. But what it has meant, is that for the past 4-6 interest rate cuts, your borrowing power has not increased in the eyes of the banks. Sure your actual repayments have but they wont allow you to borrow any more than what you can afford at 7.1%.

But those house prices continue to rise… meaning that there comes a point where your affordability in a mortgage wont allow you to pay anymore for a property.

The other interesting point to make here is, if the interest rates stay low for ten years, will this market continue?

No Chance!!!

We already have low interest rates in Perth and the market there is dead. Why? Because the vast majority believe that Perth is a mining town. That’s not the case… Perth is a major city of 2 million people… the mining is a mere blimp in their overall economy.

But this perception has knocked the wind out of people’s Consumer Confidence.

Canberra, until very recently, had the same problem too. The government announced 16,000 public servants to be retrenched and consumer confidence flew out the window in the ACT. It never happened, but this lack of confidence took control and dictated what the market did.

Greece, Spain, Japan, USA all have extremely low interest rates and their property markets are terrible.

So, I make the stand and say, I believe from today we will see the start of a change. Many less overseas buyers, far less affordability and a strong property market where many buyers who have already purchased are out of the market, will see a turn towards slowing down.

I guess we will have to go back and check in 6 months or so, as this is how long it takes for property data to take affect. The deals being pre approved in May, might buy in June. Which then settle in August. The banks bulk stamp transfers these days around twice a month which would take the data into September… ready for reporting by Christmas.

Time will tell…

Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, visit the wHeregroup blog.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.