Contagion

By Ross ElliottSome parts of the real estate market are experiencing a new feeling they haven’t known for some time: fear. Initial outbreaks, based on media reports, seem confined to overheated parts of the Sydney and Melbourne housing markets. The question is whether the fear will be contained or will it spread more widely?It’s always hard to pick the point at which market confidence turns. Australia started the year with unrestrained exuberance. Auction clearances were at record highs and off plan sales to speculative investors seemed like an ocean of inexhaustible opportunity, particularly with rising interest from foreign (mainly Chinese) buyers. Repeated warnings about the extent of investor activity, particularly in new apartment sales, or warnings about record low affordability relative to incomes, were brushed off. Then along came APRA’s rule changes, and banks also shifted their risk appetites down a notch or two, reducing their LVRs and raising interest rates for investment property.

Sometime in the second half of the calendar year, rising notes of caution crept into mainstream media commentary on housing. By October, the likes of Macquarie Bank, Credit Suisse and Bank of America Merrill Lynch were warning of ‘hard landings’. (See here for an example of the bearish comments). Add to this some ‘tutt tutting’ from the celebrity TV financial commentators and the mood seems to have quickly turned from unbridled optimism to caution.

That itself is a good thing. Opportunity and risk should be weighed carefully, not approached recklessly. The question now is how much more bad news can the market expect, will the bad news be confined to certain parts of the market, and will the market have the maturity to respond rationally?That there is still bad news to come seems inevitable. I heard last week that traditional financiers expect that 20% of investors buying off plan apartments will be unable to settle on completion, based on the revised lending criteria. If that’s true, a lot of developers will be caught and a lot of investors will be in a bind. This is likely to be confined, however, to just some parts of the capital city markets – especially the flood of new stock of one bedroom apartments, not designed for living in but for investor price points. I can’t see projects aimed at owner occupiers suffering settlement risk: intending occupiers tend to be more discerning, and have more equity. Many investors are however highly geared and have less emotional attachment to their investment as it was never intended to be their home.

Then there are markets which were supported by exceptional but temporary economic conditions. The mining town real estate booms were never sustainable and there are plenty of investors ruing that lesson already. But even large cities like Perth, where the sagging resources economy is reverberating through employment markets just as more stock arrives, are already feeling the pinch. Even the ever ebullient Real Estate Institute has adopted a more somber tone.

Ross Elliott has spent close to 30 years in real estate and property roles, and was formerly a State Executive Director and Chief Operating Officer of the PCA, as well a national executive director of the Residential Development Council. He has authored and edited a number of research and policy papers. More at www.rosselliott.com.au