Lending and property market forecast for 2019


property and lending market

Year 2018 for the Australian economy is ending on a positive note despite constant news of a housing downfall. According to a recent address by RBA Governor Philip Lowe, “the economy is moving in the right direction and further progress is expected in lowering unemployment and having inflation consistent with the target”. With low inflation, low unemployment and historically low interest rate with cash rate at 1.5%, where is the lending and property market headed in 2019?

It will be the year for first home buyers

The slump in property prices presents an opportunity for first home buyers who feared they had been priced out of the market. Falling property prices have made homes more affordable for the first home buyer. The generous stamp duty exemptions and concessions by each state have given the first home buyers more incentives to enter the property market. With the ongoing low interest rate, I expect more first home buyers to enter the property market in 2019 as more homes within the $650,000 range for NSW and $600,000 in VIC become available.  

Banks have started offering generous incentives such as great intro rates and cash back to attract the first home buyer market as banks continue to shy away from the investor market.  

Interest rates are expected to rise

RBA Governor Philip Lowe has indicated in his recent address that “the probability of an increase in interest rates is higher than the probability of a decrease. If the economy continues to move along the expected path, then at some point it will be appropriate to raise interest rates. This will be in the context of an improving economy and stronger growth in household incomes”.   

Property downturn to last until mid-2019

Houses are now taking longer to sell. Clearance rates at Sydney auctions in November plunged to 42%. At the height of the housing boom, weekly auction clearance rates regularly topped 75%. As prices fall, the ‘fear of missing out’ has turned to ‘fear of paying too much’.  Sellers have started to lower their price expectations. According to real estate analysts, this downturn is expected to last until mid-2019 with Sydney and Melbourne prices likely to drift downwards in the first three to six months. This forecast is based on continued lending tightness by the banks until the final royal commission report is released in February. The NSW state and federal elections will also heavily impact the market conditions in the first half of the year.  

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Rental income dropping

With an oversupply of apartments, renters now have more options in terms of properties to rent. Oversupply means more landlords competing for tenants and dropping rental income to get tenants. As more of these apartments are completed in 2019, those renting will have more housing options and will be left with more disposable income with less of their income going to paying rent.  

Bank valuations coming in under purchase price

Bank valuations coming in lower are common for off the plan purchases of apartments especially for those who have bought at the peak of the housing boom. For those who have settled, they are moving into apartments worth less than what they paid for. Another potential issue is the risk of buyers not being able to settle on these properties and losing their initial deposit. Many of these buyers would have bought when credit conditions weren’t as tight.  In 2019, I see more of these scenarios happening and if you are an investor who has bought off the plan a year ago, expect to cough up the difference if the valuation comes back really low.  

It is harder to get a loan

The big four banks have tightened lending criteria and one of them is how the would-be borrowers spend every dollar of their income. Banks are now asking for four months worth of bank statements where borrower’s salary goes.  A year ago, banks did not require this.  The focus right now of the royal commission is on responsible lending and the bank’s use of the Household Expenditure Measure as a means to determine a borrower’s capacity to service a loan. HEMS used to be the barometer. Not anymore. The enquiry into a borrower’s expenses will be granular. Brokers are now required to itemise their customer’s spending for everything from cosmetics and clothes, to childcare, educational expense, Uber Eats, Afterpay and Netflix. 

According to AMP chief economist Dr Shane Oliver, “the biggest threat to the Australian economy is the housing downturn. He also expects property prices in Sydney and Melbourne to fall by 20% from peak to trough”. If you are a first home buyer, should you buy now or wait until the market dives down further? If you are an investor, is this a good time to buy?

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