I was raised not to gloat when I was right particularly when most others knew that what I was predicting would come to pass and that it would cause pain to those who were not as right. And so, it is with the Sydney property market. For three years I, and quite a number of others, have been warning that the seemingly never-ending property bull run would have to end. History dictated that it did. Last week’s adjusted Auction Clearance Rate in Sydney was just a tad over 45%. Initial numbers for Saturday (7 July) are at 51%. This will probably be adjusted down.
We’ve been expecting these numbers from our own experiences in the home loan market. Any broker will tell you the same. However, where we’ve seen particular alarm bells in the last few months is the need for quick cash by real estate agents. Seven in the last six weeks have approached us for assistance.
This usually happens when agents have a large bill to pay (like a tax bill or salaries) and they need cash in a hurry and are willing to pay interest rates in double digits to get that cash. Where previously, agents would’ve paid these bills from a business’ cash flow, the listings and sales are no longer there.
So, the Sydney property clock has been reset to just past midnight. Now people are starting to ask how long it will last and how low will it go. History tells us that the adjustment in price will not be as much as this cycle’s increases but that’s little comfort for those who purchased a property in the last two years. History also tells us that Sydney’s periods of price stagnation can last a decade after a boom.
The real answer to both questions is that nobody knows. While history is often a good guide in predicting answers it’s fair to say we’ve not been here before.
My recollection of boom and bust property downturns is that they’re usually accompanied by significant rate rises and double-digit unemployment. Neither of those economic factors has come into play (yet). This time around – if you believe all the economic commentary – the downturn is the fault of regulators, foreign buyers staying away and that pesky albino whale not showing up in Sydney Harbour this year.
Some commentators are clambering all over unaffordability and pointing to a lack of a wage rise for the population and the multiple of the median house price to the Average Annual Income.
Personally, I think the way we measure much of our economic data is significantly out of date and has become almost irrelevant. Look at how we measure unemployment. You only need to work an hour a week (or other reference period) to be counted as employed. That’s if you register in the first place.
I didn’t work for two years post GFC and I know many others like me who didn’t register as unemployed (for various reasons).
…and the Average Weekly Wage. It may surprise some people that the average Sydney income is around $80k? It sounds like a healthy level of income doesn’t it? However, if you’re not a property owner, you’re renting, in public housing or homeless. Perhaps how we count our homeless needs to change (couch surfers, people over 30 still living at home…). If that’s the case (and you pay tax) you’re paying (on average) $582 pw in rent in Sydney (as of the March quarter). That’s over $30k. After tax that’s roughly half your take home pay. For that money, you can afford a mortgage on a house within 40 mins of the CBD (if you have a 20% deposit) but you probably won’t get approved for one. Such is the regulatory Catch 22 we now find ourselves in.
It’s no longer enough that you can repay or tick all the boxes to apply for a mortgage because new boxes are being added while we prepare an application and old ones are being taken away. Also, each new applicant has to be stress tested (at a rate that’s a 2.5-2.75% above their home loan rate – this has been the case for many years). Having said that we’re still getting approvals for almost all clients. That’s because we won’t waste too much time on clients who just won’t qualify.
There has also been a significant proliferation of non-bank lenders. So much so that it doesn’t matter what your circumstance – as long as you can repay the debt (either from cash flow or security) – there’s a lender who will lend you the money that you need. At a price.
It’s a good thing we’ve diversified our business so that we don’t solely rely on mortgages.