Five new threats to house prices keep buyers on their toes

The residential property market is facing a new range of threats which combined have the capacity to seriously damage home prices.

Property boosters — real estate agents and developers — mount robust arguments that nationwide prices don’t fall unless we see rising unemployment or a spike in official interest rates: Since neither of those factors are present in the market, they tell us we are safe.

Property doomsayers — academics and headline-seeking commentators — tell us prices will fall because they are out of line on both a historic and international basis — this is true, but it has been true for a long time and could continue.

While the debate bounds along, at least five highly relevant changes have emerged in recent months, which any investor should understand.

Here they are:

1. Mortgage rates are rising

Yes, official rates remain unchanged at 2 per cent, but it hardly matters to the house hunter or investor when they are shopping for a mortgage rate. Last November all four banks and their regional stablemates introduced small interest-rate rises. Now more than 20 lenders have raised rates in recent weeks. Though the changes were incremental the point is rates moved higher. The latest move is Bank of Queensland which has raised its standard mortgage variable rate again and others are expected to follow. BOQ this month lifted standard variable home loan rates 0.12 to 5.86 per cent and investor rates 0.25 to 6.28 per cent.

Unchanged official rates are misleading if the rates paid by investors and homeowners are rising.

2. Low rental yields are starting to bite

The average gross residential yield in Sydney is 3.4 per cent and in Melbourne it is 3.1 per cent — that’s before expenses. The rule of thumb is you subtract at least a full 1 per cent to get the net yield figure — so we are talking about 2 per cent in both major cities.

Super low rental yields are fine when prices are rising and rates are flat as they have been in the past two years — but the most recent evidence is that prices — especially of inner-city units — are beginning to decline.

Investors left with rock bottom yields are going to hurt if ­prices drift or drop.

3. The mining town crisis is spreading

It began with horror stories from centres such as Moranbah in Queensland where prices have fallen from above $700,000 to $250,000.

Figures released during the week from the industry research group Core Logic showed defaults for former resource boom towns are soaring.

They are 30 times the national average in Mackay and 47 times the national average in North Western Australia. The national average is a very low 0.2 per cent.

It’s worth noting that the steel town of Whyalla in South Australia — even before the Arrium steelworks went into administration a few days ago — has a mortgage repossession rate at 16 times the national average.

4. Oversupply is moving from theory to reality

The pending oversupply in the apartment market has loomed as a notional issue in the past. Now it looms as a genuine factor as the towers actually get built.

As always the problems will appear first in the speculative end of the market, namely the off-the-plan sector where investors, especially in inner Sydney and Melbourne, may face lower prices when the towers open than they had expected when they drew down mortgages.

At Core Logic, executive general manager commercial Craig MacKenzie explains there are 30,000 units expected to settle in the next 24 months in Melbourne — the city has an annual run rate of apartment sales which is closer to 8000 units.

What’s more, this is merely what is definitely going to come on the market — it is not even adding in the approvals, which may or not come to pass.

Mac­Kenzie says: “We know the banks are now looking very closely at the off-the-plan sector.”

5. The banks are coming up against investor lending limits

When APRA introduced its 10 per cent investment lending growth limit to the major banks at the end of 2014, the regulator gave the banks some leeway in managing their portfolios to achieve the target.

Any excuses relating to time pressures are now long gone and there is anecdotal evidence that the banks are rejecting overseas buyers and local investors as they try to stay beneath these macroprudential guidelines.

Quite simply, less lending means less hands in the air at residential auctions and at apartment sales days — it is one of the key reasons JLL reported a 19 per cent drop in Sydney inner city apartment prices over the three months to December.

Of course property is always local and a mining town catastrophe may not necessarily affect prices on the Gold Coast or an Adelaide-based slowdown may not make any difference to a sterling suburb in Melbourne.

The other way to look at this is that there can be very severe regional downturns and they hit hard on those who live in the districts — think Melbourne 1991-1993, Western Sydney 2005-2007, Gold Coast 2010 — 2011 or Perth today.

For serious investors, weighing up these key changes in the reality of both national and regional residential housing markets is imperative … whatever happens next.

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