Residential real estate market set to fly higher again as banks loosen lending rules and China buyers return

An unexpected rebound in the property market, especially in Sydney, is accelerating despite further rate rises from the Reserve Bank.

Tight rental vacancy rates and surging migration have been driving prices higher. But the latest data shows two new factors are also spurring a rebound. First, there are signs the banks may soon start loosening their lending restrictions. Second, China-based buyers have started to return to the local market.

National Australia Bank’s Market Research desk reports this week that “property prices continue to rise with some degree of acceleration – not only is price momentum building but it is also playing out in other major cities”.

The latest CoreLogic figures for the residential market show that Sydney residential prices are now up 4.8 per cent since the beginning of February – indeed, over the last week, home prices rose in every mainland state capital.

Meanwhile, over the most recent weekend, clearance rates across the capital cities rose to a 15-month high of 75.3 per cent

The price rises are small and incremental, nonetheless they do suggest the month of May will show another one per cent-plus rise across the board, extending the 1.3 per cent change across the capital cities over the year to date.

Moreover, the numbers are also dramatically different to the forecasts cast for the market only months ago when major financial institutions were still expecting a peak-to-trough fall of 15 to 20 per cent for the market. Instead it looks like the total drop from the peak of the last cycle in 2022 was around 9 per cent.

In recent days new data on overseas buyers and a change of heart on lending rules appear to have confirmed the market’s change in direction.

Bloomberg has reported that buyer inquiries from China for Australian properties rose 127% in the first three months of the year from the final quarter of 2022. Picture: NCA NewsWire / Gaye Gerard

According to Foreign Investment Review Board data, China was the largest source of offshore buyers in the three months to December last year, spending $600m mostly on family homes. Diana Mousina, deputy chief economist at AMP Capital suggests: “The volume of activity among overseas buyers remains low by historical standards, but they are clearly back as a factor in the market.”

Bloomberg has reported that buyer inquiries from China for Australian properties rose 127% in the first three months of the year from the final quarter of 2022, according to data from the international real estate firm Juwai IQI, which operates a global property portal for China buyers.

Meanwhile, a key restraint on home loan borrowing in the residential market may be about to fade. Banking regulators currently demand banks assess new loans on a 3 per cent buffer, which means a borrower looking at a 6 per cent mortgage is assessed on their ability to repay a 9 per cent mortgage.

However, a number of key lenders have already begun lowering their buffer closer to 2 per cent.

Westpac has moved first to break the impasse by voluntarily loosening the rules for its home loans. The Sydney-based bank has told its mortgage broker network that from this week they can reduce the volume of home loan borrowers that must fit under the 3 per cent buffer. While keeping within the regulatory standards the bank will allow some customers lighter terms through a “modified serviceability assessment rate”.

The softer terms for mortgage loans will be closely examined by so-called mortgage prisoners who wish to refinance their existing mortgages but cannot do so due to an inability to match the standard service buffers.

As new buyers emerge and home loan borrowers get to borrow more, there is also a significant and measurable change in consumer expectations. The recent consumer confidence index headline number declined 9 per cent, but inside that report the “house prices expectation index” showed a powerful 10 per cent surge to hit the highest level since February last year.

Crucially, the lift in house price expectation came “despite widespread expectations of further interest rate rises”.