Loan pre-approvals by banks can be confusing. They aren't a rubber stamp to buy whatever you want, but some buyers are being a little too cautious.
We’re not heading for a property boom
After doom and gloom dominating media reporting of the property market for much of the last three years, there has been a remarkable turnaround in tone in recent weeks. Suddenly, the pessimism has dissipated and the commentary is now all about a supposed coming property boom. Of course, there are the eternally negative commentators falling over themselves telling us that the boom will end in tears and inexorably lead to the next bust – despite the fact that every bust they’ve predicted since the Millennium has failed to materialise!
I’ve have spent the last few years tirelessly discounting the most gloomy prognostications as overcooked misjudgements about a market that was in reality just experiencing a mild and overdue correction. So just as it was my duty to allay that excessive despondency, it’s now my burden to excise over-exuberance.
We are not on track for a return to the boom circumstances that existed during the 2009/10 run-up in prices. Back then, in response to the GFC emergency, Australians received a huge fiscal stimulus from the Government and interest rates plunged 400 basis points in the space of a year. Today, we have governments at state and federal levels tightening budgets, and although the cash rate is at a record low, its absolute fall since its last peak is only around two percentage points, and it has taken two years to reach this point. So the Reserve Bank’s stimulus has been drip fed slowly this time round as opposed to the high pressure hose delivery of 2009/10.
Moreover, the typical mortgage rate now remains higher than it was in the depths of the GFC despite today’s lower cash rate. The big four banks dominate lending today after many of the non-bank lenders exited the market during the GFC and they hence enjoy larger profit margins at our expense.
What we are really seeing at the moment is a market recovering the lost ground of the last few years. The recovery is being led by Perth and Sydney, with Melbourne not far behind and Brisbane, Adelaide and Hobart bringing up the rear. With the majority of the media based in New South Wales, it’s perhaps not a surprise that some journalists are extrapolating Sydney’s earlier recovery into a national boom-time story.
Those who are quick to declare a boom are also mistaking a seasonal factor – the shortage of stock in winter – for a sustained shift to excess demand. Don’t be surprised if the advent of spring sees much of that demand soaked up by a surge in new supply.
Another factor that being given too much weight is the focus on the auction market and in particular the high clearance rates of 80% plus that we have seen in Sydney and Melbourne. The auction market is disproportionally represented by high quality, blue chip assets in sought-after areas. These are the properties that will out-perform the market. This can make it appear that we are in an impending boom, but these examples of very strong results are, in reality, very isolated.
There is of course good reason to be pleased with the market trend. It is actually in the interests of both buyers and sellers for some momentum to return, as it delivers the volume for a transparent, liquid market place where deals can be struck. This spring is likely to be a vendor’s market rather than the buyer’s market we saw in 2012, although we are likely to see auction clearance rates stabilise back to the 70s.
Expect to seek the market continue to flourish into 2014, but it would be a mistake to confuse the early signs of a recovery for a runaway market.
Image: graur codrin