It’s Been a Good Month for Property

Despite all the dire predictions, I’m a little cautious on calling the ‘last rites’ for Aussie property.

Not just yet anyway.

In fact, it’s been a good few weeks for property.

First off, we had the election.

With a coalition victory, it’s back to business as usual.

Most thought we’d have a Labor victory.

Which would’ve brought with it all the uncertainty around negative gearing. That uncertainty is now behind us.

What is certain now is tax cuts and a huge infrastructure spend. And the coalition’s home buying lending scheme. Guess where those gains are likely to end up.

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House prices likely to boil

Then last week the RBA released the minutes from their recent meeting. Those minutes suggested they’re closer than ever to cutting interest rates. That’s likely to keep house prices on the boil.

On top of that, also from last week, APRA announced they’re relaxing their lending rules.

APRA had hitherto required banks to assess a mortgage on the ability of homebuyers to repay their loans at an interest rate of 7.25%.

APRA has now decided to do away with that restriction.

A 2–2.5% loan buffer will remain, but with most loans now under 4%, borrowers will now be assessed on their ability to repay, at an interest rate somewhere south of 6.5%. Not the 7.25% figure as before.

Doing the sums, here’s how Your Mortgage reports it:

Australian couples earning a combined annual salary of $160,000 and living with two children would be able to borrow as much as $797,000 under the new rules and $841,000 should interest rates fall — a notable jump from the $719,000 they can take on with the current regulations and interest rate.

That’s a rise of 17% in round numbers. In other words, borrowers can now afford to pay 17% more, to buy a house.

You have to understand what’s happening here. And what it will do for house prices.

Because in part, it explains why house prices have come off their highs.

It has been difficult to get a mortgage because of this very APRA requirement. It’s negatively impacted house prices over the last year or so.

In other words, the recent fall in house prices, have in part, been credit related.

Like I said, it’s been a good month for property. And all these events are likely to cushion any down move in house prices.

We’ll see.

But there are some analysts who are already calling the bottom.

Every boom/bust has been bigger than the last one

Both, multinational bank HSBC and investment bank Citigroup have put their heads on the block and called the bottom for Aussie property.

Citi Research, is forecasting that house prices will not only bottom, but are likely to increase by the second half of next year.

To play devil’s advocate, I don’t take a lot of stock in analyst reports.

But, I do take a lot of stock in company price charts.

It’s about the only thing that will never lie to you. I’ve found everything else is mostly confusion and fiction.

Anyway, the price charts of listed Australian REITs have on the whole, been busting higher all year. And are now trading around decade highs.

The economy as a whole might be far healthier than many soothsayers would have you believe — because it all comes back to rents.

For the REITs to go higher like this, it suggests rents are increasing. It suggests increasing demand for industrial and office space, and therefore, the economy as a whole is in reasonable shape.

For house prices to plunge, you’d want to see a major downturn in the economy, and the distressed selling that might go with that.

But with Aussie REITs busting higher, it just doesn’t suggest it presently.

So, I’m a little cautious calling a house price crash, as some analysts are.

Indeed, if history is to repeat, property prices are likely to rise further in value, into a peak next decade.

Study a little history and you’ll see how the boom/bust cycle repeats.

It must repeat, because we never get to the underlying cause of the boom/bust cycle.

Whilst land has a selling price, we must get a real estate cycle.

And every boom/bust has been bigger than the last one.

So the biggest real estate cycle of all time may still be in front of us. It’ll be exciting to watch it all unfold.

Regards,

Terence Duffy,
Chartist, Time Trader

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends & Forecasts.


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