Why Banks Are Changing Their Tune On the Australian Property Market
Our property markets are underpinned by the banks. So when they change their tune, it is time to listen, especially if you’re looking to invest in property
You might remember the headlines we saw earlier in the year when Covid-19 really started affecting us in Australia. Banks were screaming that property prices would plummet.
Westpac and NAB predicted a 20% price fall… but CBA came out and said, “Oh no, not 20%”
Prices could fall by up to 30% as a result of the pandemic.
They soon changed that crazy prediction and said they expect price falls to be 10%.
Well now, CBA has changed its tune again, and I think it’s a lot more realistic
In CBA’s latest forecast of property prices, they said that they expect a 6% fall in capital city property.
That means that if a property today has a price of $1M, they expect it will drop to $940,000.
Does that sound like a property market that’s going to crash?
Now mind you, that’s a 6% drop across the country but they have actually broken it down city by city.
They expect the biggest price drop to be in Melbourne with a drop of 10.2%
Fair enough, although I think that might be a little overstated.
Sydney prices to drop by 4.9%
And all the other cities by even less than that
And they predict Canberra to rise by 2%
But here’s the big takeaway…
They expect these price drops from September 2020 until June 2021… and then prices to rise afterwards.
And in especially Brisbane and Sydney, they expect prices to be higher by the end of next year than they are right now
So what does that mean for you as an investor?
It means that if you feel able
And you do your research correctly (more on that in a moment)
This might be the time to buy… and maybe even secure a great deal.
Sydney prices are expected to fall by only 4.9%. Let’s say round numbers 5%.
Do you think that’s a big fall? I mean you could get 3 different real estate agents to value a property and there could easily be more than a 5% difference between what the highest and lowest valuations come in at.
We went through the biggest price correction in history between 2017 and 2019 when Sydney prices dropped by 11% and Melbourne prices dropped by 7%
Yet, I don’t remember too many people saying that Sydney and Melbourne property prices were cheap early last year.
Mind you, according to Core Logic, house prices in Sydney increased by 5.3% from the start to the end of 2019.
And despite the recent slight price falls (on average about 3%), property prices today on average are higher than they were a year ago
However, that does not mean that you can just go and buy anything
You do need to do your research and there are certain areas and properties you need to avoid.
First and foremost, if you’ve been watching any of my past videos, you know what I’m about to say…
AVOID Off the Plan Units!
Especially in areas such as Rouse Hill and the North West of Sydney,
Gosford in the Central Coast,
Docklands in Melbourne
Surfers Paradise in Queensland
And Parramatta in Western Sydney
Because these areas are going to be heavily oversupplied in the next couple of years.
Rouse Hill is going to see the number of available units triple in the next 2 years
Gosford will see an increase of over 72.9%
Parramatta an increase of 13% and this is a market that is already oversupplied with units.
With all of this over supply coming to the market, you’re going to see banks value units at less than the purchase price, just like they did back in 2017 and 2018, which caused a lot of investors to lose money.
For example, if you buy an Off the Plan Unit for say $820,000 and when it comes time to settle, if the bank thinks it is worth $760,000, that’s a $60,000 difference.
And guess who needs to come up with that $60,000 out of their back pocket?
And if you don’t have it… well, you lose your deposit that you put on the property.
I remember speaking to a lady back in 2018 I think who bought an Off the Plan unit for $1.23 Million near Sydney airport.
And she had secured it with a deposit for 10%.
So she paid $123,000 to the developer
But then… when the unit was completed the bank valued her property at less than $1 Million.
Remember, the purchase price was $1.23 Million and the bank valued it under $1 Million. That’s a difference of over $230,000!
She didn’t have the money to fund the difference so she had to walk away from the deal, losing here her $123,000 deposit in the process.
I see that happening again as banks see the unit market as being a higher risk market for them.
And as result of the mortgage holidays they have offered for the last several months, which have impacted their bottom lines, banks are hungry for revenue
But they need to ensure their risk profile doesn’t increase in the process
So where do you think they will be hungrier for loans?
It’s to people either refinancing or buying houses.
So if you’re an investor, be very wary of buying an apartment, especially something off the plan. I’d highly recommend sticking to houses and if you can’t afford a house in the suburbs you know, engage some someone to find you something interstate or even in a large regional town, rather than resorting to an apartment.
Now the other thing you need to be very aware of is the falling rents in many suburbs, especially in Sydney and Melbourne. This can have a negative impact on your ability to get a loan and also affect your personal cash flow.
So if you’re looking to buy an investment property, then I think your window of opportunity to get a good deal is closing.
It certainly looks like once again our property market is going to be robust, through another financial crisis, just like it was during our last recession when prices dropped 4.4% and just like it was during the GFC when house prices dropped by about 7.9%
However, do your research. Individual suburbs are going to perform differently. Even in Melbourne, which is currently the city expected to perform the worst over the coming months, South Yarra is going to perform differently to Tarneit, In Sydney Pymble will perform differently to Parramatta and in Queensland, Paddington is going to perform differently to the Gold Coast.
Banks are aware of this. And I expect they are going to be more open to lending in the suburbs that are doing well…
We’ve seen this happen before.
For example in 2016, Macquarie Bank came out with a list of postcodes they thought were risky and didn’t want to lend as much in anymore. These included suburbs like Chatswood in Sydney, Docklands in Melbourne and Brisbane CBD
NAB also published a similar list at around this time.
Interestingly, the suburbs that were deemed high risk were those that had a higher concentration of units.
I expect that we’ll see something similar again with banks trying to avoid certain areas or at least lower their exposure to certain areas and increase their exposure to others
So yes, banks are certainly changing their tune when it comes to property in Australia. They don’t expect the market to crash… and in fact expect any downturn to be very mild and short-lived with the market to regain steam in 2021.
However, this is average data. Some areas will suffer more while other areas will grow in value. So, as an investor, this means increased risk and increased opportunity. Risk if you get it wrong. Opportunity if you get it right! You can’t just throw a rock and buy whatever it lands on, you can’t just buy in an area you’re comfortable in so you can drive past the property.
You need to do your research, look at data, get professional help and if you accept that property investing is a long term game, I believe that right now could be the start of a very exciting time for you as a property investor.
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October 7, 2021