WARNING! Are we about to see a market correction?

The Australian Reserve bank in November has clearly indicated that it feels the bottom of the interest rate cycle has been met (not withstanding world economic events).

There has been a number of reports out over the last few weeks which are indicating some concern for long term property growth.

KEY POINTS:

Information released by the banking sector has indicated mortgage arrears are increasing. In fact, two states and one Territory have reached record levels of default. This is in a time of historically low interest rates.

The Basell 3 agreement which Australia’s banks are party to, has meant the international banking regulators have told Australian banks to start relying more on Australian customer deposits to fund loans, rather than overseas money markets.

At the moment, Australian banks rely heavily on those overseas markets to fund home loans because they are often considerably cheaper than paying interest on deposits.

So the banks now have three options: To cover the added cost, they can increase interest rates, or reduce the discount you’re expecting to receive on your variable rate next year.

A third option is that the banks could take the hit in their bottom lines, and we all know that is not going to happen.

A report out from SQM Research an independent business has found the Sydney and Melbourne property markets to be 40% overvalued currently and with growth looking like it will his double-digit levels in early to mid-2017 the extent of over valuation would clearly be at the top of the property bubble scenario.

So how will this cause a property correction? Well we have interest rates at their lowest but mortgage arrears at their highest for years, you only need a small movement in interest rates of say half a percent to cause mortgage arrears to climb further. This is when you have the two-fold effect of Bank repossession and a large quantity of housing stock coming on the market, this combined with the nee jerk reaction of the banking sector to cut off monetary supply, causes property prices to drop.

Also we all know what happens when large quantities of properties come to the market and prices are dropping, every potential buyer waits for what they feel may be the bottom of the market cycle. The behaviour is self-perpetuating causing house prices to drop still further and this is what causes a property crash. It has nothing to do with supply of housing and everything to do with monetary supply to buy houses.

If banks are not lending, then people are not buying and banks do not lend well in falling markets. They safeguard themselves by increasing the margin of a home valuation to reduce their risk. Say you are buying a home for $900,00 and you are borrowing 80% or $720,000. When the bank does the valuation it will very likely factor in a further likelihood of 20% drop in house prices, that’s another $180,000. So the bank values your home you are looking to buy for $720,000 not $900,000. This means they will only lend you $576,000 towards the home, meaning you need to find the other 40% if you are willing to pay $900,000. But what happens is you renegotiate the price down or withdraw from the purchase and there you have it, the self-perpetuating market correction.

So, what next you ask, well if you are happy where you are and not looking to move for many years, sit it out and over time prices will recover. If you will need to sell or are looking to sell in the next 18 months, then this is the time to do it and achieve the maximum return.

If you are looking to sell soon or in the near future, then why not talk to the housing market experts at Fox & Co, you will get honest unbiased opinion.

Article by Craig Corner

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