What do buyers in Sydney’s north-western suburbs -- from Baulkham Hills to Epping -- know about real estate that is missing from most other markets?
At the weekend, while the action clearance rates in most of Melbourne and in Sydney’s inner and eastern suburbs was around the 70 per cent mark, in north-western Sydney clearances fell below 30 per cent.
First and foremost, one of the two biggest factors that have been pushing up dwelling prices -- bank credit -- has been totally transformed. (The other big factor, supply shortages, is still around in many areas).
Earlier this year if I wanted to buy a residential dwelling, either to live in or as an investment, the banks had the red carpet out because they were making big returns on capital via housing loans and were fighting for market share. Blue chip borrowers could negotiate interest rates well below the advertised rates.
Then came the restrictions on investor housing mortgages led by higher deposits and increased interest rates. But the dwelling market sailed through that because the big banks were still looking for market share so they made owner-occupier loans even more attractive. Discounts on advertised interest rates blew out to 1 per cent for blue chip owner-occupiers.
Now the home lending game is changing rapidly. The four big banks have been forced to raise equity capital by the regulators, so they have increased interest rates on existing loans by up to 0.2 per cent. But for those buying dwellings, the biggest change is that the 1 per cent discounts have either evaporated or have been greatly reduced.
That means that the real new loan interest rates have been increased by up to 1.2 per cent in extreme situations but are certainly up by between 0.8 to 1 per cent for most sound borrowers.
Combine that with tougher lending restrictions on investor loans and there has been a dramatic underlying change that is not highlighted in most property media.
But the good burghers from Baulkham Hills to Epping understand the new game which they combine with local factors. You can expect more areas -- but certainly not all -- to get attacks of Sydney’s ‘north-western suburbs disease’.
The simple fact is that whereas a short time ago the big four banks were looking to increase their housing market share, now they reckon that a combined 80 per cent is a good position to be in and it is time to take advantage of market dominance to achieve greater returns to serve the higher capital now required for dwelling loans.
The smaller banks do not have the same increased capital requirements and will enjoy an advantage with more attractive loans. But, unless they make big inroads, the big banks will remain in money making rather than higher market share mode. I described the new situation when only Westpac had raised its rates (How Murray and the government are transforming the banking game, October 20).
If the Reserve Bank lowers interest rates, the banks will be very tempted not to pass on all the rate reduction given their new mood. Given they have already lifted rates, if they do not pass on a full Reserve Bank reduction then they will cop enormous political flak from the Turnbull government. They will need to weigh that against the need for higher profits to maintain dividends.
The last thing the Australian banks want is a collapse in the overall housing market because it would cause substantial bad debts. The latest interest rate moves may hit certain areas but overall will not cause a collapse. However, the big new loan rate rises will put a halt to big, widespread dwelling value increases.
It would require tougher economic conditions leading to higher unemployment and/or a withdrawal of Chinese buying for the housing market to fall markedly.
Another hidden factor boosting house prices is the avalanche of superannuation speculation and share market volatility which has caused many Australians to decide that conventional superannuation will not provide for their retirement so they have chosen negative gearing and dwelling investment as their choice of retirement funding. Sometimes that policy has been implemented via self-managed funds.
The long-term savings market desperately needs certainty about the rules.