Five Reasons Sydney Property Prices are set to Fall

 

 

Article by Anne Grobler, Head of Marketing at Open Agent

 

Over the last decade, property prices in Sydney have outpaced not just those in other Australian cities, but also those in the UK, the US and Ireland. In 2015, the Financial Times reported that all 159 apartments at the upmarket Barangaroo development, in a prime Sydney Harbour location, were sold within three and a half hours of going on sale. What’s more, about a third were bought by overseas investors.

 

Fast forward to 2017 and the Sydney property market isn’t looking quite so robust. So, is this a pause for breath, or the beginnings of a crash? Let’s take a look at the five key factors that may be decisive.

 

  1. Oversupply of apartments

 

During the property boom, developers have been eagerly supplying the Sydney market with as

much property as they could build. While the supply of apartments has been roaring ahead, the buying population hasn’t been increasing at the same rate. Comparison website Finder surveyed 26 housing experts, 40 per cent of them claimed Sydney had an oversupply of apartments.

 

  1. Settlement risk if values fall

 

Apartments are particularly prone to speculative buying because they can be bought “off plan” before they are even built, simply by putting down a deposit. The idea is, for a small investment, the buyer can reap the rewards of the increasing value of the property during the period it’s being built. They can then either take possession or sell it on.

 

But what if prices start falling during the building period? Buyers can find themselves having agreed a price which is higher than the apartment’s current value. If they need finance, their lender may decide there isn’t enough security. The buyer may have to renege on the deal, because it’s cheaper to lose the deposit than to be lumbered with an apartment that is losing value.

 

So now the developer must sell the apartment at the lower price. This is how market pull-backs start and if the drop-in property values accelerate, the self-reinforcing downward spiral can cause sharp reductions in prices.  Before buying off plan, ensure the location or area of the listing is trending in the right direction. An area seeing the positive period of a property cycle will not often lose value. To gain knowledge on property cycles and trends find a local agent via OpenAgent.

 

  1. Chinese banks tightening money transfer rules

 

Previously, Chinese banks were fairly lax about applying the rules on how much money citizens could transfer abroad. In 2016, the Financial Review detailed individuals in China would restricted to exchanging the equivalent of US$50,000 in foreign currency each year. In the Australian housing market, this won’t get you far.
So, Chinese investors wanting to buy property in hotspots like Sydney have found themselves unable to get their money out of China. They are now being advised not to sign purchase agreements on property unless their funds are already abroad. Which brings us to the next risk.

 

 

  1. Banks getting cold feet

 

Banks have noticed the oversupply of apartments, they have decided they are riskier investments than they previously appeared. They are now tightening their lending criteria, leading to sales being cancelled, or mortgages refused. This is not good news for house prices, since first time buyers entering the market are the driver for sales of houses further up the ladder.

 

Another reason for the banks’ caution is the likelihood of interest rate rises. They calculate how many borrowers are not able to make increasing mortgage payments. With wage stagnation still widespread, the sums are not going to look pretty.

 

  1. “Liar loans”

 

In February 2017, UBS Securities Australia reported that 28% of mortgages issued in 15/16 were based on untrue statements by the applicant – “liar loans”. These characterised the US housing bubble shortly before the great crash, so they are not a particularly reassuring sign. They indicate that people can’t afford to buy but are desperate to get on the property ladder by any means they can. By definition, these are poor quality loans.

 

However – people have been predicting a crash in the major city property markets for years. Those who delayed buying, or even worse, sold up to take advantage of a predicted crash, have lost a lot of money. Predicting property prices is not a game for the faint-hearted.

 

 

 Anne is the marketing manager at Open Agent. Open Agent allows customers to find and compare quality real estate agents in their area. Head to the website to find your best local agent

 

 

 

 

Phil

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