What drives a property price boom? The fundamental factors home buyers should look for

The RBA Governor says interest rates will eventually go up and home owners need to build buffers.

The RBA Governor says interest rates will eventually go up and home owners need to build buffers. Photo: AAP

The comedown from the historic housing price booms in Australia’s two major cities continues, with figures released this week showing 2018 was the national housing market’s worst year in a decade.

So what drove the price explosions, and which locations are set to boom next?

Property expert Veronica Morgan attributes the booms in Sydney and Melbourne to investor enthusiasm coupled with lax lending by banks, and the contagious ‘fear of missing out’.

“The reality is it was driven by investors, easy access to money, and confidence,” the Good Deeds Property Buyers principal told The New Daily.

“When prices start rising people think, ‘We better get on this ride’, and then we all have this inability to look at the situation objectively.

“Now we’ve got this lack of confidence, and it’s the flip side of the same coin.”

On January 1, banking regulator the Australian Prudential Regulation Authority (APRA) lifted its cap on interest-only loans for investors, with APRA chairman Wayne Byres deeming the speed limit, introduced in March 2017, a success.

APRA’s latest banking figures show that demand for investor loans plateaued in 2018, with the major banks’ combined investor loan books totalling $471.4 billion as at November 30, 2018, little more than the $471.1 billion a year earlier.

Since the market peaked in July 2017, Sydney home values have slid by 11.1 per cent, while Melbourne values are down 7.2 per cent since peaking in November 2017, according to the CoreLogic figures released on Wednesday.

The current downturn in Sydney is now “the deepest of any of its downturns since 1980”, CoreLogic analyst Cameron Kusher said.

“Melbourne’s housing downturn isn’t yet as deep as during the GFC but falls are much more rapid than they have been in most other downturns,” he said.

News of the housing market’s horror year prompted Treasurer Josh Frydenberg to weigh in and implore the banks to dump tougher lending practices and “open their loan books” to would-be home buyers.

“Targeted and short-term ­interventions from APRA in the housing market has, according to the RBA, ‘increased the resilience of the economy to future shocks’,” Mr Frydenberg said.

“However, now these interventions have been wound back, it is vitally important that the banks continue to provide affordable and timely access to credit. Keeping open their loan books to borrowers will help maintain the strength of the Australian economy.”

Location still No.1

As property prices fluctuate, carefully selecting a home or investment property with sound fundamentals is more crucial than ever, Ms Morgan said.

“Location is No.1. You’ve got to select a great location,” she said.

Ms Morgan prefers investment properties within a 10-kilometre radius of the CBD in Sydney and Melbourne.

“As the population grows, the proportion of people that can live close to the CBD shrinks as a proportion of the total. That creates scarcity,” she said.

“The desire to live near amenities is always on the increase. When the market booms, buyers priced out of those areas will look elsewhere. But the minute prices fall, buyers will say, ‘Great, I can buy where I want to live again’.”

The same principle applies in smaller cities.

“[But] the reality is they don’t have those economic fundamentals to drive long-term growth at the same rate,” Ms Morgan said.

‘Obvious signs of potential booms’

Simon Pressley, head of research at Brisbane-based buyer’s agents Propertyology, is scathing about the role APRA and the banks have played in cooling the Sydney and Melbourne markets, describing the credit squeeze as “harmful to the national economy”.

“Overzealous” credit conditions had the effect of a 5 to 7 per cent drag on property prices broadly during 2018, Mr Pressley said.

With prices in the major cities expected to continue to fall through 2019, investors hungry for capital growth are turning their attention to regional areas.

“The best opportunities for the foreseeable future are in locations outside of capital cities where housing is more affordable, annual cash flows are stronger, housing supply is tight, and economic conditions are good,” Mr Pressley said.

“As we’ve already seen during the last couple of years, double-digit price growth will occur again in 2019 and beyond in many regional locations.”

The potential for a property price boom is based on a confluence of fundamental market and economic factors. These include:

  • Jobs growth;
  • Early signs of increasing wage;
  • Tight housing supply; and
  • Falling rental vacancy rates.

There are obvious signs of potential booms in myriad locations for anyone “prepared to look past Sydney and Melbourne”, Mr Pressley said.

“On a national level, our economy is looking better than it has for years with unemployment at 5.1 per cent, the federal budget set to be in surplus for the first time in a decade, the economy growing, and our population set to increase by more than 350,000 again this year,” he said.

“Interest rates aren’t expected to rise until 2020 at the earliest, plus the international student, tourism and mining sectors are all strengthening and creating even more jobs.

“There is a long list of big-picture, positive stuff, which collectively paints a very bright future.”

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