Improving sentiment, ongoing fiscal and monetary stimulus, and bank lending constraints are providing the backdrop for the continued flow of attractive senior lending opportunities.
Housing prices experienced a second monthly decline, falling 0.7% in June after easing 0.4% in May. These falls have been concentrated in Melbourne (-1.1%), Perth (-1.1%), and Sydney (-0.8%), and have been more pronounced at the more expensive end of the market. Overall, the decline in house prices has been fairly modest and CoreLogic notes the improvement in a number of other leading indicators such as a 29.5% increase in sales activity (following a 21.5% bounce in May), new listing up 42% from May lows, and the capital city auction clearance rate rising to 59.9%. While encouraging, conditions could deteriorate if we see a return to coronavirus restrictions or the premature removal of fiscal and monetary stimulus and mortgage assistance measures.
Divergence in property demand has intensified recently, with inconsistent performance between apartment and land sales. Apartment presales remain slow and we are also seeing valuation declines of 10+% in the current pipeline of residual stock facility opportunities. Combined with prudent LVRs, these loans provide attractive returns and low leverage compared to the original off-the-plan list price. In contrast, conditions in the land market are improving. Sales and enquiry levels have rebounded across the markets as restrictions ease and buyers look to take advantage of the federal government’s HomeBuilder scheme.
Going forward, fiscal and monetary policy are likely to remain accommodative, and state and federal government initiatives will support the construction sector and employment more generally. With increasing risk aversion and tighter lending criteria, the strategy of lending at conservative LVRs against quality assets is providing attractive risk-adjusted returns for investors.
