Sustainable housing market recovery reducing lending risk
It’s official: the housing market is in a state of recovery The September Quarter saw the median dwelling prices lift 0.9% across Australia, including a healthy 3.5% in Sydney and 3.4% Melbourne, according to CoreLogic data.
Of course, there will always be questions about how long the current rising market can last given today’s sedate economic environment. Some commentators have dismissed recent growth as a “dead cat bounce”. Others worry that the speed of the recovery could lead to another housing bubble.
However, we believe rising prices in both Sydney and Melbourne are sustainable and there is further growth in both markets still ahead.
Official interest rates were cut once again this month, the big four banks have relaxed their lending criteria without resorting to the worst lending practices of the pre-Royal Commission era, and unemployment in New South Wales (4.3%) and Victoria (4.9%) remains well below the national average. Most importantly, supply remains constrained (October’s ABS figures show a drop in dwelling approvals of -25.6% between August 2018 and August 2019) and prices still have a long way to go to return to near their 2017 peaks.
This is all good news from the point of view of CRE lending.
One major concern in lending to developers is completion risk or the scenario whereby a buyer cannot settle on a property – usually because they can’t obtain finance. Falling property prices are one of the greatest contributors to this risk as they affect a borrower’s loan-to-value (LVR) ratio and therefore their ability to get a loan. Falling prices also often encourage buyers to hold off, meaning developers cannot sell or sometimes even proceed with their developments. In a rising market, such as this one, the opposite holds true.
In short, the current market data market should be welcome news to investors and, barring some unforeseen economic shock, we expect these conditions to continue over the short-to-medium term.