The credit squeeze in Perth and Darwin

It's a given that the credit squeeze is hurting Sydney and Melbourne....but no one is talking how it will affect the already depressed Darwin and Perth markets.

Anyone here got any insight? Theories?

 

The credit ‘squeeze’ has reduced maximum borrowing power. This shouldn’t have too much of an impact on these markets, as most borrowers wouldn’t need to maximise borrowing capacity. More recently credit is taking longer to obtain.

The drag on these markets is more fundamental - slower economies, lower employment, oversupply, etc. Credit Squeeze hasn’t really changed for any of these factors.

I don’t think lending criteria so much hurts these lower median markets. When the price of credit changes, that’s likely to have a bigger impact on demand than credit changes.

 

Credit squeeze will hurt all markets. Even for perth and darwin, they will probably get further depressed, as the demand from interstate buyers as well as those local investors with multiple property portfolios will shrink even further.

 

The last 2 people I spoke to were upsizers and both paid over thd median house price for the suburbs they bought into. The are not high income earners so buying these properties from scratch would have been out of the question for them even pre APRA. However, because they are selling then buying they can buy houses they otherwise could not afford and still end up with modest loans. Stock on these areas is already tightening and prices are warming up. I don't know if credit whatever is going to impact this much.

 

I was thinking along those lines too untill @Rolf Latham and @Jess Peletier mentioned the new hoops buyers need to go through in order to prove their expenses (4 months+ of meticulous saving...)

Now I'm not so sure.

The other thing that's playing out in my mind is that Darwin is a city of renters (50 percent). I suspect most bought-in-the-boom landlords have been able to sit out the downturn as IO credit costs have been cheap and the yield high. My educated guess is (as @MTR suggests ) the switch to PI is really going to hurt a lot of people up here. The usual suspects of CBD appartments and new builds in the burbs come to mind.

Then again with houses from 3-600k and units front 2-400k maybe the bar is low enough to get around these issues?

 

Investors have been leveraging up quite a bit pre apra. These guys would probably have bought multiple units or properties in darwin to capitalise on the boom previously. So a low price for single unit may be a low bar, but if u own a few low bars u will still end up with a high bar when ur multiple IO goes to PI

 

It's unfortunate but the fact is it will affect those markets too. If mining picks up, that will reduce the impact to some extent.

Also, the process of extending interest only period is not that simple either anymore and remains on the watch list of many investors!..

 

I reckon there will be less of an impact in these markets. The banks will also look to diversify their holdings out of Sydney and Melbourne as these markets are at the peak.

For example..Perth's median is well under Melbourne...and 10-30k under Brisbane and Adelaide.

Last cycle it was the second most capital city (top 5).

 

It's got nothing to do with banks stopping (exception postcodes are in all states) ..

??

 

Post code restrictions exist..but from a risk management perspective they would be diversifying from Melbourne and Sydney.

The other factor is wages in Perth and Darwin are not hugely different to Sydney. In Perth...you can still but a place for under $450k within 30 klms of Perth near a station. For example Butler...is about 45klms ....some houses for 300k..and it has a train which would take 40 min to the CBD.

Disclosure ...I own in Butler...built a 4x2x2 for under 360k ......5 years...ago..still worth in the low 4s.

 

I don't think investor cares about banks risk (they of-course want to balance their books)..

Point was credit squeeze is going to hurt these markets too (which holds true)..

 

You forget the power of the FHB....they are now a lot more brazen...banks love them..some are being courted with rates as low as 3.69%.....if they have a 15-20% deposits they can get these rates...it will be cheaper than renting.

 

Point was credit squeeze is going to hurt these markets too (which holds true)..

 

Interestingly the number of properties for sale in Perth has started to blow out again in the last 5 weeks and according to todays west is sitting at 15,093 and 5 weeks ago it was sitting at 13,858.
Go back to early 2014 the numbers were around 9000 and for the year prior just slightly above the 2014 levels.
For those interested for the W/E 08/2/2014 for Perth (from the "West Australian Real Estate section"
Properties listed for sale were 8638 (12 months prior was 9266)
Properties listed for rent was 4972 (12 months prior was 2983)
The Median rent was $460 and the vacancy rate was 3.2% (about $350 reported in todays West and a vacancy rate at 3.9%)
According to the REIWA website today "days on market" has blown out to 74 days and is the highest, since the graph on their website only goes back to 2014.
Perth Median House Prices, Sales Volume and Rental Market Data - REIWA
All at the same time as rental vacancy rates are slowly coming down.
So whats driving the rental vacancy rate down , more investors buying in or established investors getting out and the "pool" getting smaller.
After a little help from Dutton ,Cormann, a few shock jocks and Murdoch ,then reaffirmed by the Wentworth by-election , most are expecting a new incoming government next year, and some possible big changes for property investors.
Some may even be selling that saw big profits prior to the boom and are just reading the writing on the wall.
Although in a report last week something like 16% of Perth home loans have negative equity and 10 year growth in many suburbs was hovering around 0-2% about 5 months ago.

 

Be it

• D2ICap,
• IO2PI rollover (It just my hunch as very many don't agree on this, but i think we will see increasing forced sale due to this as we move ahead)
• micro level credit scrutiny (I think extent of understating ones expense and its impact is massively underrated)
• reduction in borrowing power,
• bank valuations leaning towards being conservative, l
• Limts and restrictions in extracting existing equity.
• Access supply pressure
• OTP settlement pressure
  
  Most of the above headwinds for next 2/3 applicable to Frothy segments are also applicable to less frothy segments to some extent, So it will be impacted just not by the same extent and may be with lag.

 

When was the first round of APRA policies? Q1 2017? That was the beginning of the tightening of policy and the end for many to expand their property portfolio.
It helped stopped Sydney prices running away faster than they did and put a further dampener on the Perth market which was already struggling. With local investors not being able to buy more properties in their home town there was even less buyers to soak up the over supply. With developers not able to access as much finance there were less builds etc.
It started having an impact then and it will continue until the supply dries up. Without easy access to credit developers and investors stopped building 18mths-2yrs ago. Partly because there was no demand, partly because their risk profile didn't suit, partly because it was no longer feasible but also because they couldn't finance the projects. New construction starts are currently down about 50% from 2014 and will head towards an undersupply of dwellings even if there isn't much interstate migration.

My thoughts are many and varied
- I think interstate (NSW/VIC) investors will look to cheaper states as their serviceability means they can't borrow as much. They have been looking at Perth, Adelaide, Brisbane for quite awhile but will continue to do so.
- Darwin is not a market I follow well but I suspect it is 2 years behind Perth to eat up it's over supply
- people will use this "opportunity" to upgrade in their own town. They may rent out their old house but if serviceability is an issue then they sell their current PPOR and upgrade to a new one. The competition I am seeing in the $700-850k areas close to the city (5-10k ring) is quite intense. Those listings do not last long.

 

The current credit squeeze is/will not have a major impact on middle and upper end PPOR markets in Perth due to prices being so relatively affordable and within the new credit limits.

It has however taken many investors out of the prospective buyer pool entirely, as your average household can no longer get finance for an IP if they already have a mortgage. I think this is really hurting the investor heavy lower end of the market (units, outer suburbs, etc). A big contributor to the heavy falls the bottom end of the Perth market continues to experience.

And with rents so affordable and house prices still sliding, there is minimal first home buyer activity.

Nowadays, when a Perth investor or upgrader sells some entry level stock, their market, which is mainly investors or first home buyers, is nowhere to be seen.

I assume similar story for Darwin, but I don't know that market very well.

 

I'm seeing a stagnation in Perth prices which were already quite battered, but not really a further drop at this stage. Rents appears to be ok and my property manager there has done a great job of managing my property during a difficult time for the Perth market overall.

Until we get some let up on the finance side, which won't be for a while, I don't think anything is really going anywhere!

 

I was browsing thru inner Perth suburbs less then 10 km from city,
It looks like some of the suburbs in this region seems to have given back the gains they experienced from 2011 till 2015.
some are already 15+% down from its peak.

for eg.

• mt lawley peaked at 1.13mn in 2014 now median is at 918k (2012 price)
• balcatta peaked at 550k in late 2013 now median is at 496k (2011 prices)
• cloverdole peaked at 550k in 2014 now at 430k 2011 price
• Bassendean peaked at 579k in 2015 now at 498k 2012 price
  
• Bayswater peaked at 650k in 2014 now at 565k early 2013 price.
  
• belmont peaked at 585k in 2014 now at 460k late 2011 price

Is something else in play to distort median?
Am I seeing this right? as my browsing was not extensive.

@Perthguy @Westminster @Rex @Andrew Hancock other Perth gurus?

Looks like Perth house prices in inner suburbs has been following credit env changes very closely.