Following last week’s retrospective around some of the big external factors that were predicted to influence the residential market 2019, I continue that theme, with a little more rear vision reflection.
A starting point for speculation about 2019 focused on access to finance as possibly the single biggest factor set to impact the market. Suggesting that finance alone would push aside all other topics proved to be 100% accurate.
As we headed into 2019, buyers faced tighter hurdles to gain finance and that greatly reduced confidence in the market, and even if there was not an acknowledged credit crunch in name, to some degree a ‘credit strike’ by the major banks did eventuate.
‘Shadow’ Credit Crunch
Just 12-months earlier the biggest threat then hanging over markets was the prospect of increasing official interest rates. While we did see rate rises happen in New Zealand, Canada and the USA, the trend was short lived.
However, the prospect of significantly higher interest rates that could possibly dampen demand and prices, did not happen, in fact just the opposite as interest rates across 2019 fell and then kept falling to their lowest point ever, with the RBA rates falling below 1%.
But what did happen was that the arrival of the banking royal commission in February 2019, this quickly blew away public trust and buyer confidence started to collapse.
We then saw the big impact of tougher lending rules making it harder for all buyers and that included firstly investors, and then for first time buyers and for anyone looking to trade up or down.
As the property market slowed, and became more pronounced during the second half of 2019, the slower property market started to impact other areas of the economy with less demand for labour and horrible retail sales.
The Federal Government’s responds to the banking royal commission is still not clear and the lack of a firm policy settings continue to impact the financial markets, includes housing finance.
However, setting aside the commission, there’s room to surmise in some respect the phantom ‘credit crunch ‘may have helped avoid some more nasty shocks to the residential market.
This time last year I suggested that the dilemma facing the RBA and the government, was that by tightening lending standards too far, could run the risk of causing property prices to fall, magnifying the challenges facing the banks and the wider economy.
APRA’s restrictions were originally designed to curb high risk lending practices but we then saw ordinary home buyers experience delays and constraints that have directly impacted the market. The final score on that count has still to be tallied.
However, 12-months ago, the possible negative impact that restrictions on housing finance would exert on Australia’s residential property market started to look very obvious.
The combination of a very anxious market and tough finances did not hold a bright outlook for 2019. As we entered 2019, I suggested we were seeing the most complex set of market influences taking shape for more than a decade, and as such I settled on three sets of core topics; buyer motivation, big picture drivers and the physical market.
My focus on buyer motivation required no great intuition because I believe positive motivation drives the entire market, and if we have reluctant buyers, we have reduced demand.
At times during 2019 it felt like there was a flood of bad news and so the core motivations that have always driven the housing market was sure to suffer.
Looking forward to 2019 there were a handful of big picture factors set to have big impact on the residential property market – population growth, infrastructure and finance/tax reform and much of that narrative was focused into the 2019 Federal and NSW elections.
Infrastructure is also unequivocally aligned to population growth and when the two get out of synchronisation and become miss-aligned we have trouble on our hands. This was predicted to be a big election topic, as it was, alongside the almost endless debate focused on negative gearing and capital gains concessions further deflating buyer sentiment.
Reflecting on the Predictions for 2019
The expected external factors around the market in 2019 were predicted as being complex, with the luxury of hindsight here are some key predictions for 2019 updated to what actually happened:
- The housing market will take the full year to start a steady recovery however, oversupplied areas will suffer well beyond 2019 – that proved to be very true.
- Housing finance will re-shape and new players will emerge, but perhaps not at current super-low rates – rates have remained super-low, but the emergence of new players has been less obvious, perhaps best to say ‘tbc’.
- The housing choices of baby boomers will have a big impact on demand, product type and finances both directly and indirectly – that proved to be very true and will be a topic for 2020.
- Tax reform will remain disruptive and painfully slow – another regretful but true factor that is impacting the market and the wider economy.
- The demand for development sites will be driven by very competitive prices with most acquisitions ‘on ice’ until 2021 – this has proven to be true however there’s strong demand for development sites in key and popular locations.
- Housing affordability (for both buyers and renters) may well see government intervention not only via infrastructure but more directly – here we continue to have a mixed bag of policies that many suggest still remains half-hearted.
- Product diversity will be key in driving new developments and equally across land, housing and apartment projects – this is another reality of the market that we did see in 2019 and will continue to see in 2020 as supply starts to slow and demand become more local and fragmented.
From these few factors it’s possible to see that market forecasts 2019 would be a very complex, that view was accurate and well founded. However, there are other influences that were also significant, and these include:
- The negative impact that the election cycle and people’s poor view of politicians,
- The end of the Banking Royal Commission and its recommendations will impact every aspect of the financial system,
- Questions around earlier assumptions that the economic outlook was seen as mainly positive,
- How far (during 2019) would all home prices fall before they started to stabilise, is still a market factor,
- The First Home Buyer has over the last 6-months re-entered the market,
- There was a flight to quality 100%,
- Auction rates did for much of 2019 remain under pressure with private treat and off-market sales gaining in popularity,
- Some over-supplied markets continue to see rents come under pressure,
- Finance clearly remains a big issue with tougher bank valuations,
- If a range of non-bank finance options taking a greater market share, still looks some way off,
- 2019 was without a doubt the year of incentives,
- Interest rates did not remain on-hold they fell and continue to do so,
- Established homeowners will continue to pay-down their loans at a faster pace, and that’s very true.
Having reached the end of 2019 we have a short plotted re-count of how predictions for 2019 actually unfolded and in some areas continue to unfold, and over the next three weeks I will turn to the shape of trends that may well influence 2020.