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After years of a burgeoning property market, it is easy to become deflated by falling house prices and reduced demand, a shift that has largely been lead by the banks introducing tighter lending criteria, coupled with cautious purchasers who suspect prices will fall further.

Michael Kark - Chief Operating Officer and Co-Founder

Some cite the bubble has finally burst and for others, it’s simply the market balancing itself out but if we dig below the surface and look at the fundamentals of the market, they’re stronger than they’ve ever been.

Yes Melbourne and Sydney apartment prices have fallen over the past 12 months, but this is the result of a reduction in the availability of bank funding for purchasers. On top of this, the Royal Commission into banking has also increased the internal controls and regulations around property lending in an effort to ‘cool’ the market – with many citing owning property in Melbourne and Sydney as a pipe dream.

But the flow on effect of reduced demand is developers are now struggling to procure sufficient presales to commence construction. Purchasers are wary of committing to off-the-plan sales due to the uncertainty surrounding the availability of bank finance come settlement, coupled with the concern that prices may fall even further.

To add to this, the availability of construction bank funding has been reduced. This is due to the Australian Prudential Regulation Authority (APRA) placing restrictions on construction lending, as well as banks facing steeper internal costs for construction lending due to the higher associated risk.

In an environment in which banks are finding it more difficult to raise capital due to the drop in their respective share prices, construction lending is increasingly becoming less attractive. However, on the contrary, investors are favouring the predictability and relatively high comparable returns of investing into mortgage funds. This move has resulted in the rise of non-bank lending through mortgage funds which are filling the void left by the major banks to fund construction.

Why it’s not doom and gloom

With a market that is constantly the subject of negative chatter across a number of industries including real estate, construction and the media, it is easy to lose confidence in the immediate future of Australia’s construction and property industries respectively.

Nevertheless, delving deeper into the facts and figures uncovers that the fundamentals of the property market are, in fact, still strong. This outlook brings hope to developers struggling to convince the banks, non-bank lenders and purchasers to stick with them as they weather the current economic storm.

If we look at the basic fundamentals that make up the property market, we can be thankful that Victoria’s has so far remained relatively strong, particularly in comparison to its northern counterparts in New South Wales.

With the national cash rate remaining at a record low 1.5 per cent per annum, there are no indications that this will increase in the near future. Couple this with a low unemployment rate in Victoria of just 4.8 per cent, and an employment growth rate of 2.3 per cent per annum, it puts the state in good economical stead.

It also works in Victoria’s favour that there is no evidence of housing oversupply with rent for apartments increasing to 2.5 per cent for apartments over the year ending September 2018, while the weekly median price sat at $410.

For developers losing hope it is also important to note that the total rental vacancy rates remain low indicating that there is still a robust demand for rental properties throughout Melbourne.

As of October 2018, these vacancy rates sat at 2.0 per cent for Greater Melbourne (a decline on the previous year), recording 2.1 per cent in Melbourne’s inner suburbs (up to 10km from the CBD), 2.6 per cent in the middle suburbs (10-25km) and 1.5 per cent in the outer suburbs (25km+).

What does this mean for the next phase of the property cycle?

Development activity will remain fairly subdued over the next 12-18 months as developers struggle to procure presales to begin construction, in addition to bank debt. However, all is not lost for developers with non-bank lenders who specialise in the middle property market able to assist developers commence projects.

Moreso, the increasing population influx into Melbourne, in particular, will result in large pent-up demand for housing.

With construction one of Australia’s largest employers, any slowdown in the industry is going to adversely affect the economy as a whole.

However, the demand for housing that we expect to develop over the next 12-18 months is likely to trigger the beginning of the next property cycle, of prolonged interest rates, strong employment, wage and population growth.

Naturally it is easy to be scared off by the volatility of the property market, in Victoria particularly. However with a number of strong fundamentals swaying in favour of the construction industry and the local economy as a whole, we cannot be deterred by our current situation, but rather, hopeful that a new cycle is imminent.

This story was also published on Real Estate Conversation
See article here.