Housing On High Alert

In view of the warning signs, now is the time for investors to check their exposure to property

- Greg Hoffman

I recently had lunch with a mortgage broker of some 10 years’ standing. Lately she’s been contemplating giving the game away. “The banks just aren’t approving anything,” she lamented. If you’ve applied for a loan lately, or spoken to someone who has, you’ll probably know what she means. The banks have been tightening their credit standards and this has limited the amount many buyers can borrow and, therefore, pay for properties.

Sellers still accustomed to more buoyant times have been reluctant to reduce their offering prices to meet restricted borrowers. The result has been a sharp decline in the volume of properties changing hands. And, in some key markets like Sydney, prices have been falling.

The situation could go a number of ways from here, so I’d like to handicap those scenarios, as I see them, and touch on various stocks that are likely to be affected.

Check the odds

First, let’s consider the most optimistic scenario: that property prices and volumes roar back. Perhaps credit is loosened up in some way and the Reserve Bank lowers interest rates further. Then the next five years might look like the past five, in which case the current conditions represent just another “dip” in a long bull market.

In my view, it’s hard to see the banks turning the credit tap back on full stream after some pressure from the regulator and recent revelations at the royal commission. This is the least likely scenario in my mind and I put the chances of it at 8% or less.

The next most optimistic scenario would be a more modest but still hefty pick-up in volumes and prices, perhaps with capital gains of 3%-5% a year. This would represent a nice outcome for property investors and related businesses. I put the chances of this at around 20%.