The interest rate cut was a bad outcome for the property market: John Edwards

GUEST OBSERVATION

The Reserve Bank’s recent decision to introduce an interest rate reduction is a strong indication that there are changes brewing for Australia’s property market.

To fully understand how this rate cut will affect our housing markets, I think it’s essential to firstly understand how they have performed over the last 12 months. My research shows that there has definitely been some ‘winners and losers’ in the state comparisons.

The clear winner of the housing market battle is Sydney, which has documented a 16.78% annual growth rate from the period of December 2013 to December 2014. Performing equally as well in the unit market with an annual growth of 12.90%. By all accounts, what we have just witnessed is one of the largest boom periods in Sydney’s housing market history.

Taking this into consideration - along with its strong annual economic growth throughout 2014 that saw its state final demand increase by 3.5% - it is clear to see why people who are looking to enter the housing market would choose New South Wales. This compares to Western Australia, for example, whose economy is arguable in recession with its state final demand falling in the last three reported quarters.

This aside, when we take a deeper look at the Sydney market we uncover some unfavourable facts, including:

1. The ABS’ latest reported commencements in new housing currently sits at 4,082 dwellings above the median commencement rate of the last five years.
   
   
2. New housing approvals, as last reported by the ABS, are running at 2,591 dwellings above the five year median.
   
   
3. Population growth, as last reported by the ABS, is slowing and currently running at 1,728 people below the five year median.
   
   
4. Residex estimates that there are currently some 7,000 dwellings surplus to need.
   
   
5. Unemployment is increasing, and is likely to increase a little more than was anticipated, given the lower crude oil prices and a consequential likely reduction in employment in the LNG development and exploration area.

These observations suggest that the Sydney market is heading into considerably oversupplied territory, which could lead to some significant corrections. In fact, analysis right across Australia indicates that there is a national stock overhang, and in many states it is significant.

So what does this all mean in a situation where interest rates have decreased?

We can anticipate that the interest rate decrease is likely to stimulate the markets, so house prices will probably move forward from here, with the lending control of the major banks hopefully keeping the markets from overheating.

But is this a good outcome for the property market? My simple answer is… no!

While it may be good in the short-term for existing house owners, throughout my three decades of monitoring house price growth, I can confirm that each period of growth always ends with a number of people who bought close to the top of the market getting burned due to their excessive leverage. 

I issue a warning to all, and that is that we have passed the top of a normal growth period, and we are now about to have the market further stimulated. This will take the growth into unchartered waters where affordability will be worse than we have previously seen.

If you are an investor wanting to get into the market, take care and make sure you don’t pay a premium for any purchase you make, especially if you are buying new units.

John Edwards is a consulting analyst for Onthehouse.com.au.