By Charles Tarbey

The Australian real estate market is seeing a change occur. Some pundits are claiming that the market is slowing down at an abnormally fast rate but in my opinion this is not true. The market may be slowing but I don’t believe it’s happening at an alarming rate. Rather, I think this change was to be expected.

A softening of the market was predicted to start earlier in the year but when the Reserve Bank of Australia (RBA) reduced rates in May, strong demand continued. In fact demand has run so hot of late that it has disguised the effect of any regular season in the real estate market. An example of this has been the winter just gone which was much busier than normal, even to the point that auction clearance rates were higher during winter than in spring.

I believe the property market is still healthy overall and is in a strong position as a whole. Below are some factors which I believe have contributed to the current situation and will continue to impact on the market.

1. Increasing stock levels

It seems that some real estate agents may not have caught onto the fact that regular seasons in the property market have not existed for quite some time. These agents may have been advising vendors to hold stock back until spring. This could be one of the drivers of the influx of stock that many locations have experienced lately and may be contributing to what appears to be a softening market: as the supply level increases rapidly it begins to meet demand and provide more options for buyers.

2. Falling auction clearance rates

The increase in stock has led to higher numbers of properties available for auction. The natural outcome of this is for auction clearance rates to fall. Although there are still large numbers of properties selling at auction, clearance rates are lower because there are higher numbers of properties going to auction.

3. Interest rate hikes

In order to meet new capital requirements from the Australian Prudential Regulation Authority (APRA), banks have lifted interest rates to cover costs. While this has had a more significant effect on investors, some lenders have also increased rates for owner-occupiers. More lenders may follow suit and widespread increases in borrowing costs might be seen throughout the market. A small increase in interest rates can affect those with large loans by a substantial amount. Considering this, I believe borrowers may become more careful with the amount of debt they take on.

4. Bigger deposits

Tighter lending regulations have led to banks increasing their loan to value ratios (LVRs) for many borrowers and are now requiring larger deposits. Because deposits will have to be a higher proportion of the value of the property, investors may have to take more time to save. This could in turn slow growth in the market and may already be having this effect. There is evidence that some borrowers are using credit cards and personal loans to fund their deposits. These seem like risky options to me and I would advise people to think long and hard before using high-interest loans to fund deposits.

5. Price expectations

The pace of capital growth in many areas has led to increased price expectations from sellers. I believe that this may open the door to more private treaty sales occurring rather than auctions, and also reduce the ‘rush to buy’ environment that many buyers have become accustomed to of late. This may mean that the marketplace becomes more of a negotiator’s market with sellers being more willing to entertain the idea of a buyer’s offer. I believe this will add to a more stable marketplace.