4 things borrowers can do with an increase in equity
Thanks to the property boom pushing up property prices Australia-wide, many property owners aren’t necessarily awar...
Buyers and sellers always apply a “self-confidence” factor when assessing markets, and it’s often based on recent good or bad announcements.
This is fine, of course. We all want to be ahead of the curve when it comes to trading – be it property, shares or football cards – but if enough of us hear news and react too quickly, it can cause anomalies in markets that were following a predictable pattern.
One of the best examples of this is the dead-cat bounce.
A dead-cat bounce is often seen in charts where a slowing market experienced an uptick in activity for a short time, before continuing its downward trajectory or going sideways.
The dead-cat bounce often happens after some sort of good news is announced, and a number of buyers conclude the market has hit bottom and is about to begin strengthening. Naturally, these buyers are wanting to purchase at the low point of the curve. If enough of them move at once, prices rise slightly, before normal metrics take over again.
As at the time of writing this post, we’ve had a swathe of good news arrive for a property market that has been generally softening. As a result, many restless potential buyers have decided to get active once more.
So, is this a dead-cat bounce or are we at the start of a new price cycle for Australian property?
The good news
Australian property stakeholders have had a rough couple of years in the wake of the banking royal commissions and oversupply issues. They’ve been riding things out and looking for opportunities in the tough times. Leading into the federal election, it looked very much like Labor would gain power and implement a series of policies that would make things even more difficult for property investors.
But when the good news came, it arrived in waves.
Firstly, the federal Coalition party was returned to power, and the threat of changes to negative gearing, capital gains and franking credits disappeared.
Then, the week following, APRA announced it would allow banks to relax rules around assessing serviceability as part of loan applications. This had been a huge impediment in the process of securing finance.
There was an almost audible sigh of relief across the financial and real estate landscape – and the reaction was instantaneous. The weekend following the election, I was talking with my network of agents and they all – across many locations – reported an immediate rise in buyer enquiry and auction attendance.
On top of this, an interest rate cut now, coupled with another likely before month’s end, has got borrowers salivating.
It all sounds like good news for a market in dire need of a boost, but is this sudden turnaround in sentiment simply a dead-cat bounce?
The bad news
In truth, there are underlying numbers that should give us pause.
In some locations, we continue to have a pipeline of supply due to hit the market – and there isn’t enough solid demand to absorb it. It’s the golden rule of economics that we just can’t escape.
Obviously, this isn’t common across all addresses – in some suburbs, pre-election, we started seeing prices hit their equilibrium point of near-zero price movement in an environment of tightening supply. That recipe for value growth certainly caught our eye. But this isn’t applicable across all markets.
Also, while an interest rate cut sounds great, the reason for the chop is the Australian economy is on a cautious footing. We’re awaiting the global fallout of superpowers posturing to see if our balance of trade continues to be healthy. Also, employment numbers are at a less-than-optimal level, while inflation is also tight.
In addition, the contraction in property prices across our large markets has placed come property owners into – or near enough to – a negative equity situation.
Finally, just because APRA slightly eased its strangulation of lending guidelines doesn’t automatically mean banks are going to stop forensically analysing loan applications. They still have debt-to-income ratios to deal with and they aren’t going to open the floodgates. It will be a slow and steady approach to loans in the near term.
The Labor Party loss was a shot of adrenaline to a market that was struggling to breathe. I wasn’t surprised to see an immediate jump in activity on the back of desperately needed good news.
But this sort of pulse-quickening boost is tough to sustain – and, in truth, it won’t be.
I believe we’re in for steady recovery with little chance of massive growth in the near term.
I still think some locations will see price contraction – although at a slower rate. I also believe some addresses have bottomed and we’ll see some growth emerge.
There will be fantastic opportunities for those who can get their finance in order early and be ready to jump.
The dead-cat bounce in this instance is a blip that will be short-lived, but our long-term outlook remains positive. If you’re in the market for numerous future cycles, don’t be scared, just be ready. Stick to the fundamentals and you’ll find we’re in for blue sky future on distant horizons.