RiskWise downgrades property risk as Labor loses the unlosable election: Doron Peleg

GUEST OBSERVATION 

RiskWise Property Research has significantly downgraded the risks to the property market, particularly in Sydney and Melbourne, following the shock results of the Federal election.

Labor’s loss has eliminated the number one risk to the property market and this, combined with the high likelihood of interest rate cuts by the RBA this year and the first home buyers’ scheme, will support the bottoming of the market by the end of the year and then a gradual recovery.  

Fears of a Labor win, and with it its proposed changes to negative gearing and capital gains tax, had a major impact on buyer sentiment, particularly investors, who saw residential properties as depreciating assets.  

RiskWise’s April Quarterly Risks & Opportunities Report identified two key factors that would have major impact on the market, particularly in Sydney and Melbourne, being the proposed taxation changes and interest rate cuts by the RBA.  

The number one risk of a Labor win has been eliminated.

What we saw happening was the ALP’s proposed changes have, rightfully, had a major, and tangible, impact on buyer confidence, which RiskWise identified in its report, Impact Analysis: Negative Gearing, CGT and Australia’s Residential Property Market.

Those, jointly with APRA’s credit restrictions and the banks’ scrutiny of loan applications as a result of the Royal Commission, lead to major price reductions, uncertainly and impacted buyer sentiment, according to the Westpac Consumer Report, which found house price expectations were extremely low.  

This meant even before an actual ALP win, the high possibility of these taxation changes had impacted the property market.

The Coalition win has eliminated the uncertainty and complexity in the market associated with the taxation changes, as well as significantly mitigated the property downturn, given it can be demonstrated the price reductions were, in part, due to fears of the proposed taxation changes. 

In addition, with the other key factor we identified in our Quarterly Risks & Opportunities Report that RBA are extremely likely to undertake two interest rate cuts by the end of the year, we should expect the market to bottom by the end of 2019 followed by gradual price increases.  

While the impact is likely to be lower than the impact of interest rate cuts in a higher interest rate environment, this will still have a very positive impact on the market, as rental returns in Sydney and Melbourne are, generally, very low. Therefore, interest rate cuts will materially reduce the ‘out-of-pocket’ costs for property investors. 

Interest rate cuts will increase dwelling demand, decrease price reductions in weaker markets, support the recovery in Sydney and Melbourne markets, and increase prices in areas that enjoy good demand and show resilience.  

In addition, on May 11, Prime Minister Scott Morrison announced a first home buyers’ scheme, which will allow those eligible to buy with only a 5% deposit rather than the standard 20% and help stimulate the market.

Overall, there would be major improvement in comparison to the situation in April, there were still risks associated with the property market.

Tighter lending standards, the findings of the Banking Royal Commission, restrictions on foreign investors, unit oversupply and large falls in dwelling commencements still all had a material impact on the market.  

Weak markets with continuous price reductions, weak economies and poor population growth will take longer to recover and will require a more conservative and risk aware investment strategy.

While there has been a reduction in dwelling commencement, sale of new units are still very low and, therefore, in some areas it could take a longer period of time for the stock to be absorbed into the market meaning the risk is still high in many areas.

DORON PELEG is the CEO of RiskWise Property Research

RiskWise will publish a Special Edition of the updated Risks & Opportunities report, in the light of the election results, in the next few days.