Expect a skittish start to property in 2019 in Sydney

The spring auction selling season is over, with just three more Saturdays until the summer holiday hibernation.

There were three marked trends observed during the past three months with the property market going down like a wrought iron kite.

Firstly there was a drop in auction offerings as potential vendors decided it was not worth their while to list.

Secondly the Sydney clearance rate, which bounced around, weakened overall from 50 percent plus results to somewhere in the 40s.

Then was the inevitable accompanying price decline.

There were no real surprises in this emerging auction landscape.

The bidding over-exuberance that we all saw for an extended period in the sellers' market between 2012 and 2017 has almost completely disappeared, but there are still some red hot results.

The pendulum has swung to the other extreme of utmost buyer caution. 

We now have a buyer's market, except they can't all buy what they previously thought they could afford because the bank's knee-jerk reaction to the exposure of some reckless lending exposed by the banking royal commission.

I wrote recently that a couple with one child and a dual income of $120,000 could borrow $800,000 during the boom.

Fast forward and the same couple, now with a a little wage growth to a $129,000 combined salary and another child, can only borrow $680,000 because of stricter bank lending.

Their capacity to buy has gone backwards.

We are now actually four years into the attempts by the Australian Prudential Regulation Authority, to curb over zealous lending, which was turbo-charging price growth.

The banking regulator's initial measure was imposing a 10 per cent speed limit on the growth in lending to investors. The cap was scrapped in April with APRA saying it had served its purpose. The reaction had already come from investors who have stopped buying in droves given the expectations of lower prices makes housing less attractive.

APRA's next measure that reduced the occurrence of interest only (IO) loans is proving to be the real sleeper in why prices are down, and likely to stay down for some time.

The regulator wisely decided IO loans needed to be constrained to preserve overall financial stability.

Interest-only, along with the tax deduction of interest payments via negative gearing, certainly made financial sense for many investors.

But the banks were reckless in encouraging ordinary home buyers to ditch the conventional interest and principal loan.

There was a lot of upsizing to bigger pricier family homes that only happened after getting an interest only loan.

For a $750,000 home loan the monthly repayment of $4,174 fell to $3,325 if only the interest was being repaid for the first few years.

Now IO buyers, who amplified the housing price cycle, helping push prices up, have mostly gone.

And for the next few years exisiting interest only borrowers will likely need to get out before the loan automatically switches back to the higher rate, so there is an increased risk of continued price deflation.

Throw in the uncertainty over negative gearing policy and the property market is understandably going to be skittish as 2019 kicks off.

There's likely to be a further compounding of bank caution flowing from the February 1 final report of the banking royal commission. Then we have the NSW state election followed by the disruptive Federal poll.

We shall see a return to normal market conditions sometime.

This article was first published in the Saturday Telegraph