Summer News Season – Borrowing & Under-quoting

The residential property market can often be a political football, as various interested groups call for the government or the regulators to “do something” about the market.


In the second half of 2017, we’re seeing the effects of governments and regulators “doing something” about the residential property market.


Whether those actions were wise is beside the point. They were taken, and now the market is seeing the effects.


The first action was in March, when the Australian Prudential Regulation Authority (APRA) clamped down on interest-only loans, in a bid to cool what it perceived to be a hot property market. The regulator wrote to all lenders, telling them to restrict interest-only loans to 30% of new residential mortgage loans, and placing strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent


The banks reacted to this by making interest-only and investor loans more expensive in order to comply with the new limits; they also brought in tougher rules on deposits.


Some even updated their credit policies to require much more detailed answers about a borrowers’ other debts, income, and foreseeable changes to their finances during loan terms.


Anecdotally, investors were coming out of fixed-term mortgages at 4%–5%, and refinancing into P&I (principal and interest) loans at 5%–6% – in effect, being hit with a 20% rate rise, without necessarily changing LVR.


The second change from the government/regulator sphere was in Victoria, where we saw, in May, changes to the Estate Agents Act 1980 take effect, to strengthen laws against “underquoting” of residential property. Underquoting can occur when a property is advertised at a price that is less than the estimated selling price, the seller’s asking price, or at a price already rejected by the seller. It is a technique designed to attract buyers, which is expected to drive up the sale price.


With media reports of “underquoted” prices jumping much higher the moment an auction starts – leaving potential buyers immediately blown out of their price range expectations – the frustration and anger on the part of potential buyers was palpable. Again, there were calls for the government to “do something about it.” So the Victorian government set out to crack down on the practice.


Victoria’s new laws require real estate agents to provide a statement of information for every property listed for sale. This must include an indicative estimated selling price based on three “comparable” sales in the area. Agents must provide an accurate quoted price range for every property they sell or face fines of up to $30,000.


The early indications are that the legislation has partially worked, narrowing the margin between advertised prices and final selling prices significantly, but the simple fact is that there is a fatal flaw to the legislation – which is that the reserve price is up to the vendor. Owners can set the reserve as late as auction day, and it is within their rights to refuse any offer at or above the reserve price at any time before contracts are signed.


Moreover, the reserve can legally be set above the indicative selling price. And seeing that there is no obligation for the owners to inform the agent of the reserve price until the day of the auction, there is still plenty of scope for potential buyers to be disappointed.


And it appears that there has been something of a “buyer’s strike” in Victoria, with the Melbourne clearance rate sliding significantly this year. According to CoreLogic, the clearance rate in Melbourne in the week to December 3, at 65.4%, was the lowest since July 2016.


We believe this is directly linked to the regulator and government actions. In fact, you could make the case that Victoria is showing the effect of a third such action, the vacant residential property tax (VRPT), which, from 1 January 2018, will be levied on dwellings that are vacant for more than a total of six months in a calendar year.


In Sydney, the regulatory crackdown is also affecting clearance rates, which have fallen steadily through 2017 to their lowest levels since 2012. According to CoreLogic, the Sydney clearance rate was 56.2% in the week to December 3, up from 54.8% in the previous week.


CoreLogic says the national weighted average capital-city clearance rate in the week to December 3 was 60.3%, the lowest since the summer of 2015/2016.


The result of the lessening of activity is that capital-city property markets continue to slow, with prices and auction activity flat at best – or falling, as in the case of the biggest market of Sydney.

This is great for a buyer like us, because we have a better idea of the value of the properties we want to buy than the typical buyer. But overall, it just goes to show that changes to one or two components of the residential property market – as these regulatory/government actions have brought – can be enough to tamper with the market’s confidence. With the Spring season dampened, and Christmas upon us, the market won’t open up again until February.