The upside of a down property market

Here are four ways to find the silver lining in a stormy period for property.

There hasn't been much good news coming out of the property market of late. Housing finance is falling, house prices are declining and borrowers are finding it more difficult to get a home loan. The Hayne Royal Commission means an uncertain future for accessibility to finance and interest rates. Almost everywhere you look, there are heralds of property doom.

But there are bright spots in the midst of a dour housing outlook. While the property market may be suffering, the housing decline has created some unlikely winners.

Properties are becoming more affordable

As property prices decline, the barrier to entry for first home buyers is shrinking. The latest Adelaide Bank/REIA Housing Affordability Report found that the proportion of median income required to meet average home loan repayments fell 0.8% to 31.4% over the September quarter.

Along with this, vendors are discounting properties more. CoreLogic figures show that, across capital cities, vendors who sold their home below the initial listing price discounted their properties by 6.1% compared to 4.6% a year ago.

All this has added up to a surge in first home buyer interest. Finder traffic shows that our first home buyer pages saw 60% growth in traffic from the beginning of 2019. The newest lending figures from the Australian Bureau of Statistics support this trend. First home buyers now make up 27% of new home lending, compared to 20% in 2018.

Rents are falling

Australia is becoming a renter's market. Rental rates are easing as home values decline. Over the December 2018 quarter, CoreLogic figures show national rental rates fell 0.3%.

It's even better news for renters in capital cities. Combined capital city rents were down 0.4% over the quarter to remain unchanged over the entirety of 2018.

At the same time, vacancy rates are climbing. Vacancies in Sydney went from a very tight 1.8% in January 2018 to 2.8% in January 2019. Melbourne vacancies, meanwhile, grew from 1.4% to 1.8% over the same period.

As more properties come on the market and rents continue to slide, a declining property market has put renters in the driver's seat.

Rental yields are rising

The slide in rents isn't all bad news for investors either. At the same time that rents are declining, rental yields are actually growing. According to CoreLogic, the gross rental yield across the nation was recorded at 4.0% for the end of December 2018. Rental yields were up for the year across every capital city except Hobart and Darwin.

The outlook was even better in regional markets. Regional rental yields hit 5% by the end of 2018. While rental growth is slowing, home values are declining faster than rents. This means property investors pay a lower price for homes and get a better yield out of their investment. It's good news for renters and for landlords.

Borrowers are leveraging less

The RBA has long expressed concern over Australia's high levels of household debt. Australians lead the world in household debt, at nearly 200% of income, according to figures from Morgan Stanley. Australians also spend a greater share of their income servicing debt than citizens of any other country, with 16% of household income eaten up by debt.

About 30% of this is mortgage interest. Aussies are highly leveraged to their houses.

But a shakier market is seeing this trend reverse. CoreLogic found that the share of home loans with a loan-to-value ratio of 90% or more was at its lowest level in history. Only 6.5% of new home loans over the September 2018 quarter were for LVRs of 90% or above. Meanwhile, 79.1% of new loans over the quarter had an LVR of 80% or less.

"The trend towards fewer new mortgages being written with high LVRs reflects a more conservative approach to mortgage lending being taken by lenders," CoreLogic said.

Australians have a long way to go to dig themselves out of debt, but the trend towards lower-LVR loans is a step in the right direction.

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