Tips on spotting tailwinds in a property correction

Speaking to The Adviser, Mr Khoury suggested that a sharp property correction has turned buyer FOMO (fear of missing out) into FOOP (fear of overpaying).

He flagged that the recent Australian Financial Review Property Summit signalled continued optimism in the market through this corrective cycle. And the reason for this, he said, was fundamental economics.

“Supply and demand forces are simply rebalancing — and both provide tailwinds, if you know where to look,” Mr Khoury stated.

“We don’t buy into the calamitous predictions of 30 per cent price drops. Yes, in certain over-priced or over-supplied pockets that might be the case, but not across the board.

“When we look at each of the last three or four growth cycles, the market increased around 28 per cent. And when the downturn came, it shaved around 5 per cent off values.”

While he said that history may not always repeat itself, it should give developers and investors an incentive to act quickly when opportunities arise.

He added that as the banks now expect rates to continue growing through to around mid-2023 (and when coupled with an expected surge in refinance activity in early 2023 (as super-low fixed rates roll off), now could be a good time for borrowers to secure longer-term finance.

Mr Khoury flagged that in the current market, borrowers need more finance options, particularly for self-managed super funds ([SMSFs] which can only borrow through a bare trust), and business owners, who may find it harder to demonstrate serviceability in line with major bank requirements.

He revealed that Assetline had this week launched products (30-year Horizon Mortgages) to specifically cater for these segments: “Our new 30-year Horizon Mortgages gives more borrowers more options for longer-term lending, for commercial and residential assets.”

According to the managing director, lending, the current supply and demand interplay in Australian property could help identify future property opportunities.

Structural housing undersupply

Mr Khoury set out that, regardless of interest rates, Australians will always need somewhere to live, which constantly feeds demand.

Moreover, he suggested that changing banking regulations have also “made it harder for many mid-tier developers to get capital over the past few years”. 

“Along with onerous planning requirements and construction delays, these bottlenecks mean the long-term undersupply of housing — particularly in Sydney and Melbourne — has not improved,” he told The Adviser, suggesting that this could be an influencing factor as to why the more expensive end of the market that has been hit hardest by price drops.

“Lower-cost dwelling values are still rising — because this is where supply is still catching up”, noting that in 2020–21, fewer than 30,000 new homes were completed in Sydney — a 29 per cent drop on 2017–19 averages (which also missed the Greater Sydney Commission’s target of 36,000 a year.)

Moreover, industry analysis predicts there will be a nationwide shortfall of over 163,000 dwellings by 2032, Assetline’s MD of lending said.

Demand bounce back

Meanwhile, the government had “turned the demand tap back on”, with immigration caps lifting to almost 200,000 per year, Mr Khoury flagged, which would also feed into demand, particularly in Sydney or Melbourne (where skilled migrants generally tend to move to first, according to ABS data.

Mr Khoury highlighted that Australian Housing and Urban Research Institute modelling recently forecast that the Australian population would increase by up to 24.6 million people by 2066 — and around 55 per cent would want to live in Australia’s two largest cities.

“There’s also a growing downsizer market, and they are looking to move into quality residences,” he continued, citing downsizer reports that around 1.7 million of the 8 million or so Australians aged 50 and over plan to downsize in the next five years.

“They are looking for new buildings with low maintenance lifestyle — an ideal scenario for boutique developers and long-term property investors.

“There’s a flight to quality in the inner ring of Sydney and Melbourne, and we’re seeing assets being repositioned in cool and funky neighbourhoods.”

While demand may be dampened by rising rates, Mr Khoury said that wage growth in a tight labour market would go a long way to mitigating those pressures. 

In conclusion, Mr Khoury said that the lender was rolling out its new Horizon Mortgages line for SMEs and SMSFs to sit alongside its current offering and help more borrowers access the market.

“We work hard to understand the fundamentals behind the deal — is it an area of low supply and high demand? Is it targeting the right tenant? We can add value by structuring the loan to provide the right level of capital. For example, if you’re at the top of your LVR, we can add some short-term lending to a Horizon Mortgage to see you through that period,” he said.

“We know most people can ride out this short crunch — they have a fair bit of equity.”

Mr Khoury concluded by saying that Australian property had “certainly proven its enduring ability to keep growing over the longer-term”, adding: “There will be solid buys in today’s market — and with strong supply and demand tailwinds, they may not last long.”

[Related: New non-bank lender launches]