Australia’s Royal Commission into Banking has been long overdue most people would agree. The nature of financial lending has evolved dramatically since its deregulation in the mid 1980’s.
The competition and growth of second and third tier finance providers, together with the demands from their shareholders, forced banks into areas and diversification that were, to say at the least, questionable. The Royal Commission has now uncovered much, that many of us already knew, and that few would have ever dared criticise.
The Banks have been the Australian economy’s greatest strength and now potentially its greatest threat.
What we have is the great conundrum.
Shareholders are suing the banks whose share price then suffers to both parties detriment. The more that is being claimed the greater their losses.
Banks now need to review all their add-on charges to consumers, which have to date supported record profitability. So to maintain profitability will they be forced to increase interest rates on those same consumers?
With tightening credit controls, borrowers who now wish to move loans from the banks who are raising interest rates, may now not qualify under new lending requirements.
And with these new lending controls, banks will not, in the immediate future, lend at the previous capacity thereby reducing the borrowed money supply. The main beneficiary of easier money in the past 30 years has been the property industry, which has grown and is advancing on the supply of money. What now?
With the property market beginning to show signs of a correction a lot of property owners will still be burdened by high land tax assessments. The averaging system that the governments uses over a three year period provides a better outcome for collecting tax however, in a downward market with returns and values falling the average value is only partially affected.
If we consider the last three years of growing prices in property when the market values start to fall your next assessment is of vital importance in future tax assessments. The government valuers have ensured that their assessment for rating and tax purposes has been current and up to date, will the same be said as the market begins to fall.
Taxation on property and property holdings an ongoing burden on the property investor and ensuring that valuations are current and accurate may save thousands of dollars in the next market phase.
Eighteen months ago I started gathering information from Domains property research in an effort to better understand the current market situation. I listened to many industry and financial experts discuss this information and make seriously inaccurate statements about the condition of the Sydney market place.
The discussion in property has been based around the medium prices being paid in Sydney and its unparalleled growth. Or so it seems. The data reflected growth in medium prices. The above data shows that the average prices have in fact fallen over the last 6 months by comparison to last year. In fact over the last two months the difference in the average price has fallen by almost 35%.
How is this possible?
The medium price does not accurately express the value of the market place only the middle number. In fact from figures provided by Domain the total value of sales in the last two month period were $3.2 billion whilst twelve months ago there was $4.4 Billion dollars in sales recorded. The total number of sales in this period were almost the same – so where did the value go if in fact the medium price remained the same.
Less value in total sales within the same volume activity suggests falling prices. With falling sales value we are seeing less money in the residential market place.
Comments by Reserve Bank assistant governor Michele Bullock last week reflected an opinion which I highlighted in a previous article. The strength of the Australian residential market place is predicated on ownership not speculation. The level of investment and speculation that has occurred over the past four years in the Sydney residential market place is cause for concern and this may only be the tip of the iceberg.