At Some Point Will We Run Out of Money?

The last few days have seen a cavalcade of inconsistent headlines.

First, ANZ and CBA announced initiatives that will make it harder for property buyers to get finance. 

CBA’s lending changes were particularly tough; its interest rates will not be as competitive; for many loans it will only lend 80 per cent of the property value (down from 95 per cent); and in many instances, borrowers will have to make principal and interest repayments (where once they could choose interest only).

But, at the same time, clearance rates at this week’s auctions remained high 77.2 per cent.

So, what gives?  If the banks are being tougher on lending, why are properties still selling (apparently) so robustly?

There are probably two reasons for this.

First, those bidding at auction this weekend were probably armed with pre-approvals given under the previous more generous lending regime.

Auctions in a month’s time will probably generate less robust results for comparable situations simply because the lenders will not extend enough credit.

Second, there is also an indication that sellers are not being as optimistic with their price expectations such that many markets appear to be close to their peak.

For example, over the past month, prices have now fallen by 0.9 per cent nationally.

And prices in Sydney and Melbourne declined by 1.2 per cent and 1 per cent over that period, trimming their gain over the past 12 months to 12 per cent and 12.9 per cent respectively.

So where to from here?

Absent a collapse in prices, it is likely that prices will keep chugging along. But, given that wage growth is not strong, and lenders are becoming more conservative, at some time robust house price growth will stop when we can extend ours finances no further ie, when we run out of money.