Investor lending is as close to a property market crystal ball as you’ll get. For all of you who have been to an Australian property update, you’ll know that the philosophy of the right property in the right market at the right time is a guiding force. In today’s edition of the blog, I’ll take you through one of the components we assess to determine the right time for a property market.
Our research has shown that the most significant indicators of the future price trajectory of a capital city property market are the following:
- Sales volumes
- Price growth relative to inflation
- The value of investment funding
Let’s focus on point three. In the October reporting month the value of investor financial commitments fell to $11.5 billion, a 6.1 per cent decline, resulting in the sixth consecutive month of decline. With close to half of investor funding for the last 36 months being funnelled into Sydney property, the reduced investor appetite provides an opportunity to highlight the relationship between investor funding and price growth.
The figure below tracks the percentage growth in investor funding in New South Wales against growth in the median price of a house in Sydney. You can see that changes in investor funding tend to lead changes in property growth by a period of approximately six months. As such, the variable provides a forward looking gauge of the future movements of the property market.
In March 2015 investor funding in New South Wales took a rather drastic turn downward, with annual growth decreasing from 60 per cent (year on year) in the September quarter 2014 to 40 per cent to the March quarter of 2015. Fast forward eight months and decreased investor demand leads the Sydney property market to experience its first quarterly decline in prices since 2012, signalling a transitional moment in the markets price cycle. We may not have a crystal ball, but we do a have a tried and proven research model that goes a long way to mitigating the risks involved with property investment.
