Property values: Weekly market wrap with Sam Dodimead

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The irony of banks forecasting property values

Property values have become a hot topic as market analysts share wildly varying short-term forecasts making headlines in mainstream media. Forecasts I’ve read have varied from property values declining by up to 5% to, at worst-case, declining by up to 30%. The analyst predicting the up to 5% decline suggests property values will flatline for a few months before rebounding and the growth cycle commencing with values increasing by another 10-20%.

This begs the question: how are they so far apart and why are banks’ in-house economists so pessimistic?

As part of providing economic stimulus, the Reserve Bank of Australia (RBA) provided a Term Funding Facility (TFF) for the banking system, under which banks have access to funding from the RBA for three years at 0.25%, with additional funding available if banks increase lending to businesses, especially small and medium sized businesses.

These funding costs are substantially lower than the 1% estimated wholesale cost of funding around that same maturity.

The RBA’s Statement on Monetary Policy explains that so far, banks have only drawn down around $4 billion, representing 3.5% of their aggregate TFF allowances. The size of the facility has increased from $90 billion at its inception to $115 billion in May. This reflects growth of banks’ lending to business, which increases their allowances under the facility. While some banks are expected to increasingly draw upon their TFF allowances as existing funding matures, term funding needs more generally have been low.

Australian Banking Association CEO Anna Bligh said that banks stood shoulder to shoulder with Australians who were suffering as a result of the COVID-19 health and economic crisis.

“Banks are here to support customers throughout the crisis and help the economy on the other side as we recover from the devastating effects of this pandemic,” Ms Bligh said.

One of the biggest risks to the market, forced sellers, appears to be nullified by banks’ preparedness to use cheap funding via TFF allowances to continue supporting borrowers.

Looking specifically at the property market in Canberra, weekly new properties listed on Allhomes have fallen by 38.32% from the week ending 27 March, prior to the banning of open homes and public auctions to the week ending 15 May. Low stock volumes have seen the auction clearance rate remain above 55% for the last three weeks after having reached a low of 39% on 4 April (noting auction clearance rates were not reported on the Easter or Anzac Day long weekends).

A lack of stock coming to market, historically low mortgage interest rates and the RBA providing cheap funding to banks creating latitude to cost-effectively work with borrowers who require ongoing assistance post repayment holidays are mitigating the biggest risks within analysts’ forecasts.

This makes me wonder: if those who are wanting to own property in Canberra, and are delaying making their decision hoping the pessimistic market forecasts are realised, understand the significant market forces working that may be against them?

Find up-to-date local news, lifestyle, entertainment, sports and more at Canberra Weekly.

With Sam Dodimead, local property professional and host of Canberra Property Podcast

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