October 2004 - Banks & Developers jostle in a changing property climate. October 2004 RETURN
The Banking, Development and Property sectors have come out of an absolute boom period for their respective activities. It seems every body had their noses in the profit trough, yet are all the parties protected from a change in market conditions? Property has had a massive 7 years of a continuing increase in values. This is quite an extended period with nothing but good news & high profits. This can lead to an influx of parties trying to increase their share of the activity, mainly Banks and developers. One downside to this is, that in the scramble to be a part of the action, many ideals can be forgotten. 1. The investing public lose sight of strict property selection criteria and often over pay or buy lower grade property 2. Due to the ease of sales, developers lose their attention to standards of design, quality and location. 3. Banks free up their lending requirements and fund projects that later would be described as over ambitious or even dubious. In fact the banks were competing that heavily to provide funding, money was thrown at developments on the basis a portion could be presold and all the remaining properties would sell and be worth considerably more when completed any way. All crazy expectations of boom conditions. Correctly recognising an overheated property sector The Reserve Bank of Australia went to great lengths to slow the boom conditions. In the resultant slowdown of demand, the fad of pre selling or off the plan campaigns were less effective and are often viewed as a passing trend. This is not that bad a situation though. Now that the market has normalised, completed properties that meet selection fundamentals will still sell in a realistic time frame. Instead of recognising this and giving developers the ability to sell projects on completion, the Banks have dramatically altered their guidelines. Instead of ensuring construction can be completed, they are freezing the construction funding until the developers create presales (even at discounted levels) or at worst calling in the loans. This can mean developers have to find expensive off market re-financing or even abandon the projects that would have been successful given the required support. This is crippling the market in supplying quality property. Whilst we again applaud restraining an over supply of ordinary property, an over reaction by the Banks has occurred. The market is strengthening and current projects are starting to sell well yet the Banks are in squeeze mode. In essence they were firstly reckless in the grab for profits, then too late in tightening up funding and now they will be too late in recognising the recovery. This will lead to an under supply of new property in 2005 & a possible rise in prices. This will probably lead to higher profits and the cycle will turn again. Getting the balance of new property, profitable lending and buyer support is not easy at the best of times. Be reactive and slow to change, every body loses. Get the balance right and sustainable profits can be had by the Banks, developers & the buying public. Editors Note: Over the past year, the RBA forecasts of interest rate rises and property values tumbling were consistently provided to the general public. This is despite that on the 8/9/04, they themselves have maintained current interest rate levels for the 9th consecutive month; and 2. the other main creator of property demand, the level of employment, has remained very strong throughout. We can only assume that artificially cooling the property market has helped prevent a rise in interest rates that the business sector can ill afford.
The Banking, Development and Property sectors have come out of an absolute boom period for their respective activities. It seems every body had their noses in the profit trough, yet are all the parties protected from a change in market conditions? Property has had a massive 7 years of a continuing increase in values. This is quite an extended period with nothing but good news & high profits. This can lead to an influx of parties trying to increase their share of the activity, mainly Banks and developers. One downside to this is, that in the scramble to be a part of the action, many ideals can be forgotten. 1. The investing public lose sight of strict property selection criteria and often over pay or buy lower grade property 2. Due to the ease of sales, developers lose their attention to standards of design, quality and location. 3. Banks free up their lending requirements and fund projects that later would be described as over ambitious or even dubious. In fact the banks were competing that heavily to provide funding, money was thrown at developments on the basis a portion could be presold and all the remaining properties would sell and be worth considerably more when completed any way. All crazy expectations of boom conditions. Correctly recognising an overheated property sector The Reserve Bank of Australia went to great lengths to slow the boom conditions. In the resultant slowdown of demand, the fad of pre selling or off the plan campaigns were less effective and are often viewed as a passing trend. This is not that bad a situation though. Now that the market has normalised, completed properties that meet selection fundamentals will still sell in a realistic time frame. Instead of recognising this and giving developers the ability to sell projects on completion, the Banks have dramatically altered their guidelines. Instead of ensuring construction can be completed, they are freezing the construction funding until the developers create presales (even at discounted levels) or at worst calling in the loans. This can mean developers have to find expensive off market re-financing or even abandon the projects that would have been successful given the required support. This is crippling the market in supplying quality property. Whilst we again applaud restraining an over supply of ordinary property, an over reaction by the Banks has occurred. The market is strengthening and current projects are starting to sell well yet the Banks are in squeeze mode. In essence they were firstly reckless in the grab for profits, then too late in tightening up funding and now they will be too late in recognising the recovery. This will lead to an under supply of new property in 2005 & a possible rise in prices. This will probably lead to higher profits and the cycle will turn again. Getting the balance of new property, profitable lending and buyer support is not easy at the best of times. Be reactive and slow to change, every body loses. Get the balance right and sustainable profits can be had by the Banks, developers & the buying public. Editors Note: Over the past year, the RBA forecasts of interest rate rises and property values tumbling were consistently provided to the general public. This is despite that on the 8/9/04, they themselves have maintained current interest rate levels for the 9th consecutive month; and 2. the other main creator of property demand, the level of employment, has remained very strong throughout. We can only assume that artificially cooling the property market has helped prevent a rise in interest rates that the business sector can ill afford.