If you think Australia’s real estate markets move based on the fundamental law of supply and demand, think again. According to an expert, there’s an even more powerful and subtle force at play.
We’ve been told that the fundamental law of supply and demand rules how the markets move.
If there’s any imbalance in the demand and supply dynamics, you get price growth or fall.
If you have more supply coming into the market compared to willing buyers, prices are likely to drop.
The opposite is true when you have more buyers than available housing, then prices are likely to rise.
But apparently, there’s another factor or market player that’s even more powerful than this basic supply and demand dynamics.
Who’s really driving property prices?
In a healthy and normal market, the buyers and sellers determine how the market moves.
But Andrew Wilson, chief economist with Domain says it’s actually your bank that will ultimately decide.
Lenders have the power to decide whether a property transaction goes ahead or not.
Unless of course, you pay the property in cash and you don’t have to take out a mortgage.
But lenders can reject your home loan application even if you’re financially qualified to get a loan if the asset isn’t consistent with their “risk modelling” according to Wilson.
What this means is that they can decline your application if they think that you’re buying in a “risky” area based on their modelling.
The tricky part is, the banks’ definition of risk varies and is a closely guarded secret, just like their lending criteria.
“The banks aren’t lending in certain areas to mitigate their risks,” says Wilson. “But they also don’t reveal their methodology in terms of what they determine to be a positive or negative market.”
Blacklisted “risky” suburbs: a subtle market manipulation?
In October last year, NAB released its infamous blacklist of more than 600 suburbs and towns where it capped its lending to property buyers, citing growing risks in these markets.
Earlier in 2016, AMP released its own blacklist of 140 suburbs. Shortly after, Macquarie Bank also issued its blacklist of 120 suburbs across the country.
But this differential lending practice goes all the way back to the GFC era (circa 2010) when major banks collectively abandoned lending to buyers of Gold Coast apartments citing growing risks for these assets.
While this move may not be the only catalyst for the Gold Coast property crash, it has certainly exacerbated the drop in unit prices, in some cases plunging by up to 50%.
Wilson points out that differential lending by the banks are rising once again and it’s a big concern.
“This is a big issue. If a market is undergoing a correction like Perth, and if lending isn’t allowed or restricted due to perceived risks, how is that market going to recover? What it means is that markets that are already positive like Sydney, become even more positive and negative markets become more negative.”
The implications of differential lending on the property market cannot be underestimated says Wilson.
“There’s a growing concern that the banks are engaged in picking winners.” Andrew Wilson, chief economist, Domain
“Essentially, they have the power to create market booms or cause prolonged downturns. I think the banks should leave it to the buyers to decide and not become players in that market dynamic. That’s simply because it’s fraught with danger and raises questions about market manipulation by the banks. It’s a serious discussion we need to have.”