Good news for the property sector?

An unexpected surge in the property market, particularly in Sydney, continues to gather momentum even in the face of Reserve Bank rate hikes.

Rising demand, driven by tight rental vacancy rates and increased migration, has been pushing prices higher, according to a report by The Australian.

However, recent data suggests that two additional factors are contributing to the market's rebound, the publication reported. First, there are indications that banks may soon relax their lending restrictions. Second, buyers from China have started returning to the local market.

According to National Australia Bank's Market Research desk, "property prices continue to rise with increasing momentum, not only in Sydney but also in other major cities."

The latest residential market figures from CoreLogic reveal that Sydney's residential prices have increased by 4.8% since the beginning of February. Moreover, over the past week, home prices have risen in all mainland state capitals.

Clearance rates across the capital cities reached a 15-month high of 75.3% during the most recent weekend, indicating a positive market trend.

While the price increases may be gradual, they suggest that May will likely see another rise of more than 1% across the board, extending the 1.3% change observed in the capital cities year-to-date, according to The Australian.

These numbers starkly contrast with earlier forecasts made just months ago when major financial institutions predicted a market decline of 15% to 20% from peak to trough. Instead, it appears that the total drop from the peak of the previous cycle in 2022 was approximately 9%.

Overseas buyers returning

Recent data on overseas buyers and a potential shift in lending rules further confirm the market's change in direction. According to the Foreign Investment Review Board, China was the largest source of offshore buyers in the last three months of 2022, primarily investing $600 million in family homes.

“The volume of activity among overseas buyers remains low compared to historical standards, but they are clearly becoming a factor in the market,” Diana Mousina, deputy chief economist at AMP Capital, told The Australian.

Data from the global property portal Juwai IQI indicates that buyer inquiries from China for Australian properties rose by 127% in the first quarter of 2023 compared to the previous quarter.

Relaxing serviceability buffers

Simultaneously, a key constraint on borrowing in the residential market may soon ease. Presently, banking regulators require banks to assess new loans with a 3% buffer, meaning that borrowers seeking a 6% mortgage must prove their ability to repay a 9% mortgage. However, several major lenders have already begun reducing their buffer to around 2%.

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Westpac, for instance, has taken the initiative to relax the rules for its home loans, according to The Australian. The bank has informed its mortgage broker network that they can now lower the proportion of home loan borrowers subject to the 3% buffer. While still complying with regulatory standards, the bank will allow certain customers more flexibility through a “modified serviceability assessment rate.”

The more accommodating terms for mortgage loans will be particularly significant for "mortgage prisoners" who seek to refinance their existing mortgages but are unable to do so due to an inability to meet the standard service buffers.

As new buyers enter the market and home loan borrowers gain access to greater funds, there is a notable shift in consumer expectations. Although the recent consumer confidence index headline number declined by 9%, the "house prices expectation index" within the report experienced a substantial 10% surge, reaching its highest level since February of the previous year, The Australian reported.

This increase in house price expectations occurred “despite widespread expectations of further interest rate rises.”

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