Some of the reasons why potential borrowers are hesitant to transact in April 2024
Borrowers may hesitate to borrow against their property for several reasons, and a decrease in property valuations could indeed be one of them. Here’s why:
Equity Concerns
If property valuations have decreased, borrowers may be concerned about the impact on their equity position. In simple terms, lower property values mean less equity available within the structure of the property finance package, of which can affect borrowing capacity and potentially result in higher loan to value ratios (LVR). Noting that LVR’s are trending downwards from 65% to 50%, additionally, higher interest rates and stricter lending criteria are in place being adopted to the specific sponsor’s within the acquisition timing or refinance period.
Risk Aversion
We are all reluctant at the moment, the mantra of “wait and see” is a constant with borrowers naturally becoming more risk adverse in a declining or static property market. Not well documented at the moment but long term sustainability of property values and potential further declines, should be on participants minds within the real estate fraternity, making borrowers hesitant to take on additional debt secured by falling property values.
Cash Flow Concerns
Declining property values can also affect cashflow, especially for investors relying upon rental income to service current debt levels. Lower property values may also lead to decompression of yield rates impacting borrowers ability to generate sufficient income to lower debt levels.
Lending Criteria Tightening
We are also starting to witness a tightening of lending criteria with some lenders responding to declining property values, making it more difficult for borrowers to qualify for loans or obtain usual terms. This could include higher levels of equity participation, stricter income verification or reduced LVR’s.
Negative Equity Risk
In some cases of declining property values, borrowers may face risk of negative equity, where the outstanding loan exceeds the property’s current market value. Negative equity can make it challenging to refinance and or sell leading to financial stress for borrowers. Already, we are seeing sale of real estate, or revaluation of properties from 2017/2018 show little or no growth within value as at April 2024.
Market Sentiment
The writer believes that market sentiment at this time plays a significant role in both property and borrowing decision. If participants perceive that the property market is unstable, or anticipate further declines in property values, a “wait and see” approach is in play rather than committing to acquisition and fundamentals of real estate.
In summary, with the above factors, confirmed with land tax and other factors are now contributing to a pause in real estate within the State of Victoria.
If the reader requires any property Valuations Advisory and or Transactional Management, do not hesitate to contact the writer.
Mark Ruttner, Managing Director
mr@fvg.com.au 0411 419 674
First Valuation Group
Suite 110/181, St Kilda Road, St Kilda, Victoria, 3182
valuations@fvg.com.au
