How Tougher Lending Conditions Affect Australia's Million Dollar Postcodes

How Tougher Lending Conditions Affect Australia's Million Dollar Postcodes Manish Khanna
Manish Khanna
Wednesday 19 Dec 2018

Australia is considered to be among the most liveable countries in the world because of its thriving economy, stable government, modern infrastructure, and multi-cultural social milieu. Offering a high standard of living and top-notch lifestyle, it is viewed as a luxurious destination with a plethora of opportunities. Naturally, people from around the world wish to make the country their home and settle down here for good. In fact, the immigration figure has increased from 30,042 in 1992-93 to 178,582 in 2015-16. The population of Australia touched the 25 million mark in 2018 with highest migrations to the cities of Sydney and Melbourne.

The skilled workforce is concentrated in the metropolitan cities, which has made these vibrant regions the ideal place for settlement of high-net-worth individuals. The maximum million-dollar postcodes exist in Sydney’s CBD followed by Melbourne’s suburbs. The top ten wealthiest postcodes include Darling Point, HMAS, Edgecliff, Vaucluse and many other prominent places with luxury properties for sale in Australia. Many waterfront properties take the top spot with the small suburb of Point Piper becoming the richest postcode in the country.

The rich and the famous love to splurge on lavish houses built in picture-perfect settings. These extravagant homes are surrounded by scenic views and loaded with contemporary amenities and opulent interiors. Out of reach for the common public, these mansions are worth millions of dollars and act a status symbol for the owners. These trophy homes are meant for ultra-wealthy people who possess assets worth $50 million or above. The affluent class often strives to find investment opportunities which can reap terrific rewards in the long-run and premium properties are their best bet.

The most desirable homes are being sold at staggering amounts, and the well-off individuals are not batting an eyelid before shelling out the dollars. As many as 1809 luxury properties were sold in Sydney in 2017. With sky-high prices and saturation of spaces for erecting new facades, the property has experienced a slump after it peaked in 2017. House prices in Sydney are down by 9.5%, and by 5.8% in Melbourne. Now buyers are focussing their attention on the suburban areas which are more affordable.

The standard contributors to a downturn are amplified interest rates or a global recession which affects international markets and investments. However, this time around the story has changed, and the root cause is credit control to cool down the markets ignited by hot transactions. In 2017, the Australian Prudential Regulation Authority directed the banks to keep the interest-only loans within the 30% limit in their books. The lax lending patterns have been going through a paradigm shift in the past year which has affected the availability of credit in the housing market. It has made many of us question if the luxury property market is slowing down?

The boom which lasted from 2012 to 2017 was the result of easy credit where major lenders hinged on the primary household expenditure yardstick to calculate approximately the living costs. This sloppy expenditure estimate amplified the lending amounts and led to price rise in territories with high demand. With a lot of people struggling to repay the debts, the government intervened and took charge before the problem could blow out of proportion. Since the customer is now tied to the provider, they have to adhere to the conditions and rates imposed by the financial institutions. Thus many homebuyers have become mortgage prisoners.

The banking royal commission and regulators are now supporting stricter lending rules to reinstate stability in the market. The changing policies have altered the lending standards. For example, banks are willing to lend more to investors than owner-occupiers as the latter are burdened with higher living expenditures. However, the situation is not all hunky-dory for the investors as well. With depreciating property values and stricter lending norms, they are finding it difficult to maintain their investment portfolios.

The market conditions have influenced the million-dollar postcodes too. The number of such postcodes has fallen after experiencing their peak in 2017. The prices of luxury real estate fell in as many as 118 postcodes in 2018, and 21 of these plummeted below the $1 million mark. Only six new postcodes joined the million-dollar league this year, which is much below the average of 25 entering the club every year. Credit thinning has a broader effect on the high-end properties which can be witnessed in the Sydney housing market at present. 

Nevertheless, it is not the end of the road for investors as the population is rising every year and housing will remain a fundamental demand. Also, the cash-rich investors are well placed to negotiate an upgrade when buying an investment property. Refinancing will experience more stringent scrutiny which can lead to the rejection of loan applications so the portfolio expansion may become a limited choice. 

The experts believe that the tightening of credit will significantly affect those who had borrowed over 90% of the house price from the banks. However, the number of such buyers had declined reasonably in the past one year. Economists are predicting that the change will not lead to a decline of 5%-10% in the housing market which is not a drastic fall or crash down. With a significant chunk of the population’s wealth stuck in property, it could impact the national economy if the situation becomes worse, but there are no such indications currently.

Nonetheless, the severe conditions have put a brake on the steep rise in prices and stepped up scrutiny on lending practices. It has brought many scams to the forefront. Westpac was slapped with a fine of $35 million for irresponsible lending while providing home loans. To dispel fears of an impending economic downturn, the RBA insisted that the mortgage credit will remain readily available. Additionally, the economy is growing steadily at 3.4%, and unemployment is down to 5.3%. The decline in prices will only bring about equality in the distribution of wealth and will prove beneficial for the society at large.     


Increasing immigrant population, low-interest rates and slow pace of supply will not let the markets crash. The decline was necessary to curb the soaring property prices in the country which were leading to disparity and risky future. As soon as the prices stabilise, the confidence of the investors will be reignited in the million-dollar property market.