Market Review

Market Review
by Kevin Said, CIO TierONE Capital

Overview

The Australian property market has continued its recovery, with seven consecutive months of value growth supported by resilient buyer demand, tight supply, and a more stable interest rate outlook. While conditions remain uneven across states and property segments, overall momentum is positive. At the same time, the non-bank lending sector has seen strong capital inflows, driving compression in mortgage fund yields despite the RBA maintaining a higher cash rate. This environment is favourable for borrowers but requires investors to remain discerning.

Property Market

• National Growth: Property values have risen for seven consecutive months, reflecting stabilising economic conditions and improving sentiment.
• Stronger Markets: Sydney and Brisbane continue to outperform, supported by population growth and limited supply. Adelaide and Perth remain resilient with strong affordability metrics.
• Weaker Markets: Melbourne and Canberra are lagging due to affordability constraints, weaker investor demand, and elevated supply pipelines in certain corridors.
• Regional Performance: Select regional centres are holding value, though growth is moderating after several strong years. Coastal lifestyle markets have flattened, while inland towns linked to mining and infrastructure remain relatively buoyant.
• Property Types:
  • Detached housing remains the strongest performer.
  • Apartments show patchy results, with oversupply a risk in some metro markets.
  • Townhouses are attracting demand in growth corridors as an affordable alternative to detached housing.

Interest Rate Commentary

• RBA Outlook: The RBA continues to signal potential rate easing in the coming quarters, provided inflation remains within its 2-3% target band.
• Mortgage Fund Dynamics: Unlike retail mortgages, mortgage fund rates are not directly linked to the RBA cash rate. Instead, pricing reflects:
  • supply/demand dynamics in private capital markets;
  • risk-return expectations in the non-bank sector; and
  • competition among private credit funds.
• Yield Compression: Over the past 12 months, returns on mortgage fund investments have fallen by ~150 basis points, (compared to RBA Cash Rate decreasing 75 basis points) largely due to surplus capital chasing limited high-quality deals.
• Borrower vs Investor Impact:
  • Borrowers benefit from cheaper credit and more competitive terms.
  • Investors face reduced returns and must carefully assess fund quality.
• Regulatory Risk: ASIC has highlighted concerns about unlicensed entities and pseudo mortgage funds raising capital without appropriate AFSL authorisation. These carry heightened risk, and ASIC has become increasingly vocal over the last 6-9 months in cracking down on such practices.

Practical Implications for Investors

1. Expect Lower Yields: Returns from mortgage funds are likely to remain compressed while capital oversupply persists.
2. Improved Credit Quality: Lower borrowing costs support stronger projects and reduce default risk, which is a positive for capital protection.
3. Fund Selection Matters: With ASIC monitoring unlicensed operators, investors should ensure they are invested in properly structured, licensed mortgage funds.
4. Diversification by Market: Given the uneven recovery, exposure across stronger-performing markets (Sydney, Brisbane, Adelaide) may balance softer conditions in Melbourne or Canberra.
5. Medium-Term Outlook: If RBA rate cuts occur, property demand may strengthen – but investor yields in mortgage funds may compress further unless lending volumes expand.

Kevin Said
Chief Investment Officer and Director
TierONE Capital