The Australian population grows at about 1.3 per cent a year. Over a longer period of time, you would expect the population of experts that serve that population, in any industry, to grow at roughly the same rate. Of course, there will be periods when the population of experts grows more slowly, or declines, producing a shortage. In those periods, those who remain earn outsized returns and profits attracting new entrants. If an oversupply subsequently transpires, reducing average profits, experts leave for greener pastures elsewhere.

With that in mind, it may come as no surprise that while the Australian population is growing at about 1.3 per cent a year, the population of real-estate agents has been growing at more than 9 per cent per annum.

Clearly this is unsustainable. That the population of real-estate experts has grown so much faster than the underlying population it serves is telling. It suggests that outsized profits have been available recently in the property market. Rising property prices, combined with the consequent increase in supply, has provided enough profit to feed a growing population of agents. Everyone is happy.

But it might all be about to end.

One of the reasons for rising property prices, arguably the most important influence, has been declining interest rates. As global central banks flattened yield curves, by bringing longer-term rates lower through quantitative easing, cash became a liability because it was earning less than necessary to sustain life. Consequently, savers ceased saving and began ‘investing’ in everything from shares and bonds to art and low-digit licence plates, wine, farmland and even residential real estate. The latter occurred despite the fact that the yield has been pushed so low in Australia that no listed residential real estate investment trust could possibly exist.

Indeed, records have been smashed across all asset classes around the world, especially for assets that can never produce any income; witness the US$110.5 million ($145.75 million )paid for a Jean-Michel Basquiat painting – a record for a post-1980 painting and a record for an American artist. In Sydney, the NSW number plate ‘29’ was auctioned in May this year, with a $450,000-$550,000 pre-auction estimate. It was sold for a record $745,000. A week later, the NSW number plate ‘36’ was sold for $705,000.

In the context of global asset price rises like these, Sydney, Melbourne and Brisbane property is nothing special. And if declining interest rates promoted a boom in property prices, rising interest rates must end it, along with the abundance of fees for a population of real-estate agents.

Interest rates for borrowers are already rising and the financial stress on interest-only mortgagors is just beginning, as Table 1, showing ANZ interest rate changes announced on June 9, 2017, reveals.

ANZ lowered the interest rate on principle and interest (P&I) mortgages by 5 basis points but it raised rates on interest-only loans by 30 basis points. Keep in mind that the Reserve Bank has not raised rates, meaning ANZ’s move was out-of-cycle.

For property investors with an interest-only mortgage, switching to P&I will cause payments to rise by as much as 40 per cent.

Immediately after ANZ’s announcement, CBA subsidiary Bankwest doubled minimum deposits to 20 per cent, barred interest-only borrowers from some product offerings, reduced rates on some owner-occupier P&I loans by 31 basis points and raised rates on interest-only lending for investors and owner-occupiers by 34 basis points.

NAB announced that it had lowered loan-to-value ratios on interest-only housing loans to 80 per cent.

A shadow shopping survey of ANZ, CBA, NAB, Westpac, St George, Bankwest, Bendigo and Adelaide Bank, BOQ and Suncorp, conducted by Macquarie Bank executives posing as first home-buyers earning $105,000 and spending $2800 a month on general expenses and rent, found that the major banks were offering to lend 14 to 19 per cent less to owner-occupiers and 12 to 26 per cent less to investors than they were two years ago. In 2015, the banks were willing to lend $650,000 to $700,000. In 2017, the same banks were willing to lend only $550,000 to $600,000.

More importantly, regulatory requirements will limit the proportion of any bank’s mortgage book that can be on interest-only terms. That limit will be 30 per cent, which is lower than the proportion of interest-only loans already written, meaning that many interest-only borrowers will not be able to refinance their loans in coming years without rolling onto (P&I) terms, and the associated much higher repayments.

All of these changes necessarily reduce the appetite of property speculators and ‘investors’, especially those who have already caused a 300 per cent rise in calls to the National Debt Helpline.

Less foreign investment

Appetite for residential real estate has not only come from domestic borrowers.

Foreign investors have been a significant contributor to rising property prices, remembering that it is the marginal buyer that determines the price for everyone else.

Treasury Secretary John Fraser says, however, that the number of foreign investment applications to the Foreign Investment Review Board (FIRB) for residential housing in Australia has declined from 40,000 last year, to an expected 15,000 this year – a 62.5 per cent fall.

Amid this decline, the NSW Government has doubled the stamp duty from 4 per cent to 8 per cent for foreign investors, as part of a housing package designed to improve affordability (i.e., reduce prices). The imposition of a 100 per cent stamp duty increase must drive the nail deeper into the coffin for residential activity and prices by keeping foreign investors on the ropes.

In August 2016, fed up with a glut of apartments sitting vacant because overseas owners weren’t renting them out, Vancouver, Canada, implemented a 15 per cent foreign investor tax rate. The law added almost $300,000 to the price of a $2 million property. Toronto has since also joined Vancouver, imposing the same 15 per cent tax.

In the four months immediately following the August 2016 impost, foreign investment in the Canadian state of British Columbia, where Vancouver is located, fell from 13 per cent of transactions to just 4 per cent and the number of sales of detached houses, condos and town homes fell 39.5 per cent from a year earlier. Prices initially fell but have recovered. Nevertheless, the decline in activity will have an impact on employment and retail sales generally.

So, we have rising interest rates and falling interest from foreign buyers. What else has changed?

Australia’s immigration and net population growth produces requires about 155,000 additional dwellings each year. The residential construction boom has been producing annually more than 230,000 apartments alone. As Figure 1, Dwellings under construction, shows, the boom in construction activity has been real.

It is also unsustainable. Some suggest the boom in supply of multi-storey apartments is correcting a previous undersupply, but if that were true, aggregate rents would not be in decline and vacancies would not be on the rise , yet Figure 3 shows both are happening.

Property developers offering incentives

Rising vacancies and falling (real) rents combine to create another source of financial stress for highly indebted landlords, many of whom are first-time property investors with no experience of a recession. And with mortgage debt as a percentage of income, household debt as a percentage of GDP and credit-card debt all at record highs, there is no question consumers can least afford any hit to their wallets. It won’t help that wages growth is at a 19-year low and wholesale electricity prices have risen 50 per cent this year, suggesting electricity retailers will soon pass on large increases to consumers.

With foreign investors going AWOL, and many who had previously paid a deposit unable to export the remainder of their funds from their homeland to settle the property, nor borrow the shortfall from local banks that have shunned foreign buyers, it is no surprise that property developers are beginning to offer all sorts of incentives to move stock.

We have seen everything from frequent-flyer points, new electric or hybrid cars and holidays, to 10-year rental guarantees being thrown in to induce purchasers. Such tactics are dressed-up price cuts and the intensity will increase as the peak of supply emerges in the next 18 months. Expect a growing list of developers going broke and expect the number of under-40 developers in the Young Rich List to disappear as quickly as they emerged.

Finally (and we could go on and on), banks are pulling the rug out from buyers by simply blacklisting suburbs they are willing to lend to, or raising the deposit required for anyone to buy a property on those lists. If you are a newly minted and leveraged owner of a property in one of those 200 suburbs listed by the NAB or the 140 listed by AMP, expect it to be much harder to find a buyer if you’re under any pressure to sell.

Finally, if you don’t agree with the above, perhaps the following list (with extra input from my friends at UBS) will help:

APRA restricts ‘interest-only’ to 30 per cent of new lending. A significant number of investors will be forced onto principle and interest when they refinance their interest only loans. Their monthly payments could rise as much as 40 per cent

APRA restricts investment lending growth to 10 per cent

$6 billion bank liability tax to hit bank profits and is expected to push mortgage rates higher

NSW Government increases land tax surcharge from 0.75 per cent to 2 per cent

From July 1, the Victorian Government will increase the foreign purchaser additional duty (FPAD) to 7 per cent, levied on the total value of the property not just the land value (which on an apartment in a high rise was negligible)

Federal government changes 457 visa restrictions, making student migration less attractive

Federal government limits foreign buying to 50 per cent of apartments in new developments

ASIC review into lending practices by mortgage brokers will slow credit growth to marginal borrowers (I shared a taxi in Melbourne with a gent who turned out to be a broker and who I overheard telling someone on the other end of the line, “We have to give him another $75,000 income, otherwise he won’t get the loan.”)

Add to the above list the points already discussed and if they collectively don’t trigger a slowing or reversal in property price growth, nothing will.