25 September 2018
Over the past six months, grey clouds have been building in the distance for borrowers, and for many, the brewing storm is yet to hit in full force.
Australia’s current lending landscape is a tough one. Moves by legislators and regulators to kerb borrower enthusiasm have created headaches for those now looking to build a
That said, there is opportunity ahead for those able to weather the challenge.
The state of play
The runaway nature of Australian property prices in Sydney and Melbourne from 2012 was causing concern for legislators.
It was claimed investors were taking up all the stock and isolating first homebuyers from the market – and there were no indications things were going to slow down.
In 2014 the Australian Prudential Regulation Authority (APRA) responded by instructing banks to cap growth in investor lending to 10 per cent of their total loan book.
An additional move in 2017 by APRA required banks to keep interest-only loans to less than 30 per cent of their mortgage portfolio too.
While both these measures were said to be temporary – in fact, the first has been recently relaxed – they appear to have done their job too well with investor-loan growth now at single-digit percentages.
Add to the mix the current banking enquiry. It’s findings so far have levelled criticism at bank practices.
To compensate and prepare for the eventual recommendations, lenders are already tightening their requirements from borrowers – particularly investors.
The upshot is that getting a property loan approval at the moment is tough.
It’s been a fast turnaround too. Whereas six months ago a bank customer might have been approved to borrow $800,000, nowadays that same client might be lucky to get $500,000.
That means many who contract to purchase based on a pre-approval gained under the old guidelines, will find their application knocked back under the bank’s new rules.
Another reason for impending mortgage stress is many loans are about to roll over from Interest-only to Principal-and-Interest in the next 12 months.
This means higher repayments for some already stressed borrowers.
These customers will have little choice but to accept the new loan terms being offered by their current lender, because competition for interest only lending will be virtually non-existent.
Here’s the perfect storm scenario:
- The cost of money will go up,
- The availability of money will drop,
- And, in certain markets, value growth will be non-existent for a number of years.
Is there opportunity?
In short – yes, but it’ll be those who got their affairs in order early who’ll benefit most.
Investors who’ve built a resilient portfolio are certain to take advantage.
Your investment strategies must be long-term so you can smooth out the peaks and troughs of market and finance cycles in order to secure your future for decades to come.
1. Have impeccable records
Now more than ever, it’s important to have kept your financial records in tip-top order.
By this, I mean you need to know your numbers inside and out, and back to front.
It all has to be documented as well. Not so long ago, for example, it was acceptable to front up to the bank with little more than your estimated living costs and gross income, and with a signed statutory declaration as back up.
Nowadays, it’s a case of being able to account for every dollar. You may have put “Annual clothing allowance – $1000” in the loan application, but today’s banking credit departments are checking your credit card statements as well.
They know your Gucci shoes and Burberry briefcase cost twice that, and they’re willing to say, “No!”
Having impeccable records means you can accurately account for every dollar.
It also demonstrates to the bank that you can stay on top of your loan commitments.
Being a good customer really can pay dividends in these trying times.
2. Maintain cash flow
Cash flow is king when it comes to loan serviceability, so if you’ve built a multi-property portfolio, make sure your income isn’t overextended.
Key to this is portfolio diversification. We always recommend maintaining a buffer as part of your investment strategy because changes in interest rates, personal circumstances and the cost of living are inevitable.
In addition, banks are now upping their ‘stress test’ on client’s finances – increasing their own interest rate and cost tolerances on your supplied numbers.
Being on top of your cash flow can be the difference between a yes or no on your next loan.
3. Equity buffer
Along with cash flow you must maintain an equity buffer as well.
Having adequate equity is essential to a lender’s requirements.
The problem that often occurs during a period of high property value growth (like recently) is some owners use their new-found equity on unproductive debt.
They might spend up big on their credit cards and then consolidate that debt into their house loan.
While they’re at it, they might get a bit extra from the bank in order to buy a new car or go on holiday.
These borrowers are not allowing for the future and have effectively re-bought their property off the bank at today’s prices because they ‘feel wealthy’.
The best opportunities are there for those who have liquidity in their equity.
I’m a big believer in making your money work for you and if your equity isn’t liquid, you can’t capitalise on opportunities when they arise.
Building a resilient portfolio in times of great growth is essential so you not only survive any eventual slowdown, but can pounce on newly revealed profitable prospects.
If you’ve failed to prepare for our new, tougher financial times, now might be the chance to catch your breath, talk to an expert strategist and plan for the cycles next turn.
After all, the state of your wallet dictates the state of your mind.
17 September 2018
The property industry is continuing to drive the Australian economy according to the latest economic growth data.
The Australian economy grew by 0.9 per cent in seasonally adjusted terms in the June 2018 quarter National Accounts released last week, with annual growth of 3.4 per cent.
Investment in new dwellings increased 3.6 per cent for the quarter, with strong results in Victoria and South Australia.
The construction industry grew by 1.9 per cent for the quarter.
Construction within the residential property sector grew by 3.1 per cent and non-residential property sector by 1.3 per cent over the quarter.
The ABS noted that the recent pickup in new dwelling investment reflected strong approvals in early 2018 which are now flowing through to commencements.
“The property industry is helping to propel economic growth to its highest level since 2012, highlighting its importance as a driver of jobs and economic prosperity,” said Ken Morrison, Chief Executive of the Property Council.
“Our national economic well-being depends on a strong property industry, supported by smart investment in vital public infrastructure for our growing cities.”
“The benefits of growth are overwhelmingly positive, but must be locked in and supported by good planning and smart infrastructure investment to ensure all Australians reap the gains,” Mr Morrison said.
10 September 2018
Malcolm Gunning, President of the Real Estate Institute of Australia (REIA), and Leonard Teplin, Director of Marshall White debate the potential implications the most recent leadership spill could have for the residential property market.
It feels like we’ve had more leadership spills than seasons of The Bachelor, and some industry leaders are worried that Australia’s reputation for changing Prime Ministers at the drop of a hat is having negative consequences across the property market.
Director of Marshall White, Leonard Teplin says the constant change of leadership in Australia is driving residential buyer sentiment to an all-time low, and it’s the Australian public who are left to sit back and watch the fallout, again and again.
“There are no real winners, only losers. The Australian public must once again sit and watch while the effects ripple across our economy and property market,” Mr Teplin said.
“It’s no secret that every time there is an election, market sentiment drops, people delay purchases and put off big decisions until the new leader has been decided, and election promises turn into policies.
“In real estate, this sentiment is reflected in weaker conditions as buyers cautiously await the inevitable policy changes and market overcorrections that are sure to follow suit.
Industry leaders are concerned about the potential implications the leadership spill could have on the property market. Image by Adz via WikiCommons
“As Scott Morrison gets set to take over as the nation’s leader, property purchasers both locally and abroad will be questioning what this change in direction will mean for them and their investments,” Mr Teplin told WILLIAMS MEDIA.
But Malcolm Gunning, President of the Real Estate Institute of Australia (REIA) doesn’t believe the leadership spill will have a drastic impact on the property market.
“I don’t think there will be any change because Scott Morrison was really the architect of the current economic policy,” Mr Gunning told WILLIAMS MEDIA.
“Tougher lending criteria introduced by the APRA, and the banking royal commission is what’s really having the biggest influence on the market at the moment.”
Jock Kreitals, CEO of the REIA agrees.
“In terms of the recent changes of Prime Ministers and Ministers, I do not see any impact on the market attributable to this. The policy of the Coalition regarding negative gearing and CGT remains unchanged.
“The PM as the previous Treasurer has reiterated the position a number of times. Further, the PM well understands the impact of changes in policy having worked in a policy role in the property sector,” Mr Kreitals told WILLIAMS MEDIA.
Real Estate Institute of New South Wales (REINSW) CEO, Tim McKibbin says the new Prime Minister should put good fiscal policy ahead of economically damaging, populist politics.
“Those advocating for removing the deductibility of expenses incurred in earning assessable income in the residential property market are damaging people’s ability to acquire a home,” Mr McKibbin told WILLIAMS MEDIA.
“This is adversely impacting the property industry – Australia’s biggest employer – and playing petty politics in the misguided belief it will promote their personal brand.”
Potential implications for foreign investment revenue
Mr Teplin believes the latest leadership spill could impact international investment revenue.
“A stable government is a pillar of optimised liveability and one of the main reasons Australia has enjoyed a consistent influx of foreign investment into the real estate market, in turn driving the delivery of new infrastructure and economic progress,” Mr Teplin said.
This recent setback could be detrimental for Australia’s international investment revenue, “which serves a much-needed portion of the market that drives new residential supply and delivers stock to the rental market,” Mr Teplin continued.
Mr Gunning told WILLIAMS MEDIA the message the government is sending to overseas investors is what worries him the most.
“Our government seems to be very stable – and I’m not talking about leadership changes – but both parties are reasonably well aligned in policy. What sends the discouraging message is the tightened immigration and the taxing of foreign investors,” Mr Gunning said.
“Chinese investment into Australia’s residential property market has stopped, and I can say with conviction that the message this sends back to China is that they’re not welcome. So it’s more about the message it sends by the government rather than the changes in leadership.”
“It will take investors out of the market”
If Labor were to win the next election, as it appears they will, Mr Gunning says the rental market will suffer.
“Labor is absolutely rusted on to negative gearing. They are of the opinion that it will help affordability, which is completely incorrect. What it will do is drive up rents because there will be fewer people buying investment property,” Mr Gunning said.
“There has been 13 per cent growth in rent over the last five years, which is historically low and below inflation. If Labor gets in, it will take investors out of the market which will hinder supply – up goes the demand and the cost of rent.”
Mr Kreitals told WILLIAMS MEDIA that if Labor were to be elected, the current market falls would be “exacerbated”.
“Labor has on many occasions, including recently, reiterated the position that it took to the 2016 election to change negative gearing and CGT arrangements. In the lead up to the 2016 election, a number of studies were undertaken to examine the impact of such changes. In short, housing prices will fall and rents will go up.
“SQM Research, for example, forecast that in the first year of the policy, prices would fall by up to 3 per cent, and by up to 8 per cent and 4 per cent in the following two years.
“It needs to be remembered that at the time of the 2016 election, property prices were rising. Introduction of Labor’s measures would exacerbate the current market falls and flow on to the construction industry and economic growth,” Mr Kreitals said.
Industry leaders debate the implications the leadership spill could have on the property market. Image by Maxmillian Conacher via Unsplash.
And if stability is the cornerstone of sound investment, Mr Teplin says buyers will look to take their money elsewhere for more predictable returns in safer markets.
“As sentiment plummets and the population continues to grow faster than new stock can be delivered to meet the market, now more than ever we need a strong, stable, united government to help rebuild the real estate market and deliver stock to where it is most needed,” Mr Teplin said.
“Political in-fighting isn’t just bad for business on a global scale – its effects are felt right across the property market long after party room vengeance has been executed.”
Affordability improving for renters, first home buyers
The June quarter 2018 edition of the Adelaide Bank/REIA Housing Affordability Report found that affordability has improved for renters and the number of first home buyers increased during the second quarter of 2018.
The number of first home buyers increased to 28,401 – an increase of 7.3 per cent during the quarter and an increase of 20.6 per cent in the June quarter of 2017.
First home buyers now make up 17.8 per cent of the owner-occupier market, compared with 14.3 per cent at this time last year.
Rental affordability improved in New South Wales, Victoria, Queensland, South Australia and Tasmania, remained steady in Western Australia and declined in the Northern Territory and the Australian Capital Territory.
New South Wales remains the least affordable state for renters, where the proportion of income required to meet rent repayments is 28.8 per cent – 4.7 percentage points higher than the national level.
Scott Morrison admitted last year that Australia has a housing affordability problem and announced a number of measures in the May budget.
“There are no silver bullets to make housing more affordable. But by adopting a comprehensive approach, by working together, by understanding the spectrum of housing needs, we can make a difference,” Mr Morrison said at the time.
Mr Kreitals told WILLIAMS MEDIA it’s worth considering the importance of property to the economy, highlighted by the latest GDP figures.
“For the quarter, the economy grew by 0.9 per cent and 3.4 per cent for the year, which is the fastest rate of growth since the September quarter 2012.
“The property industry is continuing to drive the Australian economy with investment in new dwellings increasing 3.6 per cent for the quarter. The construction industry grew by 1.9 per cent for the quarter and 5.5 per cent over the year,” Mr Kreitals said.
04 September 2018
Jon Bahen, director of Abel Property – Cottesloe told WILLIAMS MEDIA about building inspection reports in Western Australia, including what they are, why you need one, and what they cover.
What is a building inspection report? And do you need one?
For most people purchasing a property is one of the biggest financial decisions they will make in their life and it is always important to ensure due diligence on the home has been done. A building inspection report can be part of this process and is a great way to protect your interests and peace of mind.
In most circumstances, a building inspection report is included as a condition of the Contract for Sale. The investigation for this report needs to be carried out by a qualified building inspector, surveyor or builder and the cost for this report is borne by the buyer.
There are a number of different types of building reports with different cost structures. For example, a basic structural inspection can be obtained for $280 for a single level three bed, two bath, brick and tile/metal home with slab on the ground, while a premium inspection which is usually used is around $495. This expenditure is a wise investment considering the potential cost of buying a property that needs extensive unexpected restoration and repairs.
What does a building inspection report look like?
The report will include photos and address of the property, name of the applicant, the time and date and the age of the home. It also lists the name, contact details, and qualifications of the inspector, including their WA Builders Registration number.
Next, a summary of the significant findings will be highlighted to ensure the prospective buyer can easily see what necessary or immediate repairs are required.
The report will contain explanations of the definitions used by the inspector to record the condition of the property and any disclaimers and information about what is not reported on.
The remainder of the pages will contain photos and detailed room-by-room information on the condition of the floors, walls, ceilings, doors, and all fixtures including bathroom and kitchen appliances.
What does a building inspection report cover?
The inspection covers a visual assessment of the property and provides an opinion regarding its general condition. An estimate of the cost to repair the defects is not within the scope of the Australian Standard and does not form part of a report. If the property is part of strata or company title, the inspection does not cover common property, only the immediate interior and exterior.
The electrical and plumbing systems are only checked for basic functioning. If the buyer requires a more detailed report on these systems, they will need to employ licensed professional plumbers or electricians.