Tuesday, May 19 2015
Below are some extracts I read from an article today and thought the following pretty well sumed up the state of play at the moment and potential impact of changes occuring in the lender space. I will posting more about lender changes in the comings weeks.
(Source: Property Observer)
I may stand-alone here, but Sydney’s done – there I said it!
Normally, locations go flat when they become unaffordable or major infrastructure projects are abandoned but this time it may be at the hands of the banks, the governing bodies and the ATO.
Now making a statement like this is bold. Firstly, you need fundamental facts to back it up and these are the things I research – knowing where and when to invest, along with when to stop investing in an area. And lastly, we need an alternative place to invest. So, here we go:
The first sign for me that Sydney was on the cusp of a change was on April 23rd. A fundamental bank policy change that two major banks announced was the reason. This change stated that effective April 24th at 5pm, all Non-Resident lending Loan to Value Ratios (LVR) would be reduced from 80% of purchase price to 70%. Meaning borrowers must have another 10% cash to put towards the purchase.
One of those banks was the biggest lender to Chinese borrowers. The myth that the Chinese are all paying cash for houses is simply not true. The best Business Development Manager (BDM) that this bank employs has seen an immediate drop of 25% in mortgage volume since this change. Now that’s one BDM, for one bank, in one district of Sydney.
There is no question the overseas buyers are pushing our prices up but it’s not just the Chinese. They accounted for $27.7 billion in property transactions last year but the USA purchased $17 billion, Canada $15 billion and Malaysia $7.2 billion. The falling Aussie dollar has made our property much more attractive to them along with a buoyant property market.
But like usual, when there is money, there are Sharks looking for loopholes. So bringing sunshine to my eyes, are the ATO. Yeah, you won’t hear me say that too often. They are currently investigating 150 cases of unlawful purchases from overseas buyers. The loophole is done through trusts and companies. There appears to be a loophole in the FIRB’s (Foreign Investment Review Board) approval process for developers too. The great thing is that the ATO are a big enough player to bring this behavior to a halt and prosecute those offenders. Watch this space!
With the rate drop in May, one would think this would fuel more buyers to pay more. The funny part is that even though interest rates dropped, as a borrower your borrowing capacity hasn’t increased. wHy?
Banks are servicing your loan application at the 7% mark. This is a protection mechanism to safeguard you when interest rates rise in the future. This 7% mark hasn’t shifted in the last 3-5 interest rate drops. So no matter how much the rates still go down, your ability to service more debt will not increase unless your income does.
Banks must now also hold more funds in managed accounts per mortgage they approve. Meaning for every $300k mortgage the bank must hold $600k in managed funds. This has doubled in recent years. Hence we’ve seen Managed Funds increase to 3.05% in May when interest rates decreased. This was done to attract more consumers to invest their money. Consequently, this reduced the banks profits by another 0.25%. So it comes as no surprise that in mid May the interest rate war between the banks ended. One major bank no longer discounts interest rates for investment loans. The others will follow.
The governing body for mortgages, APRA (Australian Prudential Regulation Authority), have also told the banks that if their investment portion of their portfolio has increased by over 10% this year, then they must hold another $500 million in managed funds. Meaning banks will now be reluctant to pass this level and reduce interest rate discounts on investment loans.
The Median house price in Sydney has topped $900k. Insane, I know. Now according to the ABS, the Median income is $80,048 per annum. So a couple with two children, who each earn $80k, have a maximum borrowing capacity of between $800k – $1 mill. They have reached their cap.
So to summerise:
- The banks are slowing up lending to Non Residents
- The ATO are stopping illegal overseas transactions, plus reversing illegal purchases
- Interest rates have dropped, but you can’t borrow any extra funds
- The banks are stopping interest rate discounts to investors
- The Sydney property market has seen fantastic capital growth for over 2 years
- Property prices are unaffordable
Now given that investment loans now account for 50% of all mortgages written, the above corrections will see a drastic decrease in investor activity. This decrease will significantly impact consumer confidence across the board. And the end of the Sydney property cycle will be here.
Think about it… You have been inspecting houses for the past 2 months and you’re used to a high volume of purchasers inspecting and turning up to auctions. Then, the next week the volume is halved. Would that get you thinking? Is there something going on that I don’t know about? Your consumer confidence has just been shot.
So, after all this doom and gloom, where and what do we invest in?
The key to investing, is buying in great locations in the low part of the property cycle. Where consumer confidence is at its lowest. where is this the case?
South East QLD is an emerging market where those who get in RIGHT now will benefit. If you wait until Christmas, you have missed the boat.
Tuesday, May 12 2015
The ABS has recently released figures on migration to and from Australian cities. It shows that Sydney is losing as many as 14,900 people every year, while Melbourne and Brisbane had significant gains.
Urban Task Force CEO Chris Johnson believes Sydney’s skyrocketing living costs could be behind the mass migration.
“It seems that Sydney’s rising housing costs are leading to a steady flow of people out of the city,” he said.
“Last financial year according to the ABS, Sydney had a nett loss through internal migration of 14,900 people while Melbourne gained 4,000 people and Brisbane gained 3,500 people.”
“There is a steady stream of people leaving Sydney with most of these people going to Melbourne or Brisbane. It is important that strategic planning for population growth in NSW understands the nett flow of internal migration. The recently released data from the ABS now gives planners more accurate data on internal migration,” Mr Johnson said.
Out of the total loss from Sydney, the ABS figures also include those moving interstate (6,900) as well as those only moving away from the Sydney metropolitan area (8,000).
Saturday, May 09 2015
Chinese buyers could pump as much as $60 billion into Australian housing over the next six years, with much of that investment going into new housing, according to a Credit Suisse report.
Strategist Hasan Tevfik and his team produced a landmark analysis last year revealing the scale of Chinese housing investment for the first time.
Now they have revised those original forecasts dramatically upwards in the wake of the latest foreign investment figures.
Over the next six years to 2020, Chinese spending on housing will more than double what it has been over the previous six years.
China has become Australia's biggest source of approved foreign investment for the first time after a $12.4 billion splurge on real estate in the last financial year.
Of that total around two-thirds, $8.7 billion, was spent by investors based in China or by new immigrants from China on residential real estate, according to the Credit Suisse analysis.
That represents an increase of 60 per cent on Chinese spending in the year. It is also equivalent to 15 per cent of the national housing supply.
"Purchases are concentrated in Sydney and Melbourne where Chinese demand is the equivalent of 23 per cent and 20 per cent of new supply, respectively," Mr Tevfik said in a client note this week.
"While new foreign investment proposals may make Australian real estate less attractive for Chinese buyers, we believe the potential erosion of demand will be marginal.
"After all, Australia is on the doorstep of the greatest wealth creation in three centuries. Despite moderating growth, we expect more Chinese wealth to be invested abroad."
Australian housing-related stocks – developers, building material companies and property websites – will be beneficiaries of the boom.
But the surge of the Chinese money is taking its toll on prices, especially in Sydney, where prices lifted 13 per cent last year, and in Melbourne, where prices were up 5 per cent.
"If Chinese buyers are on the verge of snapping-up the equivalent of a quarter of new supply, we can see why house prices in both cities have outpaced income growth," Mr Tevfik said.
"Without a structural increase in supply to match the structural increase in Chinese demand, there will unfortunately be strong property price inflation for many years to come."
Housing supply needs to increase by 4 per cent annually to accommodate the strength of Chinese demand.
Approvals of new houses and apartments hit a record level in March, pushed higher by a jump in Queensland apartment approvals.In the year to March, more than 210,000 houses and apartments had been approved nationally.
The Credit Suisse analysis said new application fees – of $5000 or more – on foreign property buyers, introduced by the federal government would do little to stem demand. However new fees in Victoria may have a greater impact on foreign demand.
In this week's state budget, Victoria announced surprise new taxes on foreign buyers of residential real estate, including a 3 per cent stamp duty surcharge.
"We imagine the potential increase in fees to buy a Melbourne property would drive the marginal buyer to other Australian cities like Sydney where charges are lower," Mr Tevfik said in the client note.
"A tax in Victoria could make Sydney house prices even more expensive."
Sunday, May 03 2015
(Source: AFR)
Investing surplus cash into superannuation, borrowing to invest and paying off the family home are the top strategies from advisers on how to hit the magic $1 million savings target for retirement.
But as to whether $1 million is enough depends on life expectancy and whether you are planning on a champagne or rainwater lifestyle.
"There is no 'average' when it comes to living expectation," says Stuart Wemyss, a director of ProSolution Private Clients, a financial advisory group. "$50,000 a year might be enough for some people whereas others will need $150,000 a year. For most people, it's going to be somewhere in that range."
The debate about the $1 million target for super savings was sparked by the former head of the federal government's super review, Jeremy Cooper, warning $1 million "won't necessarily guarantee a comfortable retirement". Many argue that $1 million is still the magic figure – each. So rather than a couple relying on $1 million, many advisers say $2 million is more realistic.
But for the "average" super saver, getting anywhere near the $1 million target will be a prodigious feat of savings, investment and risk-taking over coming decades, according to government statistics.
For example, according to recent figures the average balance at the time of retirement was about $197,000 and only $105,000 for women, which means recent retirees will need to rely on the age pension in their retirement.
The average Australian 40-year-old male can expect to live for another 40 years, according to life expectancy tables.
ENORMOUS CHANGES
The magnitude of change that can happen during that period is reflected by looking back 40 years when the average house price in Sydney was $34,000, Gough Whitlam was prime minister and the Australian Securities Exchange was trading under 300 points.
The average house price in Sydney is now more than $600,000 and the stock market is touching 6000.
John Woodley, chief executive of Fitzpatricks Private Wealth, warns that for older investors, say in their 50s, it could mean increasing risk when this should be reduced because of the difficulty in recovering lost ground if there is another market crash, such as the global financial crisis.
Woodley encourages a lifestyle review involving reduced discretionary spending, pushing back retirement, partial retirement or reallocating assets, such as downsizing.
David Bryant, head of investments for Australian Unity, says the traditional strategy involving real estate, bank shares and term deposits that has worked "so well for so long" is approaching its end.
"Investors need to consider introducing other options such as unlisted commercial property and investing offshore. Get prepared now for where you will end up. Get familiar with how and what to invest in, and increase your exposure over time," he adds.
Claire Mackay, a financial planner and accountant with Quantum Financial, recommends topping up super with regular salary-sacrifice and personal contributions for any free cash.
For example, a 55-year-old can make an annual maximum contribution – 9.5 per cent superannuation guarantee and salary sacrificing – of $35,000.
Thursday, April 23 2015
With the property market on the move getting to a 20% deposit is a major challenge. Particularly when you consider Brisbane’s median price is heading towards $500,000.
By the time you get to your $100,000 the market could have moved on another $50,000 or $100,000. So you are forever playing catch up.
Buyers also forget the other costs like stamp duty, conveyancing, bank fees etc which can add up to around 5 - 7% of the property’s value. So for your $500,000 property you may need more like $125,000. Again as prices rise these cost will push upwards.
Even for first home buyers once the price gets above $500,000 stamp duty kicks in.
People think of mortgage insurance as a dirty word but the reality is it is just a means of getting into the market sooner. In some circumstances it is possible to purchase a property with just a 5% deposit plus costs. In other words $25,000 plus other costs.
What is mortgage insurance?
Mortgage insurance protects the bank or lender, should a home loan go into default, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan.
While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, mortgage insurance can also provide the same protection, meaning borrowers can purchase property with a smaller deposit.
How is it paid?
The insurance premium is a one-off payment, and in many cases it can be added to your loan and paid off progressively over the life of your loan.
The premium payable is determined by both the loan amount and the loan to valuation ratio. The higher the loan amount and the higher the loan to valuation ratio the higher the premium.
What’s in it for you?
In a rising market it allows buyers to get into the market sooner. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, it can make good financial sense to purchase earlier even with the added cost of mortgage insurance.
To find out if mortgage insurance would be beneficial to you contact us today.
Wednesday, April 22 2015
A major driver of Sydney's phenominal property price growth has been the Chinese investor market. While many local buyers have found themselves priced out of the market cashed up Chinese buyers have been driving the market. But with median prices nearing $900,000 and yields falling below 3% the value proposition is becoming questionable.
This has resulted in a shift in focus with Brisbane emerging as a desirebale market for Chinese buyers. Prices are affordable with a median still below $500,000, major infrastructure projects are underway across the city. Brisbane’s accessibility to quality universities, major employment hubs and its clean lifestyle with an abundance of open spaces were major drivers for the Chinese to purchase in Brisbane.
A number of businesses that specialiase in assisting Chinese investors have advised a significant increase in activity. One advising 90 properties were sold in the last week.
The Brisbane market has been steadily trending upwards for the last year and half but this significant "buyer block" has the potential to change the game and create additional upward pressure on prices.
Monday, April 20 2015
The outcome of the next Federal election could have a bearing on the likely direction of negative gearing.
Prime Minister Tony Abbott has quashed speculation over the future of negative gearing by promising there will be no changes. "Yes," was his answer when asked on Thursday whether he could rule out changes to negative gearing.
However Shadow Treasurer Chris Bowen said it would be "irresponsible" to rule out changes to negative gearing before the election.
Mr Bowen indicated that Labors policy may be that only buyers of new property may be able to access negtaive gearing benefits. He has indicated those who already hold investment property would not be effected. This also clearly seems to be the view of the government.
I think the message is if you want to take advantage of negative gearing and enjoy the tax benefits associated with property investment the time to act is now before any changes come into effect. The Federal electon is due next year so there is not a great deal of time left.
Contact us to discuss your investment plans
Monday, April 20 2015
(Source: AFR)
Australians who believe $1 million is enough for a comfortable retirement are in for a rude shock, according to one of the leading providers of retirement incomes.
Superannuation industry veteran and chairman of retirement income at Challenger, Jeremy Cooper, said if the typical $1 million nest egg was used to buy a lifetime income in the current interest rate environment, it would fetch about $1297 a fortnight – the same as the government pension.
"Assumptions and assertions that $500,000, or even $1 million, in super, in the current environment, will guarantee a comfortable retirement are suspect," Mr Cooper, chairman of retirement income at Challenger, argued
"The brutal reality is that a fair price for an age pension in today's interest rate environment is around $1 million. For that amount, a couple will get $33,717 of income a year. A comfortable retirement would cost more."
Debates about superannuation tax concessions risked misleading the vast majority of Australians who view their superannuation in terms of lump sum payouts instead of reliable income streams, he argued.
Mr Cooper's statement comes after the government's intergenerational report found that by 2055, Australians' life expectancy would have climbed to 95.1 years for men and 96.6 for women, compared with 91.5 and 93.6 for people born today – reflecting the need for more retirement planning.
Current low bond and interest rates would severely affect the returns of investors, many of whom are preparing for a lump sum windfall instead of steady income.
"In the quest to ensure our super taxes are equitable, there's the potential for heavy collateral damage to be sustained to a large cohort of the people we're trying to help. These are the middle-income households hoping to accumulate sufficient nest eggs to mainly self-fund a reasonably comfortable retirement," said Mr Cooper, who chaired the super system review in 2010.
Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia, agreed $1 million is not an adequate amount for a comfortable retirement and said super assets below $2.5 million should not be taxed – to boost their savings. There was also not enough focus on setting up reliable income streams, she said.
Friday, April 10 2015
It is of no surprise that the profile of private rental tenants has changed dramatically over the past 30 years with an increasing number of families with children and older people renting for the long term.(AHURI) Australian Housing and Urban Research Institute at Swinbourne University of Technology is being used to inform government policy. The number of households in the private rental market doubled to 1.8 million over the past 30 years with the biggest growth in Queensland and the ACT,according to a bulletin based on research released in February.
Families with children represented more than 40% of renting households in 2011, a much higher proportion than in earlier decades, the bulletin noted. The number of group households has also risen,with more than one in ten private properties being rented by unrelated housemates in 2011,up from just over one in 25 in 1981 Traditionally single tenants and young families made up the largest proportion of renters.But renters to lone person households fell to one quarter in 2011 from just over 40% in 1981 Renting households are also getting older.More than half of renters were over the age of 35 years in 2011 compared with around 40% in 1981.
"While the age profile of households in the private rental housing remains young relative to all households,the median age of household heads is growing more rapidly than for households in general.This is likely to lead to the private sector being home to larger proportions of elderly households in the future" the bulletin noted. For your investors,the findings suggest properties that would suit families with children or appeal to older people will be the ones most in demand,perhaps increasingly so in the future.
Friday, April 10 2015
The number of Australians aged 65 and over is projected to more than double by 2054–55, with 1 in 1,000 people projected to be aged over 100. In 1975, this was 1 in 10,000.
Australians will live longer and continue to have one of the longest life expectancies in the world. In 2054–55, life expectancy at birth is projected to be 95.1 years for men and 96.6 years for women, compared with 91.5 and 93.6 years today.
The average annual rate of growth in the population is projected to be 1.3 per cent, compared with 1.4 per cent over the past 40 years.
By 2054–55, the participation rate for people aged over 15 years is projected to fall to 62.4 per cent, compared to 64.6 per cent in 2014–15.
The number of people aged 15 to 64 for every person aged 65 and over has fallen from 7.3 people in 1975 to an estimated 4.5 people today. By 2054–55, this is projected to nearly halve again to 2.7 people.
Female employment is projected to continue to increase, following on from strong growth over the past 40 years. In 1974–75, only 46 per cent of women aged 15 to 64 had a job. Today around 66 per cent of women aged 15 to 64 are employed. By 2054–55, this is projected to increase to around 70 per cent.
During the 1990s, Australia's productivity grew at an estimated average rate of 2.2 per cent per year. Today, Australians produce twice as many goods and services for each hour worked as they did in the early 1970s.
The economy and incomes are projected to continue to grow, but at a slightly slower rate than over the past 40 years.
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