Perhaps it’s a reflection of how old I am, but as I keep seeing the stories in the media about rapidly rising house prices, I simply think: here we go again.
There are already those out there telling us we are in the housing bubble that’s going to crash.
Then there are others who are warning us how the Reserve Bank or APRA are going to interfere and slow things down.
And then the banks that only 12 months ago forecast house prices would fall 10, 15 or 20 percent are now suggesting house prices could rise by 10, 15, or even 20 percent in this year alone in some areas.
While these periods of rapid house price rise essentially come down to the forces of supply and demand, each sprinkled with varying quantities of irrational exuberance, the precise forces behind each of the housing booms I’ve invested in over the last almost 50 years are not the same.
I remember just after I bought my first investment property early 1970s inflation boomed when the Whitlam Labour government came in.
At that time interest rates were much higher than they are now.
Inflation had the effect of reducing the real value of mortgages, but it was also a time of strong wage growth.
Then I remember the great property boom of the late 1980s which was one of the factors that led to the recession we had to have in the early ’90s and particularly remember the boom in the early 2000s, when investor demand was a significant factor driving up house prices, in part because of the changes made to the capital gains tax regime at the time.
Looking at the current housing boom, there are some very interesting features that contrast with previous cycles.
The first is that population growth is currently very low, in fact, net immigration actually caused Australia’s total population to fall over the past 12 months.
That’s very different from previous booms — particularly in the middle of the last decade — where strong immigration was an important driver of rising house prices.
Another interesting difference is the relative absence of investors in the current housing market compared with owner-occupiers. This is reflected in the much stronger demand for standalone houses rather than apartments.
In February this year investors only made up about 20% of all home loans while traditionally this is closer to 30%.
And it’s not just local investors that are missing.
There is also the absence of foreign investors. During the last boom Asian investors, particularly from China were an important force driving up property prices and buying many of the high-rise apartments being built in our CBD. They are nowhere to be seen this time around.
So far, a significant factor of this property boom has been the presence of first homebuyers assisted by various federal and state government initiatives including the homebuilder program, the first home loan deposit scheme, and various deputy concessions.
While our banks are keen to lend to First Home Buyers, I’ve heard that the Bank of Mum and Dad is now is the fifth largest lending institution in Australia.
Here homeowning parents who sitting on significant equity in their property help their children get into the housing market either with gifts, loans or they assist by guaranteeing their loans.
So how can you make the most of this property cycle?
Is the Reserve Bank going to interfere and raise interest rates?
Will APRA slow down lending as it has in the past?
These are all questions I’m going to ask of my regular podcast guest, financial adviser Stuart Wemyss.
Truths about the housing boom
Our property markets have been surging this year with double-digit growth insight for all our capital cities.
And now that more Australians feel secure about our economy in general, and their jobs in particular, this will only place more impetus under our markets.
And it’s clear that FOMO (fear of missing out) when homebuyers and investors are scared the market is running away from them is driving many decisions.
Buyers feel they must get into the market and this is showing with even secondary properties selling well above their vendor’s expectations.
Normally at the beginning of the property cycle, there is a flight to quality – people remember the type of properties that held their values well during the downturn and avoid secondary properties.
But currently, I’m seeing some home buyers so worried the market is going to pass them by that they are compromising their selection criteria just to get into this market.
Unfortunately, we’ve seen how you end up when the market eventually slows down, and it’s not always a pretty sight.
So what’s ahead for the markets this year and how can you take advantage of our current property boom without getting burned? That’s the topic of my discussion today with independent financial adviser Stuart Wemyss.
Will the RBA increase the cash rate?
- The lowest 40% of income earners have been affected by COVID-19 the most. An increase in interest rate would adversely affect low-income owners when they could least afford it.
- An increase in interest rates would be bad news for the federal and state government budget deficits. The federal government’s total borrowings attempt to reach $1 trillion meaning 1% of price interest rates would cost the government an additional $10 billion a year – not an attractive prospect.
Will APRA introduce macroprudential controls?
Chairman Wayne Buyers said APRA’s primary responsibility is financial stability, not soaring house prices, and it is not seeing activity right now that would compel it to intervene.
However, more commentators are suggesting there will be a role for changes to potential lending standards. How might this be done?
- Increase interest rates for investor mortgages and leave owner-occupier rates unchanged (investor mortgage rates are already 0.4-0.8 percent higher than owner-occupier rates).
- Limit the maximum loan to value ratio (LVR) for investment loans. At the moment, investors can borrow up to 90 percent of a property’s value, meaning they only need a 10 percent deposit plus costs. The government could reduce these LVR limits, like the Reserve Bank of New Zealand did last month.
- Increase the benchmark interest rates for investors. A benchmark interest rate is used when a lender calculates your borrowing capacity. It provides a buffer to provide for future interest rate increases. The higher the benchmark interest rate, the lower your borrowing capacity.
While a new round of macro-prudential policies is looking increasingly a matter of when, not if, as I see it, the catalyst for such a policy intervention is more likely to be based on a worsening in the quality of lending standards or increase in mortgage-related household debt rather than as a response to heat in the housing market.
Tighter credit conditions would probably have an immediate dampening effect on housing market activity while continuing to let record-low interest rates support the ongoing economic recovery.
It’s very likely that the government (through APRA) will tighten borrowings criteria for investors sometime over the next six to 18 months. Of course, this is dependent on property prices. If price rises are considered sustainable, borrowing rules do not need to change.
For property investors, it is time to lock in access to as much capital as possible over the next six months.
Depending on the type and location of your property, I would probably be inclined to wait for one to two months before getting your properties revalued. This will allow for some more comparable sales to occur. Then, around April or May, I would ask my mortgage broker to revalue my properties and lock in my borrowing capacity to 80 percent of those new valuations. The exact timing of this does depend on your circumstances.
Notwithstanding the prospect of future lending rule changes (as discussed above), it is always a good idea to maximize your access to borrowings, even if you have no immediate plans.
So, what should someone interested in getting into property be doing now.
Lock in access to as much equity as possible over the next 6 months. Depending on the type and location of your properties, I would probably be inclined to wait for one to two months before getting your properties revalued. This will allow for some more comparable sales to occur. Then, around April or May, I would ask your mortgage broker to revalue your properties and lock in my borrowing capacity to 80% of those new valuations. The exact timing of this does depend on your circumstances.
How important is timing the market?
Ultimately the price you pay for a property is largely irrelevant. What is far more important (by a factor of 10) is the quality of the asset you buy.
Property is a long-term investment. You should plan to hold it for many decades. So there’s no point getting anxious over a few months.
Discretionary vendors will be encouraged by recent results. As such, we should expect the supply of properties on the market to increase. This may have a cooling effect on prices or at least temper price rises. We must remind ourselves that prices are able to move in both directions.
One thing is almost for sure. Interest rates are likely to remain low for an extended period of time, and that’s an opportunity.
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Stuart’s Book – Rules of the Lending Game
Some of our favorite quotes from the show:
“It’s not just you and me who are going to have to pay more. The government’s borrowings would cost them more.” – Michael Yardney
“I see property price growth slowing later this year. Not prices going down, but the growth slowing.” –Michael Yardney
“I’ve come to realize that too many people worry about failing, about getting it wrong.” – Michael Yardney
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