There are more interesting articles, commentaries and analyst reports on the Web every week than anyone could read in a month.
Each Saturday morning I like to share some of the ones I’ve read during the week.
The weekend will be over before you know it, so enjoy some weekend reading.
The bizarre questions borrowers should expect when applying for a loan
It’s no secret that the borrowing rules have changes.
So what kind of questions can you expect to see when applying for a loan?
This article from Domain.com.au looks at just how bizarre some of the questions are.
Banks have doubled down on their dissection of loan applications, holding up the application process to grill borrowers on peculiar transactions.
Pets, maternity leave and exit strategies are now under the microscope as banks question every aspect of borrowers’ finances.
Prior to the commission’s public hearings on consumer lending, banks requested more information from 40 per cent of applicants.
That figure rose to 67 per cent during the first quarter of 2019, with a peak in questioning coinciding with the release of the commission’s final report in February.
Lendi co-founder and managing director David Hyman said banks were increasingly focused on whether borrowers could service their loans.
“Applicants need to be prepared to justify their expenses and provide proof of their situation across a range of areas both inside and outside of traditional lending policy parameters,” he said.
“In some cases, customers are being asked to go to extraordinary lengths to substantiate their application.”
Banks are now trawling through borrowers’ transaction history line by line and questioning expenses that don’t stack up with information provided by applicants, according to Hyman.
“The nature of these inquiries typically means the banks are digging into expenses,” he said.
“As a result of that, more often than not banks are taking a view that someone’s expenses are higher than first stated.”
The ongoing financial impact of children and pets is a particular focus.
Hyman said a purchase at a pet store could prompt a bank to clarify how many pets the applicant actually has. Considering one dog or cat costs about $25,000 over its lifetime, it’s a concern that may be justified.
One borrower was asked whether they were hiding children from the lender because they had shopped at a baby store. In reality, the applicant had bought a pram as a gift for a friend.
Banks have also questioned joint applicants over whether children would jeopardise their ability to repay loans.
Some lenders have requested proof that borrowers are returning to work after parental leave, even if the loan can be serviced on one income.
Other borrowers have been asked to show evidence of savings set aside to cover childcare costs despite this being itemised in their monthly living expenses.
Young applicants have even been quizzed over their exit strategy – proof they would be able to repay their loan when they retire – which was previously only required by borrowers retiring within five to 10 years.
“Banks are increasingly asking for it earlier, especially for long-term loans,” Hyman said.
Why are lenders so curious about borrowers?
The intensification of questioning is the progression of a push for more responsible lending by the Australian Prudential Regulatory Authority (APRA), according to AMP Capital chief economist Shane Oliver.
“There’s no doubt that lending standards became a bit lax through the property boom,” he said.
“Initially the focus was very much quantitative – the 10 per cent speed limit on investor lending, the 30 per cent speed limit on interest-only lending and the 7 per cent serviceability test.
“It moved towards a more fundamental focus on responsible lending towards the end of 2018.
There was more talk of the Household Expenditure Measure benchmark not being appropriate.”
He said increased scrutiny was reinforced by the royal commission, which highlighted examples of irresponsible lending.
“That made the lenders somewhat paranoid,” he said.
“They’ve got to this point of asking seemingly trivial questions.”
Oliver said more intense questioning would mean loans would take longer to process and the likelihood of applications being rejected was greater, but it wasn’t all bad news for borrowers.
“It could be more beneficial if borrowers are forced to think about their true ability to service a loan,” he said.
“It could result in them ending up with a product or a loan that is more appropriate for their financial circumstances.”
“If it leads to more appropriate matching of borrowers to loans that could be a good thing.”
Borrowing capacities set to get a boost
For buyers worried about how a financial interrogation could affect their borrowing capacity, there may be light at the end of the tunnel.
Previously, lenders had to ensure borrowers could meet repayments if interest rates were 2 per cent above the rate they were offered, or 7 per cent, whichever was higher. Most lenders assessed applications at an interest rate of 7.25 per cent.
But historically low interest rates meant the gap between actual and assessed rates had grown unnecessarily wide.
“A serviceability floor of more than 7 per cent is higher than necessary for [authorised deposit-taking institutions] to maintain sound lending standards,” APRA chairman Wayne Byres said in a statement.
Borrowers’ serviceability will now be assessed at 2.5 per cent above the loan’s interest rate.
The move would boost an average buyers’ borrowing power by 15 to 20 per cent within weeks, according to Hyman.
“Banks have implemented serviceability changes in the past relatively quickly,” he said. “I’d suggest we’d start to see it flow through lender by lender by the start of August.”
The five most important questions banks ask borrowers
While home loan applicants should expect detailed and often strange queries about their spending habits, these five questions matter the most, according to Lendi.
1. What are your living expenses?
Applicants are required to provide a highly detailed view of their monthly living expenses. Omitting details will raise doubts and questions.
2. Do you have a good credit history?
Borrowers who have been slack with credit repayments or slow to pay bills will have reduced borrowing power.
3. What is your employment history?
Banks want to see a consistent and sustainable work and income history. For full-time permanent employees, most lenders like to see at least six months’ continuous employment in their current job. Applicants who are not permanent full-time employees will face more scrutiny.
4. Are you a good saver?
Saving history is particularly important, especially for first-home buyers. Banks often want to see how a borrower acquired their deposit. The size of the deposit will also determine the loan-to-value ratio and affect the loan package offered. Lenders also like to see some extra savings that can be drawn on for unexpected expenses.
5. How do your loan terms fit with your broader plans?
Increasingly, lenders are closely examining proposed loan terms so it’s important to explain the rationale behind the proposed length of the loan or interest-only period.
Read the full article here
New apartment starts plunge
New apartments continue to see a slowdown.
Building activity figures are always quite complex, with lots of moving parts.
Let’s see if we can bring some clarity to the key themes, with a particular focus today on new apartments.
Sydney faces down glut
There was a sharp 27 per cent drop in attached dwelling completions for New South Wales in the first quarter of calendar year 2019, as the pace of construction backed off in Sydney.
The number of new attached dwellings under construction in New South Wales has continued to fall each quarter since the end of 2017, from about 69,000 to 62,000 by the end of March 2019.
Read the full article here
Property market update: Buyers are back, stock levels are low
What is the current state of play for our property markets?
An article on Realestate.com.au looks at what’s really going on.
This week realestate.com.au chief economist Nerida Conisbee looks at efforts to stimulate the market, why buyers are back and yet stock is low, and whether it is time to take a closer look at the Melbourne market?
So much stimulus
After putting a dampener on property for four years, regulators, Federal Government and the RBA are all re-applying stimulus to the property market.
Here is the state of play so far:
- APRA have removed the speed limit on investor lending growth, the cap on interest-only loans and the 7.5% stress test on home loans
- The Federal Government has cut income taxes, made no changes to negative gearing and will be giving first home buyers a chance to buy with a 5% deposit at the end of the year
- The RBA has cut interest rates twice and there may be further cuts
- Globally, interest rates are trending down again – this puts less pressure on wholesale rates and hence our mortgages.
A couple of things can be taken from this.
The first is the difficulty in getting policy right – property market conditions can change quickly and putting in too many brakes at once can cause conditions to turn too hard, too quickly.
The second is that all this stimulus is being applied because the Australian economy isn’t doing all that great, which will be a key factor in moderating this upturn.
When will home owners start selling again?
Buyers are back, but it’s a pity about the stock levels.
The recent housing downturn was characterised by pretty much no distress – listing volumes didn’t jump, even though prices fell.
With so many buyers out there, it does seem likely that sellers will see now as a good time to transact, however it is likely that many are waiting for a more solid turn to price growth.
This will probably take a couple more months, so ideally around the Spring selling season.
What would lead to a big jump in listings?
High levels of distress – rapid rises in unemployment, mortgage rates rising rapidly – anything that means people struggle to pay off their loans will lead to a jump in listings.
Australians are highly indebted, many are in theoretical housing stress but are also paying low levels of interest and are not particularly worried about losing their jobs.
At this stage, rising interest rates are not going to happen but rising unemployment is occurring. Ideally, for confidence in the property industry to return, what’s needed is a solid return to price growth that leads to people selling.
A closer look at Melbourne
Melbourne pricing remained stable in June and although it is still too early to tell if the market has plateaued, some indicators suggest that this has happened.
There are however some more affordable parts of Melbourne that seem to have turned a corner – north west, outer east and west for the better.
The south east and west were the areas that got through the downturn most unscathed.
In contrast, prices in the inner east dropped 16.1%, likely driven by high levels of apartment development.
Surprisingly, inner Melbourne did a lot better.
However, it is likely that a lift in apartment quality (and hence price) may have meant it did slightly better. Inner east was already pretty expensive.
Like Sydney, property seekers in Melbourne are congregating around premium suburbs.
This would explain the big lift in clearance rates and will likely mean prices will rise in many of these locations pretty soon.
Do high levels of search and engagement mean a suburb will outperform?
In 2015, an analysis our Behavioural Communications and Analytics (BCA) team on views per listing started to show Hobart tearing away from the rest of Australia.
At the time, median prices weren’t going anywhere, however by 2016, high levels of search began to translate to transaction activity.
Read the full article here
The worst is behind us
As we enter into a new financial year, it would seem the worst is behind us, and there’s plenty to look forward to.
In this article for Switzer, John McGrath looks at what’s really going in our property markets.
We’re ending the 2019 financial year on a positive note, with the first month of price growth in both Sydney and Melbourne since their respective peaks in July and November 2017.
CoreLogic’s June report indicates a turnaround in Sydney and Melbourne, with home values up +0.1% in Sydney and +0.2% in Melbourne for the month of June.
Although these movements are very small, they indicate a real change in sentiment following the federal election and the first interest rate cut in 30 months in June.
Recently, auction clearances have bounced above 60%, which is the benchmark for normal market conditions.
Extra reductions in fixed home loan rates by the banks, coupled with APRA’s decision to ease credit criteria, are also factors waking buyers up to the opportunities of FY2020.
For the financial year 2019, the CoreLogic report shows Sydney home values fell a total of -9.9% and Melbourne dipped -9.2% over the 12 months to June 30.
This is more reflective of losses in 2018, with the pace of price declines slowing every month in 2019, as the market began to regain strength.
Now we’ve got the first positive numbers, which indicates to me that we are through the worst of this downturn, at lease in these two cities.
We might get some fluctuations in monthly figures from here, as markets rarely recover in a straight line, but I think the bottom is either here or might have even already passed.
The results for FY2019 broken down between houses and apartments are as follows:
Median house price: $866,524
House price change: -10.8%
Median apartment price: $682,374
Apartment price change: -8.0%
Median house price: $709,092
House price change: -11.8%
Median apartment price: $527,748
Apartment price change: -3.3%
Source: CoreLogic Hedonic Home Value Index, June 30, 2019 results
With change in the air, what opportunities does the market floor present for you?
Opportunities in Sydney and Melbourne in FY2020
- Should you upgrade? You might sell for less while prices are soft but you’ll also be buying up the ladder for less, too
- Should you buy an investment? Prices have fallen significantly and rental yields are stabilising or growing
- Should you buy your first home? From January 1, you can access the First Home Loan Deposit Scheme and buy with just a 5% deposit; you also have the Super Saver Scheme where you can make deposits into super and use the tax benefit and investment yields to fast track your savings; plus there are various stamp duty concessions and first home buyer grants available in many states. All of this on top of fallen property values…
People often say to me, “John, when is the best time to buy?”
The common response to this question amongst agents is “20 years ago” but today I’ll give you a different one – I believe it is NOW.
I’ve been in real estate for 35 years and if there’s one thing that concerns me and that is people missing obvious opportunities. Property is an incredible effective wealth creation vehicle and even more so if you can buy at the bottom and sell at the top!
Buying a property is a big financial decision and that’s why most people wait for the comfort of the herd to move first, at which point prices will already be on the rise.
You should always buy with a level head when your financial position is nice and secure. Trying to time the market is usually a bit of a fool’s game but if you’re ready to buy now, then I’d encourage it!
Barring some major international economic event, if you buy now you’ll be purchasing at or very close to the market floor.
It’s worth remembering that in high value markets like Sydney, even a 1% price rise means you’ll be paying $8,700 more for a house and $6,800 more for an apartment based on today’s median prices. So, if you’re ready, why wait?
Let’s take a look at price changes over FY2019 in other capital cities. Only two cities had positive (but small) gains in home values and this is due to credit curbs affecting buyers in every market.
FY2019 change in home values
Source: CoreLogic Hedonic Home Value Index, June 30, 2019 results, house/apartment prices combined
Credit has remained the No 1 challenge in property in FY2019. Even though APRA is now easing serviceability criteria, tougher lending conditions are the new norm and we have to get used to it.
Read the full article here
Six fears keeping you from getting rich
When it comes to wealth – it’s just as much about mindset as it is abilities.
This article from Executivestyle.com.au explains the 6 fears stopping people from achieving wealth.
Napoleon Hill, author of the 1937 personal finance classic Think and Grow Rich, says there are six basic fears in life, and every human being suffers from them at some point.
These fears, he writes, are the psychological reasons some people never get rich.
Hill maintains that “Fears are nothing more than states of mind,” and that “One’s state of mind is subject to control and direction.”
In other words, you can avoid them.
But, as Hill writes, “Before we can master an enemy, we must know its name, its habits, and its place of abode.”
As you can probably tell already, his language — and some of his ideas — come across as a little dated, but Hill was clearly clued in to the idea that success might not be just about how much money you earn, but also how you choose to think.
The fears are:
1. The fear of poverty
According to Hill, the fear of poverty is both the most destructive and the hardest to master of the six fears. This is because of what Hill refers to as “money madness.”
People “prey” on each other financially in order to attain the most amount of money. The author points out that “A man is considered less than the dust of the earth, unless he can display a fat bank account.” He continues that “Nothing brings man so much suffering and humility as poverty!”
In order to conquer this fear, Hill says you must create a desire for riches and completely banish the option of poverty. You must be unwilling to accept poverty.
2. The fear of criticism
Hill says the roots of this fear can be traced back to the times when people used to be burned at the stake if they expressed beliefs that were contrary to common beliefs held at the time. He writes that criticism often becomes a self-fulfilling prophecy which can hold people back from being successful — and rich.
According to the author, criticism does nothing but instill fear and resentment in people, and that parents, relatives, and employers shouldn’t use it. “Employers who understand human nature, get the best there is in men, not by criticism, but by constructive suggestion.”
3. The fear of ill-health
People fear sickness because they know it could, in an extreme case, lead to death. Hill says people also fear sickness because of the “economic toll” a sickness can take on the person it affects. For example, a severe illness could eliminate your ability to work, which would also eliminate your livelihood.
The author cites hypochondria and says that people are often the creators of their own illness. The more someone thinks they’re sick or is told they’re sick, the more likely they are to actually become sick, which then negatively affects their ability to reach their wealth goals.
4. The fear of loss of love
According to Hill, this fear comes from “man’s polygamous habit of stealing his fellow man’s mate.” He says it’s the most painful of the six fears and that it “probably plays more havoc with the body and mind than any of the other basic fears, as it often leads to permanent insanity.” The author says this fear makes people less likely to trust others and more likely to gamble, which can result in spending more than you have and incurring debt.
5. The fear of old age
Hill says that behind people’s fear of old age is their fear of the possibility of poverty. “‘Poorhouse’ is not a pretty word,” Hill writes. “It throws a chill into the mind of every person who faces the possibility of having to spend his declining years on a poor farm.”
The author points out that old age not only threatens a person’s economic freedom and independence, but also their physical freedom and independence.
6. The fear of death
The fear of death comes from the fear of the unknown, Hill says. No one truly knows what comes after death, which is why it scares people. Hill says the fear of death leads to a “lack of purpose” and “lack of a suitable occupation.” Without an occupation, it’s hard to become rich.
The author maintains that for some people, this is the most cruel fear. At the same time, he thinks the fear is useless. “Death will come, no matter what anyone may think about it,” Hill writes.
Read the full article here
Weekend video: DOG VS CAT IQ TEST | Who is Smarter?
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