Spruikers Paradise- A Tale of Two Cities

For a number of years now, Sydney property buyers have been coerced into buying in Brisbane. Lured by the promise of massive capital gains and thinking they are getting greater value because the prices were so much cheaper than Sydney.

 

What due diligence did these investors actually undertake? Often it was a schmick presentation by a professional marketing company that claimed to have carefully scoured the entire property market around Australia, and hand-picked a particular unit in a particular development.

 

Well, these investors are about to revisit what they learned in Economics 101, however unfortunately clearly forgot….the law of Supply & Demand.

CoreLogic recently released their expectations for the number of units due to settle over the next 24 months in each capital city. Whilst Sydney can expect an uplift of 12.2%, Brisbane blows that number out of the water with a massive uplift of new units of 21.4%.

With such a massive jump in the supply side, you would need to see a huge lift in the demand side for these units to avoid a complete blood bath in Brisbane. And unfortunately the demand is just not there. In the last 5 years, jobs growth in NSW has increased by 38%, compared to Queensland’s 12%…and it is jobs growth that drives population growth to those States.

In the last 5 years the NSW share of national population growth was 29%, whilst Queensland experienced 20%……. ‘Brisbane, we have a problem.’

The picture is becoming very clear right now and is showing up in what is known as ‘Settlement risk’. That is, the % of off the plan units that were sold in the last few years that are settling today with a valuation lower than the contract price. Sydney has the lowest number in the country sitting just above 10%. In Brissy that number has just hit a whopping 50% according to CoreLogic. That means that 1 in every 2 settlements, is coming in at less than what it was bought for. And whilst some investors will have the cash or equity to complete that purchase, many wont.

The lesson here is simple. Property doesn’t always go up. Property can carry substantial risk.  And most importantly you must always always do your own due diligence.

– Kiril Ruvinsky, Director Corporate Partnerships

Right now, is the time to review your debt – it’s costing you money

 

Although the official cash rate remains on hold, all four major banks in June raised interest rates by between 0.3 and 0.35 percentage points on interest-only home loans, mainly used by investors, while also cutting some other owner-occupied rates by a much smaller amount.

One reason is the prospect of tougher capital rules.

Any week now, the Australian Prudential Regulation Authority (APRA) will reveal how much extra capital banks must hold to be more shock-proof, a change that on its own would dampen profits.

Recent behaviour sees the banks having a track record in passing on the cost of tougher capital requirements to their customers.

A recent Reserve Bank paper pointed out that since 2008, official interest rates set by the RBA had dropped 5.75 percentage points, but the rates banks charge on home loans were only down by around 3.9 percentage points over the same period.

It is highly likely that the next round of capital rules may also see another out of cycle rate increase for investor loans.

A second and related reason why investors and people with interest-only loans may keep copping it is the regulators’ concern about the housing market.

In March, APRA imposed a 30 per cent cap on the proportion of new mortgage lending that can be interest-only, alongside a previous 10 per cent cap on growth in the stock of housing investor loans.

Banks have adjusted to these caps through a combination of tougher lending rules, and price signals.

However, the objective of these two caps is also to limit competition in housing investor lending.

The recent rate hikes by banks should quell some of the RBA’s fears about households’ excessive interest-only borrowing, without any need to move the cash rate.

A third reason why property investors may face higher interest rates is the political target on the banks’ backs. When they are so on the nose with pollies, bankers are naturally hesitant about slugging the majority of mortgage customers, who are owner occupiers, with higher rates.

But when housing affordability is so stretched in NSW and Victoria, it’s a brave politician who comes out and bashes the banks for jacking up rates on landlords.

Whether it is tougher capital rules, curbs on the housing market, or the bank tax, lenders have plenty of excuses to raise interest rates at their disposal. Property investors have become the easiest group for the lenders to target.

With so many changes to lending criteria in the past few months, nobody quite knows where this will end. One thing is certain, however, that investors need advice right now to ensure they are correctly structured.

Many investors who are coming off their 5-year interest only agreement with their Bank, are going to get a rude shock when their Bank denies a further interest only extension of that loan. A possible solution is to apply for an extension today, whilst they are still eligible.

– Carl Thompson – Commercial Lending Specialist, Strategic Investor Group