The mortgage landscape changes for borrowers...
Summary and Impact
The Australian Prudential Regulation Authority recently wrote to banks proposing the 7 per cent serviceability buffer on home loans be removed. This is welcomed news for borrowers and the property market.
For those that understand the significance, the impact is likely to lift the market through better buyer sentiment and loan accessibility
Let's quickly unpack this for you. This is an exceptionally positive forward step for the Australian property sector as we suggested in our last post.
~ APRA’s serviceability buffers were introduced back in December 2014. It's primary purpose was a way of cooling the housing market, and protecting banks lending books. It required banks to assess all home loans against a floor of 7 per cent or 2 per cent above the rate paid by the borrower. (whichever was the higher).
The newly proposed change would likely mean the 7 per cent buffer would be replaced by a simpler 2.5 percentage point step up on current rates for all borrowers. So for loans with rates that are markedly below the 7 per cent floor (and with the recent RBA rate reduction to a cash rate of 1.25% there are many, many products), this would mark a significant easing in lending.
An exceptionally positive outcome...
Summary and Impact
Following the results of Australia’s Federal election this past weekend which saw the Liberal National Party clinch an unexpected but convincing victory. Here's a quick 'wash up' and likely 'summary and impact' on the Australian property market.
Let's quickly unpack for you, what is an exceptionally positive outcome for the Australian property sector.
~ The elimination of uncertainty around negative gearing benefits and capital gain tax. Policies remain unchanged and perhaps most importantly are unlikely to be revisited again by either side of politics, for a very long time.
~ Significant taxation cuts to be introduced by the Government for the vast majority of Australians along with small businesses, fuelling consumer confidence and boosting both employment and spending. The Government has a mandate for 94% of taxpayers to pay no more than a 30% Marginal Tax Rate once the plan is fully executed.
~ A proactive and substantive new First Home Buyer Deposit Scheme backed by the Government, enabling more buyers to enter the market with minimal deposits. (see image reference above and impact point 2 below).
NOW WE KNOW THE GOVERNMENT FOR NEXT 3 YEARS+....
5 reasons to invest in property now?
The combination of the following five key issues converging makes a compelling proposition for buyers, and should subsequently frame an investor's view of the horizon.
We anticipate demand to intensify quite significantly in the coming months as a result of...
1. Confidence returning to the Australian market due to a stable government and the fact that there will be no changes to negative gearing and no changes to capital gains taxation policies. And unlikely to be revisited again by either side of politics, for a very long time.
2. First home buyers deposit reduction requirements, removing LMI costs (Loan Mortgage Insurance), as result of Government election pledge to underwrite home loan deposits and taking on role of guarantor for First Home Buyers. First time buyers getting on the initial rungs of the ladder, is exactly what enables everyone else to move up the ladder.
3. Increasing certainty there will be two interest rate cuts later this year, reducing the home mortgage costs of borrowing money.
And the all essential Point 4 to make Point 3 above significant...
4. Strong recommendations for lenders to improve accessibility to credit, by reviewing and relaxing the policies to enable buyers to financially qualify and secure a mortgage. (Have these restrictions adversely affected you?)
5. House pricing is currently softer than it has been for years. Over the last 12 months in large parts of the country the property sector growth has undeniably slowed, forcing vendors to soften pricing to sell. HOWEVER...
...the true demand never went away. The prices and perceived value for most properties weren't actually the issue, it was simply being 'throttled' with the restricted access to buyers securing funds.
So... As the tap re-opens with lending facilities becoming accessible and on stream again, watch loan applications increase again, expect to watch the prices firm and start easing upwards. And it'll inevitably happen, far faster than you think. By the time you read about it in the news papers, it's already in the past, and old news.
Mortgage serviceability changes afoot?
Summary and Impact
[Home buyers and investors will very likely soon be able to secure the mortgages, they were prevously declined, and left frustrated by the highly restrictive lending assessment criteria imposed by APRA.
Under current assessment criteria, high volumes of home buyers and investors have been extremely surprised to find they were unable to qualify for a loan, despite demonstrating a clear ability to service the mortgage at the interest rates the lender was offering and were readily available from a wide range of banks.
Anticipate significant upswing in loan applications as buyers, new and old re-enter the market]
In a move that is most likely to benefit owner-occupiers and the wider property market, the Australian Prudential Regulation Authority (APRA) is proposing the 7 per cent serviceability buffer on home loans be removed.
It was imposed in an attempt to temper ballooning house prices and surging housing investor loan growth back in 2014.
The measures required the banks to assess a purchasers ability to service any home loan against a floor of 7 per cent' or 2 per cent above the rate paid by the borrower, whichever was higher.
Banks have typically added a further 25 basis points to the 7 per cent threshold taking it to 7.25 per cent and a buffer of 2.25 per cent above any loan facility.
If the changes were to go ahead, authorised deposit-taking institutions (ADIs) would in essence be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.
"APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk", according to APRA chairman, Wayne Byres "With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so."
Mindful that successful investment is about maximising returns and minimising exposure and cost, the various states Land Tax thresholds play an often overlooked part, in investment property decision making.
Land tax is assessed on the sum total of an individuals land holdings in any given state. (EG if you owned two taxable properties in a given state with taxable values of $200,000 and $300,000 respectively, the tax is assessed on $500,000 at the rate shown in the table below.)
2019 - Current State by State Land Tax Thresholds Table.
Separate land tax rates may apply for Trusts. Absentee owner surcharges may applicable & Exemptions may apply
(Accurate at time of publishing)
2019 economic growthThis precis of thoughts from Shane Oliver - Head of Investment Strategy and Economics and Chief Economist of AMP Capital
Three reasons why Chinese growth won’t slow much
The Chinese Government’s tolerance for a sharp slowing in growth is low given the risk of social instability it may bring.
Monetary and fiscal policy is being eased.
In the absence of much lower savings (the main driver of debt growth), rapid deleveraging would be dangerous, and the Chinese Government knows this.
Four reasons Australia still won't have a recession
A downturn in the housing cycle and its flow on to consumer spending will detract around 1 to 1.5 percentage points from growth, and growth is likely to be constrained to around 2.5-3%, but recession is still unlikely:
The growth drag from falling mining investment (which was up to 2 percentage points) has faded.
Non-mining investment & infrastructure spending are rising.
Interest rates can still fall further, and the RBA is expected to cut the cash rate to 1%.
The $A will likely fall further providing a support to growth.
Three reasons why the RBA will cut rates this year
The housing downturn will constrain growth to at or below potential.
This will keep underemployment high, wages growth weak and inflation lower for longer.
The RBA may ultimately want to prevent the decline in house prices getting so deep it threatens financial instability.
Three reasons why a grizzly bear market is unlikely
Shares could still fall further in the short term given various uncertainties resulting in a brief (“gummy”) bear market before recovering. But a deep (or “grizzly”) bear (where shares fall 20% and a year after are a lot lower again) is unlikely:
A recession is unlikely. Most deep grizzly bear markets are associated with recession.
Measures of investor sentiment suggest investors are cautious, which is positive from a contrarian perspective.
The liquidity backdrop for shares is still positive. For example, bank term deposit rates in Australia are around 2% (and likely to fall) compared to a grossed-up dividend yield of around 6% making shares relatively attractive.
Seven things investors should allow for in rough times
Times like the present are stressful for investors. No one likes to see their wealth fall and uncertainty seems very high. I don’t have a perfect crystal ball, so from the point of sensible long-term investing the following points are worth bearing in mind.
First, periodic sharp setbacks in share markets are healthy and normal. Shares literally climb a wall of worry over many years with periodic setbacks, but with the long-term trend providing higher returns than more stable assets. The setbacks are the price we pay for the higher long-term return from shares.
Second, selling shares or switching to a more conservative strategy after a major fall just locks in a loss. The best way to guard against selling on the basis of emotion is to adopt a well thought out, long-term investment strategy.
Third, when growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities that pullbacks provide.
Fourth, while shares may have fallen in value, the dividends from the market haven’t. The income flow you are receiving from a diversified portfolio of shares remains attractive.
Fifth, shares often bottom at the point of maximum bearishness. So, when everyone is negative and cautious it’s often time to buy.
Sixth, turn down the noise on financial news. In periods of market turmoil, the flow of negative news reaches fever pitch, which makes it very hard to stick to a well-considered, long-term strategy let alone see the opportunities.
Finally, accept that it’s a low nominal return world – low nominal growth and low bond yields and earnings yields mean lower long-term returns. This means that periods of relative high returns like in 2017 are often followed by weaker years.