The Reserve Bank has cut interest rates to 1% – now the lowest rate in Australia's history. That’s 25 basis points! Another 0.25 percentage point drop – down from 1.25%. That makes it two cuts in a row, after the RBA cut the rate, in June, from 1.5% to 1.25%.
Great news for existing mortgage holders if the banks pass 100% of the rate drop through, and potentially it's great 'affordability news' for new home buyers. But not such a great indicator for the general economy
The offical line from Phillip Lowe, the RBA governor is “Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” he said. “It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”
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)