If you’ve saved for a rainy day… It’s raining.
These are the guidelines you should follow for your home loan or your investment loan – if you find yourself in difficulty.
Depending on the level of difficulty you face, these are the steps you should follow… in order;
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The scene is now set for the rest of 2019.
I give credit to the Reserve Bank and the Government for pre-empting.
The Reserve Bank cut rates by 0.5% (0.4% of which was passed through) and the Government passed tax cuts through to everyone.
What was the background? The two big ticket items – Brexit and the US China Trade War.
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Anyone can read in the media that The Reserve Bank cut the cash rate yesterday.
I always endeavour to let you know what this means – so that you can plan ahead.
In July 2016 – almost 10 years after the GFC, interest rates had been low for a decade, there was a growing sentiment that they would inevitably rise – which always makes people worry.
I like to take notice of the people who have the RED (rates) button on their desk so back in 2016 I read an article from Janet Yelland (the outgoing chair of the US Federal Reserve) who had just told Congress that rates would stay low for ANOTHER decade – yes until 2025.
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The current market mood was caused by negative Government intervention to suppress buyer demand and also the election itself.
Sentiment has changed post-election and now positive Government intervention brings good news again for buyers.
There are 4 key areas that signal this.
We had an election where one of the choices we had to make, in relation to housing, allowed one generation in the population to benefit only at the expense of others.
What we chose instead though is to the benefit of every generation – yes that is possible.
First Home Buyers are the BIGGEST winners.
The cash deposit required has been the largest hurdle for them to overcome. Until now First Home Buyers have needed to find 5% of purchase price PLUS costs to get those keys to the front door. Mortgage Insurance (of around 3.5%) was the biggest cost. On a $500k purchase – this meant they had to find $42,500.
You need to be outraged … the Royal Commission WILL affect you.
The banks have got away with it again, and you, the consumer, are going to made to pay – through your home loan.
This is how;
On a $300k home, the bank makes $6,000 in clear profit the first year alone. and every year to follow.
On a $500k home loan, that’s $10,000 clear profit EACH YEAR.
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Most people misunderstand badly the term “buyers’ market” and hence never take advantage of one.
A buyers’ market is one where no-one is buying.
Consequently, it is a terrible time to sell.
In a buyers’ market there are more sellers than buyers, buyers can take their time, negotiate price and/or conditions to suit themselves and if a seller doesn’t “meet” their demands then the buyer moves on to a seller who will.
The hottest topic in real estate at the moment is whether or not there is a so called “property bubble”.
The best way to define a bubble is when property price rises more rapidly than the long term trend line.
The long term trend line reflects “normal” growth. This long term growth reflects underlying factors such as supply and demand and economy wide inflation. In times when interest rates are low, speculation becomes an “abnormal” factor and short term pressures build. Central banks and regulators have a role to play using interest rates and rules to dampen demand.
Sydney aside, let me give an example from a relatively quiet capital city market – Adelaide. A house that I am familiar with recently sold for $1,000,000. What is unusual is that it had been held by the same owner for 70 years – purchased originally for $4,000.
70 years is long enough to have seen multiple housing cycles – any growth over that period is by definition “normal” growth. Even in quiet little Adelaide that represents 7.5% compound growth for 70 years. That is the power of compound interest. At 7.5% compound growth value doubles roughly every 10 years. $4,000 to $1,000,000 – hard to believe isn’t it. Try it – start with $4000 and double it 8 times = $1,012,000!
Is that a bubble? Absolutely not. Have there been times in between 1948 and 2018 when Adelaide has been over exuberant…? Ha-ha, probably but I don’t recall.
An almost identical house in Camp Hill in Brisbane – sold recently for $1,100,000 and bought for $4,000 and held by the same owner for 71 years. Remarkably similar!! (information supplied by PS Property Advisory.)
This story could be repeated in any capital city.
Has Sydney been in a bubble recently? Once again I have some personal experience – shifting to Sydney in 2002 and needing to buy a home. The value of Sydney property did very little for the next decade (to 2012) and then it certainly played catch up between 2012-2015, then as happens in property cycles, exuberance took over. Sydney median house price has now fallen, and if you look carefully (see a. in graph below) it is now virtually right back on the long term trend line. That however is not the full cycle. Assuming this one follows similar cycles, price will dawdle lower still for several years to come until it falls back below that trend line.
But is Sydney housing over priced at the moment? History would suggest not.
What will happen in other cities?
Typically, when Sydney is “out of its growth cycle” then the “greener grass” value of other cities begins to have appeal. To pick Brisbane as another example, as Sydney price dawdles lower and Brisbane dawdles higher, then the value (relative to Sydney) of the “other” capitals – Canberra, Brisbane, Hobart, Adelaide eventually peak in coming years. Those other capitals are now at the beginning of a fairly long upward trend. (I leave Perth and Darwin out – where values run much more hot and cold due to being heavily influenced by mining cycles.)
Anyone who owns a house hopes for capital growth, anyone who is waiting to buy hopes for a downturn. Markets don’t respond to an individual’s hope, markets do however follow long term trends.
Whether you are buying your family home, or using property as a long term investment vehicle – the trend really is your friend. Another truism (which is in fact true) is that it is much more about “time in the market” than it is about “timing the market” There are as many winners as there are losers in the short term speculation market – that’s how it goes.
For anyone who holds property for the long term in a solid segment (which I would call capital cities simply because of their size) eventually everyone wins.
Ask Alan
@mortgagebrokeratyourfingertips
alan.heath@askalanheath.com.au 0411 601 459
The Sydney property market has plateaued – with prices for both houses and units off the boil since June 2017 as the peak (Domain March Quarter House Report – Apr 26th).
APRA played a large part in this Sydney slow down by applying investor restrictions to the entire country (that was unfair, in my opinion). To APRA’s credit they have now (announced 9:02 am Apr 26th) removed these restrictions.
How this will now play out in the home loan market will become clear in coming days – but here are my predictions and their significance for you:
This is VERY big news – I will have more to say as this unfolds.
As always you can call or email me anytime.
ASIC has taken an interest in the number of Interest Only loans being sold to owner occupiers
According to ASIC’s review of lenders in 2015, 25% of all owner occupied loans are Interest Only, 67% of investor loans are Interest Only.
Personally even I am surprised at the high number of Interest Only for owner occupiers.
The most appropriate loan for someone owning their own home is P&I (Principle and Interest) – why?
If you borrow (say $500,000) with a loan term of 30 years – then you need to pay the Principle back over 30 years, and Interest along the way (on the gradually reducing balance)
If you ask to have a “rest” from paying “P” , then obviously the payments if it is just “I” will be lower.
BUT …. The P ($500,000) must still be paid back in the 30 years. If you have a holiday from the P for 5 years, then when you come back to P&I then the P repayment component which now has to be paid back in 25 years will come as a surprise – because it will jump markedly
This is ASIC’s concern, that owner occupiers are finding ways to “afford” payments in the short term on a house that they really can’t afford.
I’m inclined to agree with them – in most cases people don’t realise that Interest Only loans have their payments jump markedly immediately after the Interest Only period ends
Interest Only loans really should be predominantly reserved for investors – where they have an owner occupied P&I loan and want to maximize the tax benefits on their investment loans
Read … https://www.mortgagechoice.com.au/…/investment-5-interest-o…
Read … https://www.moneysmart.gov.au/…/australias-interest-only-mo…
