Bill Evans took up the Chief Economist role at Westpac in 1991 and has consistently been “getting the big calls right for 30 years”.
When he talks – I listen.
Bill Evans predicts (The Australian Sat 11th Sep 2021) “Interest rates will rise… starting in the first quarter 2023… and going up (in steps) by (only) 1.25%”.
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Before we start, the best tip I can give you is… DO NOT DO IT YOURSELF… It took me years to work out that when friends looked at my home renovations and said, “nice tiling … do it yourself?” it was not a compliment. They were being polite. The fact that they could tell I had done it myself said it all.
I was about to start on this article when a thought appeared – why tell my clients (some of whom have been with me for 10-20 years) what they should look for? When instead I could ask them, what was most important to them, so I did.
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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.
Following the most recent Reserve Bank meeting earlier this month, it is being widely interpreted that the official cash rate is likely to stay on hold until late 2019 (Bill Evans, Westpac Chief Economist. There are now even interpretations of rates on hold until late 2020. ClickHere
The factors in play: the exuberance of regulators (APRA / ASIC) have done all of the Reserve Bank’s heavy lifting. The Royal Commission is causing banks to pull back even further. The Treasurer now mentions an “unintended” credit tightening.
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
So it seems the Reserve Bank hasn’t quite pulled up stumps yet. Widely published in yesterday’s media, a comment from The Reserve Bank minutes has been blown out of proportion.
With the current cash rate at 1.5%, The Reserve Bank is quoted as saying that a cash rate of 3.5% is the “new Neutral”. The media’s take on this is that rates are going up… And the crowd goes wild! Hang on, that’s right, it’s just more noise.
Previously the Reserve Bank had considered 5.0% as “Neutral”, so by re-evaluating this ‘middle line’ of the economy at 3.5% instead, the Reserve Bank is simply signalling that the peak of the next rate cycle is now predicted to be around 1.5% lower than the previous cycle.
No comment was made however, as to when any moves towards this new “middle line” will be made. Why? Because there are still other players in the game to consider. APRA and ASIC’s recent round of regulations and the government’s bank levy are still all in play.
The sooner the Reserve Bank comes into bat by adjusting the cash rate, the sooner the loadings imposed by regulators will fade. This is why investors should just sit tight while this plays out.
And finally, in response to all the media noise, the Australian dollar has jumped. Online shopping just got cheaper again, and that overseas trip might be back on the cards!
In relation to your home loan your response should be to:
· Calculate and start paying your loan NOW as if the rate was already 6%pa
· Let your budget adjust and let any surplus go into your loan as possible redraw for a “rainy day”
And as always you can call or email me anytime, it’s what I’m here for…
Ask Alan : Download Free : App Store: http://apple.co/1ObU9AI : Google Play: http://bit.ly/1MP04tP
Lvl18, Riverside Centre 123 Eagle Street, Brisbane
m : 0411 601 459 t : 07 3106 1444 e : alan.heath@askalanheath.com.au
I can remember (as many of us will) what good fun a game of backyard cricket could be. The type where the ‘rules’ are less like rules and more to do with whether Mum is looking to see how close you are to the veggie patch… Rules which seem to accumulate, bend, or be conveniently forgotten depending on who’s batting…
· The wheelie-bin stumps were mandatory – despite the interesting aromas.
· Over the fence was out – made sense.
· Break a window out – made sense – there was worse to come after that one!
· Hit the tomatoes – four
· Hit the neighbour – Six!
Eventually the rules became silly, with more time spent making amendments or contesting than actually playing… Pardon the analogy – and although light hearted – we could be forgiven for thinking that lending in the Australian property market is now like a game of backyard cricket
The Reserve Bank took their bat and ball and went home early, dropping the cash rate to 1.50% in a plan the keep the Australian Dollar at 70c. That plan didn’t work and now the Reserve Bank makes statements each month that virtually no-one listens to. All it did was create problems in the Sydney and Melbourne housing markets that have required new ‘backyard cricket’ rules from APRA and ASIC.
The cash rate is stalled at 1.50% and not predicted to change for the foreseeable future.
The politics around this became quite toxic through the last election and continues to be so. Older Australians (Gen X and Baby Boomers) used to be encouraged to invest for their retirement. The aged pension of $31k per annum for a couple to live on, is no longer the comfortable retirement one had once planned for. Statements about “millionaires” buying their 10th house and shutting first home buyers out of the market effectively pits Gen Y and Millennials against Gen X and Baby Boomers. It has come to this – politicians pitting parents against their children. It is a sad state of affairs we have come to in that regard.
One side of politics wishes to remove negative gearing, except for brand new homes. To me however, this seems illogical, as the minute said brand new property is purchased it then becomes “old” and can’t be on-sold to another investor. Property investing in this scenario would be the only business where one cannot deduct expenses (income) against income (rent).
The other side of politics has decided that there are too many investors and has cheered on the regulators to put price increases into investment loans. Then because of the political heat when that backyard rule wasn’t effective enough to quell the market, more rules arrived around Interest Only Loans – hence another (very recent) round of price increases.
Typically, the difference between rates for new Owner Occupied Principal and Interest loans (the lowest segment) and Investment Interest Only loans (the highest segment) is now almost 1.25%. This is, in my opinion, completely unjustified and out of hand.
When a bank borrows overseas – no one asks them who they are going to lend to. So, this margin goes straight to bank profit (and don’t they look so sad when they say they are “balancing the needs of shareholders, customers and the regulators”).
This “easy profit” of around $1.5b per annum became the soft target for the Treasurer’s Bank Levy – coincidentally around $1.5b per annum. The banks grizzled about the bank levy and then responded with the latest Interest Only tier of increases –and of course that has nothing whatsoever to do with recouping the bank levy (nudge nudge wink wink).
Under the current rules applied by the regulators, we now have two distinct groups of consumers – owner occupiers and investors – and with current price gaps it would be easy to think in terms of winners and losers.
The consumer however, isn’t silly – because when a market is ruled by regulation implemented in response to political pressure over “housing affordability”, it’s clear that the only loser is the consumer themselves. It simply throws cost into the system which the very people it is supposed to “protect” pay for. Does one not stop to think that investors will attempt eventually to recoup these costs by putting up rent?
Regulation isn’t the way for a free market to operate.
So although currently first in the batting order, these rules will eventually be ‘run out’ – in terms of importance and influence to the consumer. Until then however, we do need to adapt, understand and use them to our advantage.
If you are in the market to buy an owner occupied property, then I can say that in 20 years of mortgage broking I have never seen discounts as large as those available at the moment. You would be foolish not to take advantage of this to purchase now and secure these discounts for the life of your loan. Investors are on the sidelines, there is less competition for the property of your dreams. As the saying goes – fortune favours the brave.
If you are an investor, this is definitely not the time to become distracted by the noise that is coming from APRA and ASIC. In time, rate differences between owner occupier and investor loans will diminish. Investor rates (even with the attempts to penalise investors) are still at historic lows. I would suggest that you sit still and use this period as an opportunity to focus on your long term future, making sure that your current situation fits within this to your advantage. As the saying goes, it’s not about timing the market, it’s about time in the market.
In summary… APRA and ASIC have certainly created some noise, however, just like when the neighbour decides to mow the lawn half way through a wicket, although loud and annoying, it doesn’t mean you should quit the game, you just might need to change the direction of the pitch.
Whether your end game is a family home, a long term investor, or even both – I can help you find the advantage that you are looking for, to hit it home for a six and achieve your goals.