If I could pick one word to describe the last two years of happenings in the real estate and financial services sectors, it would have to be ‘unprecedented’!
So how did it all start?
Well, once upon a time there was a guy called Glenn Stevens, who had the arduous task of trying to maintain balanced, long-term economic growth amidst the chaos of innately short sighted, “band aid” political fiscal practices.
Actually, it could be argued that the 2008 GFC kicked off this latest Australian real estate upswing in earnest.
Although according to the ever reliable Wikipedia, the hypothesis of an Australian property bubble has been proposed since ‘at least 2001’, in line with the mini boom we saw at the turn of the century.
Back to the GFC though, where a number of investors lost everything with the collapse of overseas commodities markets, particularly within the traditionally perceived ‘safe haven’ of standard managed super funds.
The rise of SMSF property investment
Coincidentally just a year before, in 2007, legislation was revised allowing SMSFs to borrow under Limited Recourse provisions for direct property investment.
Suddenly investors had the opportunity to acquire high yielding property with which to feed their growing retirement fund and importantly, maintain control over how their hard earned money was invested.
It was a ‘no brainer’ that led to a ‘perfect property investment storm’.
Sure enough one of the big things we’ve seen in the sector over the last two years in particular, with momentum still steadily gaining, is a significant growth in the number of SMSFs established, and the acquisition of property from within them.
According to the ATO, residential property investments within SMSFs increased by 17% in the year to March 2014, from $17.5 to $20.5 billion – an unprecedented rise.
Bricks and mortar (and mining) saved our bacon
Let’s not forget about the numerous first homebuyer stimulus packages thrown out across each state and territory, in the hopes that buyers would continue biting at property and thereby stimulating the economy. Who can resist a generous cash incentive?
Plus of course, we still had the mining boom shirttails to ride high on at that stage, alongside another random (?) coincidence that seemed to work in our favour – the breakneck arrival of China as the new global economic powerhouse.
All of these neat little circumstances maintained a fairly consistent level of half-decent consumer confidence in the face of 2008’s worldwide recession and collectively, we seemed to emerge from the train wreck relatively unscathed. Barring the immediate, individual victims of course.
This period brought about a cultural shift in how we perceive property. No longer was ‘the Great Australian Dream’ just about a house in the ‘burbs to bring up your family.
Now residential real estate was seen as a tradable commodity in its own right and what’s more, a very reliable one at that. It had proved itself worthy in the face of worldwide financial calamity after all, with investment grade locations maintaining their ground or correcting slightly over the following two years.
Fast forward through a controversial change in federal leadership at a local level, and a world still struggling to regain its footing and adjust to the new economic status post-GFC, and the amount of records being broken within property and finance are becoming a little mind boggling…
Interest rates
Exactly two years ago in August 2013, the RBA cut the cash rate to 2.5%. This sent Australia into an unprecedented, long-term low interest rate rut, with slight, occasional movements between 2 to 2.5% occurring over the last 24 months.
Very few (if any) industry experts guessed what the fallout would be from this prolonged, record breaking low rate environment at that time. How could they? It was unprecedented and therefore to some degree, impossible to predict with certainty.
But the central bank had little choice. A weakening Aussie dollar, as well as lackluster consumer and business confidence and employment figures necessitated the move and unfortunately, things just haven’t picked up a lot since.
In fact with the demise of the resources sector, real estate is arguably running the show right now, leaving Governor Stevens and co little choice but to maintain interest rates at their current lowest point since Elvis was a boy.
The decision in May to decrease rates to 2.0% not only created another new record breaker, but also reflected the fact that property and the supply and demand market fundamentals on which it’s based, have become integral to our nation’s economic stability.
As Professor and Deputy Head, School of Economics and Finance at University of Tasmania, Mardi Dungey put it, “As there seem to be few signs of improvement on the fiscal front, the RBA is taking a risk that looser monetary policy can fill part of this role and not cause structural problems elsewhere.”
Have investors and the RBA been blowing bubbles?
This supports the argument of industry commentators who suggest that the RBA has made mortgage credit so appealing, to purposefully over-stimulate the property sector in the hopes that it might jump start growth in other industries and boost consumer confidence.
If this was their plan, it has been somewhat successful in terms of injecting new life into the construction and services sectors particularly. But general growth around sectors not so interconnected with residential housing is still lackluster, particularly in regional communities.
Interestingly, it’s been said by some seasoned investors who’ve lived to tell the tale of a market cycle or two, that booms start from within our major capital cities and spread out in a ripple effect, whereas busts tend to do the reverse.
Could a regional slowdown be an indicator of a broader, slowing housing market?
The Sydney surge
The impact of the alleged housing bubble over the past two years or so has arguably been most notable in inner city Sydney and to a slightly lesser degree, popular urban centres throughout Melbourne.
Last month CoreLogic RP Data statistics pointed to another twelve months of exceptionally strong growth for both cities. Sydney’s annual growth rate for the 2015 financial year increased to 16.2%, up from 15.4% a year earlier, while Melbourne housing values rose by 10.2%, up from 9.4% for the 2013-14 financial year.
February and May’s rate cuts from the Reserve Bank added fuel to the already considerable fire.
RP Data’s head of research, Tim Lawless said at the beginning of last month, “There was an instant buyer reaction across the Sydney and Melbourne housing markets where auction clearance rates surged back to levels not seen since 2009, capital gains once again accelerated and we are now seeing Sydney and Melbourne homes selling in record time.”
Investors vilified
Much of the heat in Sydney and Melbourne’s markets was blamed on increased and (you guessed it) unprecedented investor activity, with equity-laden homeowners said to be the only purchasers who could afford the escalating inner city prices.
Accused of chasing negative gearing benefits exclusively afforded to property investors, and increasingly looking to acquire property within SMSFs to shore up retirement capital (the evildoers!), investors were largely vilified as the sole cause for the apparent housing bubble across most of 2014.
Interestingly, a new breed of investor may have skewed the data around investor lending somewhat.
While many were talking up affordability issues for an entire generation of young people who were ‘at risk of never realising the Great Australian Dream’, that same generation was becoming increasingly active in the market. They hadn’t sacrificed the Great Australian Dream, but merely changed what it looked like.
Rather than buying a first home to settle down in, young Gen Y’s have been busy establishing their own property portfolios, thereby contributing to data that suggested investment borrowing was escalating at a rate that could put further upward pressure on already rising house values.
Enter APRA
Concerned that an unprecedented escalation in property investment credit off the back of unprecedented low interest rates was fuelling unsustainable (and of course unprecedented) levels of competition across select housing markets, APRA warned lenders that unprecedented macroprudential measures would be taken if they failed to keep their books in check.
When May lending data revealed that investment related borrowing had grown across most major deposit taking institutions and some of the smaller lenders, at levels above APRA’s 10% ‘safe zone’, the industry regulator stepped in with threats of serious macroprudential measures to stem the rising tide of market activity (another first!).
The effects were almost immediate. You can read more about the actions lenders have recently taken and are in the throes of implementing, to bring a semblance of balance (at least in APRA’s opinion) back to their books and appease the regulatory gods, in this interview with the Trilogy team.
Curtis, Ken and De share the immediate changes they’ve seen, how it’s impacting clients and what you can do as an investor to navigate this new lending landscape.
The cynic in me thinks this sudden desire to ‘toe the regulatory line’ is more thinly veiled profiteering from the big banks on the back of circumstance. Another way to perhaps keep that large chunk of very valuable mortgage business and contain competition?
Whatever the underlying reasons (that only finance sector board directors and corporate high flyers are privy to), the impact of this move to comply has been virtually instantaneous.
Anecdotal reports suggest that the brakes have well and truly been applied across Australia’s property markets, with activity slowing notably in the last few weeks according to a number of banking business development managers.
So what’s on the horizon?
This really is the six million dollar question – particularly if you happen to live in certain Sydney postcodes!
Given how many records are being broken and new market trends established in a seemingly faster paced cycle, within cycles, and within multiple markets travelling at different speeds, it’s difficult to say with certainty.
What is apparent is that many people will look back on this unprecedented time in our property market history and wish they’d acted then…when interest rates were still relatively low and where, with the right guidance and loan structuring you could establish a viable bricks and mortar asset base.
Remember, history has demonstrated that house prices always go up – not consistently of course, but over time, this is the general way of things.
Plus, credit is still cheap…especially if you know what to look for according to your own personal needs and importantly, how to find it among the multitude of lenders and products.
Essentially for investors, it’s about striking that important harmony between the long time enemies of investment strategy – cashflow and capital growth.
The good news is this is most definitely a market where you can have both – as De explains in our Trilogy insider report. And moreover, you MUST have both in order to satisfy the banks’ new, stricter serviceability criteria.
It just takes a bit of lateral thinking and some insider knowledge, as well as the willingness to perhaps step outside of one’s comfort zone. You can read more about that here…
As always, all investors can control are their own actions. Act according to a plan, accommodate, but don’t lose yourself in the prevailing market conditions of the day and never allow yourself to drown in speculative activity fuelled by media hype!
Then come see us in two years from now and let us know how you got on!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).