Talking with people these days, I often hear similar concerns as to ‘the way the world is heading’. Be it at dinner parties, or standing in line at the local grocery store checkout, everyone seems a little on edge.
It’s hardly surprising we’re all feeling ‘a bit off’. Some will tell you its waxing, waning or otherwise mischievous moon transitions; others suggest time is literally speeding up, creating a very different ‘vibe’ here on planet earth.
(On a side note, apparently ‘science’ has confirmed the quickening time theory as fact! Intriguing, no?)
If you’re thinking I’m getting a tad too esoteric for a mortgage broker blog, let’s meander back up the rabbit hole and talk about tangibles. Real-life, unprecedented and unusual events that we’re exposed to every day.
And let me ask…have you too noticed some strange happenings in the property and finance sector for some time now?
‘Never before’ has become the new normal
I’ve been a part of the property and finance industry for too long to contemplate. Traditionally, although there’s always been so-called ‘X-factors’ influencing the market cycles we’re so familiar with, a few fundamentals have remained constant and importantly, relatively measurable.
In this post-GFC era however, property investor Inboxes have become clogged with newsfeeds full of unprecedented industry goings on.
Whether its continuing low interest rates, spikes in investor based borrowing, increases in foreign purchaser activity, affordability barriers for first home buyers….the list goes on and we hit a new high with virtually each week that passes.
House prices on a rampage!
The way property values are discussed in today’s media has seen the market take on an animated life of its own.
Said to be ‘on a tear’ and ‘growing exponentially’, the extraordinary rates of price acceleration bring to mind giant, man eating Triffids traipsing through inner city suburbia, swallowing first home buyers whole.
According to a recent report from Bloomberg, house prices in Sydney have risen by an impressive 73 per cent in five years (close to 15 per cent per annum), while down in Melbourne the increase has been 52 per cent.
Of course the usual suspects are trotted out to justify our record ‘boom’…namely ongoing cheap housing credit and a continuing accommodation shortage…but there’s also mention of us pesky property investors and the favourable regulatory context in which we are fortunate to find ourselves in.
No stopping it
The Bloomberg report notes the investor perks of negative gearing legislation and capital gains tax discounting, making property an attractive prospect for many Aussies. Particularly those who might need to offset a large tax liability.
A number of vocal, housing affordability advocacy groups have called for the abolition of negative gearing, arguing this would make the housing markets fairer for everyone, not just equity laden investors.
But when you consider that the majority of highly paid public servants in Canberra are themselves invested in our housing markets, it’s not really conceivable that this tax environment will change any time soon.
Particularly when an estimated 40 to 60 per cent of all loans written by the major banks are secured by residential property. As pointed out by Bloomberg, this makes house prices “a matter not just of politics but financial stability.”
Walking the line
Bricks and mortar has arguably become the backbone of every developed (and developing) economy in these post-GFC times, and Australia is no exception.
As our economic reliance on real estate transactions, and the new infrastructure and employment that often accompanies a property boom continues to grow, a very delicate balancing act is occurring on the sidelines.
On the one hand is a favourable regulatory context for investors to keep dabbling away in the housing markets. While on the other, an entire generation is at risk of being completely locked out of property ownership contention.
As such, a push me-pull you tug of war is ensuing among regulatory bodies, with governments seemingly reluctant to revise tax legislation to make property investment less attractive, even as APRA and the RBA try to come up with ways to contain investor spending in the sector.
Accompanying continuous reports of ‘unprecedented circumstances’ in our real estate markets, both here and overseas, is always an underlying threat of regulator intervention to put a stop to the ‘runaway residential housing’ train.
But it’s a damned if you do, damned if you don’t, Catch 22 unlike no other that’s keeping things ticking along with seemingly no end in sight right now.
Pull the rug out with too much regulatory fiddling and you’ll have a flailing industry that will in turn see a potentially devastating dive in private and public infrastructure spending, ultimately leading to a slump in employment, and consumer and business confidence.
Leave it all to keep running its course and what might happen? Further unprecedented outcomes no doubt.
Even though regulators have made attempts to shackle the beast that is bricks and mortar values across our major urban corridors, all that’s really occurred are a few trivial ‘slowdowns’, with momentum building once more in recent months.
In fact, you could almost dismiss the alleged ‘slowdowns’ we heard about toward the end of last year as little more than standard seasonal fluctuations.
Sure, some punters were no doubt scared off, or even squeezed out of play by tougher loan assessment protocols introduced to counter a jump in investor based borrowing, but the status quo hasn’t really altered dramatically.
In other words, the favourable regulatory tax environment we have here in the Lucky Country continues to trump the finance police. Check. Mate.
And let’s face it…why would you want to stop the one thing you can rely on to keep money changing hands, when most other traditional political, economic and social constructs of our capitalist based system appear to be faltering? It would be political suicide to do so.
Watch for the fallout
While the powers that be cannot afford to halt the property train in its tracks, they’ll most likely apply further pressure on the brakes in an attempt to reduce some of the heat around our ongoing housing affordability issues.
Loan to value ratios are an obvious area that can be manipulated to control how and where housing credit is distributed, as we’ve already witnessed with many lenders changing the maximum amount borrowable for investor clients.
And there’s a groundswell of conjecture from economic commentators that the next move we see from the Reserve Bank will be an increase to interest rates, if anything. But it may not be until as late as next year when they finally make their move.
Westpac’s chief economist Bill Evans begs to differ however, suggesting a cut is more likely on the cards, but that macroprudential policy will be used to do what interest rates cannot.
“Given that both Sydney and Melbourne prices are up 14%, the RBA and APRA may be considering even tighter macro prudential policies,” Evans noted on the basis of CoreLogic data.
Certainly when regulators tightened the screws previously there seemed to be a stumble in activity. Maybe it’s a matter of turning the wheels a little harder next time?
“If, as we expect, the Bank will get around to adopting additional macroprudential policies to slow housing in the second half of 2017 the stage will be set for another year of steady rates in 2018,” says Evans.
“With the economy slowing and macroprudential policies further tightening housing markets, the risks to rates in 2018 will be to the downside rather the upside as currently expected by markets.”
For us investors, this represents a double-edged sword. Because although there’ll likely remain cheaper credit to leverage into housing with, the goalposts as loan applicants will move further away.
Now is the time to really review your financial portfolio and plug any potential holes in your credit structure. You need it to be irrefutably airtight.
So…is it a bubble?
Well…that depends who you listen to. According to the CBA, typical bubble signs are “not evident”, reports Bloomberg. But again, what’s really typical these days?
Conversely, Australian economist Lindsay David has termed this “the largest housing bubble on record.”
And the beat goes 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).