Every cloud has a silver lining, and our property markets are no different. Whilst I don’t have a crystal ball, and whilst I’m not Nostradamus, I am confident that our property markets will turn the corner sooner rather than later.
There have been a number of announcements and events which occurred over the last week or so, which is the perfect recipe to fast track our property markets from the current slump phase, towards recovery… and beyond.
Recent announcements and events have occurred are as follows…
* Last Saturday 18th May 2019, the Coalition won the federal election, and has since formed a majority government. This means negative gearing is here to stay, and the existing capital gains tax discounting rules also remain. These two (tax) issues were deemed critical to the health and prosperity of our property markets. A Coalition win will play a key role in returning confidence to our property markets as it instills confidence once again for investors.
* The fact that the federal election is now done and dusted, means that the uncertainty factor is removed. One of the issues with a fragile property market is uncertainty. People don’t like uncertainty and usually stall. Australians now understand who is steering the economy and the uncertainty issue has abated
* Yesterday 21st May 2019, APRA issued a letter to all authorised deposit-taking institutions (ADIs) to consult about its proposed guideline changes that would increase the maximum borrowing capacity of home borrowers (…read more on this below). This is a significant step towards a more balanced credit environment when compared to what we’ve all witnessed over the past several years (which has been a stringent and tight credit environment).
* Yesterday 21st May 2019, RBA governor Philip Lowe provided an Economic Outlook on Monetary Policy raising concerns about inflation and unemployment. He commented “…at our meeting in two weeks’ time, we will consider the case for lower interest rates”. Sure enough, financial markets have now priced in a 92% chance of a 0.25% cut to the cash rate on the 4th June, which will be the first cut in almost 3 years.
* On the 12th May 2019, just a week before the federal election, the Coalition announced an incentive promising to establish a First Home Loan Deposit Scheme to help first home buyers purchase a home faster by providing them better access to finance without having to save a 20% deposit. One of the biggest challenges for FHBs is coming up with the required deposit, and even for those that do come up with a 5% or 10% deposit, are usually slugged with a hefty lenders mortgage insurance bill. This new initiative (once implemented) will remove the need for LMI as FHBs will be provided a helping hand to access a 20% deposit.
More about APRA’s announcement and the perfect timing…
Currently, in a bid to limit excessive borrowing in an environment of low interest rates and high household debt, APRA expects ADIs to assess loan serviceability using the higher of;
a) an interest rate floor of at least 7%, or
b) a 2% buffer over the loan’s interest rate
The average interest rate floor is currently between 7.25% and 7.50% across most banks and lenders.
Yesterday’s announcement by APRA will inevitably enable more people to access mortgages (once implemented) as APRA said it would allow banks to set their own serviceability floors when assessing residential mortgage loan applications.
APRA has proposed revising its guidance to remove the 7% requirement and instead allow ADIs to determine their floor rate levels. It is also looking to increase the interest rate buffer guide from 2% to 2.5% “to maintain prudence in overall serviceability assessments”.
APRA said, however, it would still expect ADIs to determine and keep under regular review “a prudent level based on their own portfolio mix, risk appetite and other circumstances”.
According to APRA chair Wayne Byres, the guidance was first brought in when interest rates were higher – and, given that interest rates are now at “record lows” (and expected to remain low for “some time”), the gap between the 7% floor and actual rates paid has become wider.
He also added that the advent of differential pricing has meant that the merits of a single floor rate across all products have been substantially reduced.
We will closely monitor progress relating to APRAs initiative and revised guidance, and keep you posted as further announcements come to hand.
I’ll remind you that no one rings the bell when the market is at the top or at the bottom of the cycle. If you’re sitting on the fence waiting for the perfect time, I would seriously consider the above and make your own conclusions.
My advice would be to act sooner rather than later, and as soon as your affordability and your borrowing capacity affords you.
Most people usually buy property by following the herd, as the FOMO (Fear Of Missing Out) effect plays a role. Funny enough, when the market is cool or subdued (as per the current cycle), people hold back as they try to pick the bottom of the market cycle, to later find that the train left the station long ago.
All the above events and announcements are the perfect recipe that is sure to re-ignite our struggling property markets. When… is anyone’s guess..!!
Disclaimer: The Information is general in nature and does not take into account your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the information without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.