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cheers
shaun
The end of the partyJohn Collett | March 30 2005 | Sydney Morning Herald (subscribe)
Speculators who got in early on the great property frenzy that falls neatly either side of the millennium (late 1997 to 2003) and have banked their capital gains are laughing.
But genuine investors have a simpler, longer-term strategy. That is: pay off the family home, or a good deal of it, and then borrow against the equity in the home at near-record-low interest rates and take advantage of generous tax deductions.
Of course, investors have always been a big part of the property market. But the investing crowd with shorter time frames and an eye on easy capital gains turned into something of a horde starting in 2000. Before they joined in, the annual property price rises of 10 per cent were "fully justified", says Rob Mellor, BIS Shrapnel director of building services and construction. Demand was solid as a result of increased immigration and land scarcity - particularly in Sydney and south-east Queensland - some natural, some state government-induced.
A combination of federal tax (and other) incentives, a poorly performing stockmarket and low interest rates set the scene for investor interest in residential property to really take off.
Mellor says the investor-induced boom really occurred between mid-2001 and mid-2003, when annual price growth reached more than 20 per cent. Over the same two years, the value of investment loans for residential property in NSW and Victoria increased by about 80 per cent.
Prices of houses and units nationally peaked in the March quarter of 2004 at $369,000 (a doubling since March quarter of 1998), and have fallen back a little bit since then. That house price growth is recorded without taking into account inflation needs to be kept in mind, says Adam Donaldson, a senior economist with the investment bank UBS.
@media print {.nopr {display:none}} [size=-1]advertisement[/size]
[size=-1]advertisement[/size]
While the accompanying graph (on page 10) shows that median property prices hardly ever fall, there are long periods, such as that following the late '80s boom up to the mid-'90s, when real prices have fallen.
The last time investors fed a residential property boom was in the early and mid-'70s (when shares performed poorly), Mellor says. Evidence of that investor-led boom is with us still: a blight on the Sydney landscape in the form of poor-quality mid-rise flats. Mellor suspects that in several years' time we may be looking at some of the poorer-quality, look-alike, high-rise apartments in the same way.
For investors who have overstretched hoping to make quick capital gains, particularly in off-the-plan high-rise developments in Sydney and Melbourne, the party is over. Rising interest rates and a more selective approach from lenders on the types of residential property they lend against have seen to that.
However, as long as the economy holds and job security remains strong, owner-occupiers will be able to sit tight during what will most likely be several years of flat prices in nominal terms, according to property analysts.
That's the big picture and the most likely scenario, but what happens area by area will vary greatly, as always.
Most exposed are the poor-quality, look-alike apartments. Some investors, urged on by get-rich-quick spruikers, have used deposit bonds to secure off-the-plan apartments. These are IOUs for a 10 per cent deposit which cost the investors only a few hundred dollars each.
Many dwellings are yet to be completed and some investors who put down deposit bonds will have to find finance when the apartment is completed. In a bid to head off trouble, some developers are providing finance to holders of deposit bonds.
For owner-occupiers and investors who have been conservative in their borrowing, there's nothing to fear. Everyone needs a roof over their head, immigration will stay strong and land close to the big eastern capital cities will get scarcer.
Still, there is a sufficient number of wild-cards this time to possibly upset the relatively sanguine forecasts of most analysts.
DEBT BURDEN
Chief among these is the unprecedented level of indebtedness and the sensitivity of household finances to rising interest rates.
However, the official figures show our appetite for debt is moderating. "Household balance sheets ... are getting a major overhaul as Australians become more prudent and conservative regarding debt," says Carl Jensen, a CommSec equities economist.
The two 0.25 percentage point rate hikes at the end of 2003 appear to be taking effect, with new lending commitments - which include housing, personal, commercial and lease loans - falling for the fourth time in the six months to January 31 this year. However, finance commitments still stand 5.7 per cent higher than a year ago.
The Reserve Bank increased rates by another 0.25 of a percentage point this month. If interest rates were to rise another 0.25 of a percentage point in the next few months, the impact on those highly leveraged into the property market could be severe.
A survey conducted by Hawker Britton UMR Research before this month's rate increase found that more than a quarter of home loan borrowers who responded would struggle if rates rose by 0.5 of a percentage point. More than 40 of respondents said they would struggle to maintain repayments if the mortgage rate rose by a percentage point.
MORTGAGE BROKERS
Another wild-card is the rise of the mortgage brokers, who now place 45 per cent of new loans and refinance 30 per cent of existing loans.
Brokers are paid sales commissions by lenders, so there is a strong incentive for them to recommend big mortgages.
Regulators want to be able to better police brokers but are hamstrung because brokers come under credit laws, which are the responsibility of the states. So far, the states and territories have not done much beyond issuing discussion papers on how the brokers should be regulated.
Another concern is the growth of non-bank lenders, especially those that specialise in the "non-conforming" market. These are the "low-doc" [low-documentation] loans taken out by those who find it difficult to get a loan because they don't meet traditional lending criteria (because they are either self-employed or have a chequered credit history). The risk is that some of these brokers may be massaging the information they give to lenders, degrading the credit quality of the lenders' loan books.
HARD LANDING
Last, but not least, is the biggest risk of all: that Australia's 14 years of uninterrupted economic growth ends with a hard landing. That is the doomsday scenario in which unemployed landlords start defaulting on their repayments - leading to forced sales.
Employment has been growing strongly. But, as the economist Ron Woods of Challenger Financial Services Group points out, almost three-quarters of all of the net job growth in the private sector in the past five years has come from just three sectors: construction, retail and property, and business services. A lot of the retail growth is property-related - furniture, window coverings, soft furnishings and whitegoods. In the first quarter of the year, the three sectors accounted for 87 per cent of all jobs created (including the public sectors).
With housing construction supporting so many jobs, any decline could be a blow for the economy, not just house prices.
A property frenzy like no other
April 1986 - Financial deregulation
Hawke/Keating Government starts deregulating the financial services industry, opening the big banks to competition from new entrants.
February 1992 - Non-bank lenders
Aussie Home Loans opens it doors, becoming the first non-bank lender to take advantage of financial deregulation to compete with the banks. Aussie offers much cheaper standard variable-rate loans than those of the banks. Aussie is the first to use mobile lenders.
September 1997 - Banks respond
The banks start responding to non-bank lenders and slash their margins on mortgages in response to slipping market share.
September 1999 - Capital gains favoured
Halving of capital gains tax on investments held for at least a year gives capital gains plays a tax advantage over income-producing investments.
July 2000 - First Home Owners' Grant
The Federal Government introduces a $7000 First Home Owners' Grant to offset the impact of the GST on the cost of building materials.
March 2001 - Extension of grant
The First Home Owners' Grant is doubled to $14,000 and creates a massive "pull-forward" in demand for housing among first-home owners.
December 2001 - Cheap money
From a cash rate of 7 per cent in July 1994 and a mortgage rate of just under 10 per cent, the cash rate falls to 4.25 per cent in December 2001 - its lowest in almost 30 years. That takes the standard variable home loan rates offered by the big banks to just over 6 per cent.
June 2002 - Investment loans sky-rocket
For the year to June 30, 2002, the value of investment loans for residential property increases by 47 per cent in NSW and 63 per cent in Victoria.
December 2002 - Australian shares dive
The Australian sharemarket returns minus 8 per cent for the year to December 2002 while the median house price rises more than 20 per cent as, spurred on by low interest rates, more investors seek safety in bricks and mortar.
December 2002 - Off-the-plan apartments
The Reserve Bank Governor, Ian Macfarlane, warns property investors not to be seduced by developers into "get-rich-quick" high-rise schemes.
March 2003 - Broker regulation
A report by the Consumer Credit Legal Centre NSW, commissioned by the Australian Securities & Investments Commission, finds cases of high-pressure sales tactics. The centre calls for the regulation of the sector.
June 2003 - Real-estate agents
For 2002-03, the real-estate industry's total revenue, mostly from sales commissions, comes to a record $7.5 billion. Rising house prices and turnover result in an increase in the industry's average annual income of 17.8 per cent over the past four years.
June 2003 - Height of frenzy
Following the massive increase in investor activity for the year to June 30, 2003, investment loans for residential property rise by
30 per cent in NSW and 18 per cent in Victoria.
June 2003 - TV property shows
The media plays an important role in asset price bubbles. The number of property-related shows peaks in June 2003. During the boom, property-related TV shows include The Block, Hot Property, Backyard Blitz, Auction Squad, DIY Rescue and Location, Location.
August 2003 - Car-as-security for mortgage
A non-bank lender, Liberty Financial, allows would-be home owners to put up their cars as collateral for a mortgage. The product is quickly withdrawn after adverse media coverage.
November 2003 - Nation of landlords
The proportion of households owning investment property reaches 12 per cent. In June 1997, the proportion of households owning investment property was 6.5 per cent.
December 2003 - Spruikers
The property spruiker Henry Kaye comes to prominence after it is found that a subsidiary of the collapsed insurance giant HIH lent money to Kaye's company National Investment Institute. Kaye charges up to $15,000 for his "educational" seminars.
December 2003 - Price-to-earnings highest ever
The p/e ratio, calculated by the investment bank UBS, measures the price of houses divided by the income from property (rental). It reaches almost 40 in December. The previous highest p/e ratio was in March 1975, when it reached 32. The long-term p/e ratio of the stockmarket is about 14.
January 2004 - Debt binge
The ratio of household debt to household disposable income reaches more than 130 per cent. Five years earlier, at 56 per cent, it was low by international standards.
January 2004 - Property lending
Lending grew by 15.1 per cent over 2003 - the highest annual rate since October 1989. Equity in the home is being leveraged to take on more debt for investment and consumption.
July 2004 - Tax deductions
Negative-gearing tax deductions on rental properties reach almost $15 billion for the 2002-03 financial year. This is after 220,000 landlords lodged claims with the Australian Taxation Office for the first time.
February 2005 - Mortgage insurers
The Australian Prudential Regulation Authority moves to impose higher standards on the mortgage insurance industry, including higher capital requirements against "low doc" loans, to shield the banking sector against a housing downturn. Mortgage insurance protects lenders, not borrowers, from defaults on mortgages.
February 2005 - Low-doc takes off
Between 15 and 20 per cent of all mortgage lending is low-documentation. "Low-doc" loans are for those who work for themselves, or have a poor credit history, who would normally find it difficult to get a loan.
March 2005 - Brokers
A report by JP Morgan and Fujitsu shows that brokers account for 45 per cent of new loans and 30 per cent of existing loans (refinancing).
Feeling the pinch
Maree Ward wishes she had sold her two investment properties on the NSW Central Coast before she bought a house to live in. Fed up with renting, she bought her four-bedroom Kellyville house last year. The first of her two investment properties was purchased in April 1999 and the second in October 2000.
The 35-year-old Sydney accountant would like to keep her investment properties, but has to sell. Her plan was to refinance her principal and interest mortgage to an interest-only loan but, with the dip in property prices, she has not been able to find a lender, including her current one, to refinance her mortgage.
After the interest-rate rise this month, Maree had to find an extra $150 a month for mortgage repayments.
After being on the market for almost a year the properties went to auction the weekend before last. Not a single bid was made.
Maree believes she will still make good capital gains on the two properties even though she is "almost selling these houses in a fire sale". Last week, one of her tenants gave notice. The property is likely to stay empty, she says, because no one is going to want to move into a house that is on the market.
thought you might like it
cheers
shaun
The end of the partyJohn Collett | March 30 2005 | Sydney Morning Herald (subscribe)
Speculators who got in early on the great property frenzy that falls neatly either side of the millennium (late 1997 to 2003) and have banked their capital gains are laughing.
But genuine investors have a simpler, longer-term strategy. That is: pay off the family home, or a good deal of it, and then borrow against the equity in the home at near-record-low interest rates and take advantage of generous tax deductions.
Of course, investors have always been a big part of the property market. But the investing crowd with shorter time frames and an eye on easy capital gains turned into something of a horde starting in 2000. Before they joined in, the annual property price rises of 10 per cent were "fully justified", says Rob Mellor, BIS Shrapnel director of building services and construction. Demand was solid as a result of increased immigration and land scarcity - particularly in Sydney and south-east Queensland - some natural, some state government-induced.
A combination of federal tax (and other) incentives, a poorly performing stockmarket and low interest rates set the scene for investor interest in residential property to really take off.
Mellor says the investor-induced boom really occurred between mid-2001 and mid-2003, when annual price growth reached more than 20 per cent. Over the same two years, the value of investment loans for residential property in NSW and Victoria increased by about 80 per cent.
Prices of houses and units nationally peaked in the March quarter of 2004 at $369,000 (a doubling since March quarter of 1998), and have fallen back a little bit since then. That house price growth is recorded without taking into account inflation needs to be kept in mind, says Adam Donaldson, a senior economist with the investment bank UBS.
@media print {.nopr {display:none}} [size=-1]advertisement[/size]
While the accompanying graph (on page 10) shows that median property prices hardly ever fall, there are long periods, such as that following the late '80s boom up to the mid-'90s, when real prices have fallen.
The last time investors fed a residential property boom was in the early and mid-'70s (when shares performed poorly), Mellor says. Evidence of that investor-led boom is with us still: a blight on the Sydney landscape in the form of poor-quality mid-rise flats. Mellor suspects that in several years' time we may be looking at some of the poorer-quality, look-alike, high-rise apartments in the same way.
For investors who have overstretched hoping to make quick capital gains, particularly in off-the-plan high-rise developments in Sydney and Melbourne, the party is over. Rising interest rates and a more selective approach from lenders on the types of residential property they lend against have seen to that.
However, as long as the economy holds and job security remains strong, owner-occupiers will be able to sit tight during what will most likely be several years of flat prices in nominal terms, according to property analysts.
That's the big picture and the most likely scenario, but what happens area by area will vary greatly, as always.
Most exposed are the poor-quality, look-alike apartments. Some investors, urged on by get-rich-quick spruikers, have used deposit bonds to secure off-the-plan apartments. These are IOUs for a 10 per cent deposit which cost the investors only a few hundred dollars each.
Many dwellings are yet to be completed and some investors who put down deposit bonds will have to find finance when the apartment is completed. In a bid to head off trouble, some developers are providing finance to holders of deposit bonds.
For owner-occupiers and investors who have been conservative in their borrowing, there's nothing to fear. Everyone needs a roof over their head, immigration will stay strong and land close to the big eastern capital cities will get scarcer.
Still, there is a sufficient number of wild-cards this time to possibly upset the relatively sanguine forecasts of most analysts.
DEBT BURDEN
Chief among these is the unprecedented level of indebtedness and the sensitivity of household finances to rising interest rates.
However, the official figures show our appetite for debt is moderating. "Household balance sheets ... are getting a major overhaul as Australians become more prudent and conservative regarding debt," says Carl Jensen, a CommSec equities economist.
The two 0.25 percentage point rate hikes at the end of 2003 appear to be taking effect, with new lending commitments - which include housing, personal, commercial and lease loans - falling for the fourth time in the six months to January 31 this year. However, finance commitments still stand 5.7 per cent higher than a year ago.
The Reserve Bank increased rates by another 0.25 of a percentage point this month. If interest rates were to rise another 0.25 of a percentage point in the next few months, the impact on those highly leveraged into the property market could be severe.
A survey conducted by Hawker Britton UMR Research before this month's rate increase found that more than a quarter of home loan borrowers who responded would struggle if rates rose by 0.5 of a percentage point. More than 40 of respondents said they would struggle to maintain repayments if the mortgage rate rose by a percentage point.
MORTGAGE BROKERS
Another wild-card is the rise of the mortgage brokers, who now place 45 per cent of new loans and refinance 30 per cent of existing loans.
Brokers are paid sales commissions by lenders, so there is a strong incentive for them to recommend big mortgages.
Regulators want to be able to better police brokers but are hamstrung because brokers come under credit laws, which are the responsibility of the states. So far, the states and territories have not done much beyond issuing discussion papers on how the brokers should be regulated.
Another concern is the growth of non-bank lenders, especially those that specialise in the "non-conforming" market. These are the "low-doc" [low-documentation] loans taken out by those who find it difficult to get a loan because they don't meet traditional lending criteria (because they are either self-employed or have a chequered credit history). The risk is that some of these brokers may be massaging the information they give to lenders, degrading the credit quality of the lenders' loan books.
HARD LANDING
Last, but not least, is the biggest risk of all: that Australia's 14 years of uninterrupted economic growth ends with a hard landing. That is the doomsday scenario in which unemployed landlords start defaulting on their repayments - leading to forced sales.
Employment has been growing strongly. But, as the economist Ron Woods of Challenger Financial Services Group points out, almost three-quarters of all of the net job growth in the private sector in the past five years has come from just three sectors: construction, retail and property, and business services. A lot of the retail growth is property-related - furniture, window coverings, soft furnishings and whitegoods. In the first quarter of the year, the three sectors accounted for 87 per cent of all jobs created (including the public sectors).
With housing construction supporting so many jobs, any decline could be a blow for the economy, not just house prices.
A property frenzy like no other
April 1986 - Financial deregulation
Hawke/Keating Government starts deregulating the financial services industry, opening the big banks to competition from new entrants.
February 1992 - Non-bank lenders
Aussie Home Loans opens it doors, becoming the first non-bank lender to take advantage of financial deregulation to compete with the banks. Aussie offers much cheaper standard variable-rate loans than those of the banks. Aussie is the first to use mobile lenders.
September 1997 - Banks respond
The banks start responding to non-bank lenders and slash their margins on mortgages in response to slipping market share.
September 1999 - Capital gains favoured
Halving of capital gains tax on investments held for at least a year gives capital gains plays a tax advantage over income-producing investments.
July 2000 - First Home Owners' Grant
The Federal Government introduces a $7000 First Home Owners' Grant to offset the impact of the GST on the cost of building materials.
March 2001 - Extension of grant
The First Home Owners' Grant is doubled to $14,000 and creates a massive "pull-forward" in demand for housing among first-home owners.
December 2001 - Cheap money
From a cash rate of 7 per cent in July 1994 and a mortgage rate of just under 10 per cent, the cash rate falls to 4.25 per cent in December 2001 - its lowest in almost 30 years. That takes the standard variable home loan rates offered by the big banks to just over 6 per cent.
June 2002 - Investment loans sky-rocket
For the year to June 30, 2002, the value of investment loans for residential property increases by 47 per cent in NSW and 63 per cent in Victoria.
December 2002 - Australian shares dive
The Australian sharemarket returns minus 8 per cent for the year to December 2002 while the median house price rises more than 20 per cent as, spurred on by low interest rates, more investors seek safety in bricks and mortar.
December 2002 - Off-the-plan apartments
The Reserve Bank Governor, Ian Macfarlane, warns property investors not to be seduced by developers into "get-rich-quick" high-rise schemes.
March 2003 - Broker regulation
A report by the Consumer Credit Legal Centre NSW, commissioned by the Australian Securities & Investments Commission, finds cases of high-pressure sales tactics. The centre calls for the regulation of the sector.
June 2003 - Real-estate agents
For 2002-03, the real-estate industry's total revenue, mostly from sales commissions, comes to a record $7.5 billion. Rising house prices and turnover result in an increase in the industry's average annual income of 17.8 per cent over the past four years.
June 2003 - Height of frenzy
Following the massive increase in investor activity for the year to June 30, 2003, investment loans for residential property rise by
30 per cent in NSW and 18 per cent in Victoria.
June 2003 - TV property shows
The media plays an important role in asset price bubbles. The number of property-related shows peaks in June 2003. During the boom, property-related TV shows include The Block, Hot Property, Backyard Blitz, Auction Squad, DIY Rescue and Location, Location.
August 2003 - Car-as-security for mortgage
A non-bank lender, Liberty Financial, allows would-be home owners to put up their cars as collateral for a mortgage. The product is quickly withdrawn after adverse media coverage.
November 2003 - Nation of landlords
The proportion of households owning investment property reaches 12 per cent. In June 1997, the proportion of households owning investment property was 6.5 per cent.
December 2003 - Spruikers
The property spruiker Henry Kaye comes to prominence after it is found that a subsidiary of the collapsed insurance giant HIH lent money to Kaye's company National Investment Institute. Kaye charges up to $15,000 for his "educational" seminars.
December 2003 - Price-to-earnings highest ever
The p/e ratio, calculated by the investment bank UBS, measures the price of houses divided by the income from property (rental). It reaches almost 40 in December. The previous highest p/e ratio was in March 1975, when it reached 32. The long-term p/e ratio of the stockmarket is about 14.
January 2004 - Debt binge
The ratio of household debt to household disposable income reaches more than 130 per cent. Five years earlier, at 56 per cent, it was low by international standards.
January 2004 - Property lending
Lending grew by 15.1 per cent over 2003 - the highest annual rate since October 1989. Equity in the home is being leveraged to take on more debt for investment and consumption.
July 2004 - Tax deductions
Negative-gearing tax deductions on rental properties reach almost $15 billion for the 2002-03 financial year. This is after 220,000 landlords lodged claims with the Australian Taxation Office for the first time.
February 2005 - Mortgage insurers
The Australian Prudential Regulation Authority moves to impose higher standards on the mortgage insurance industry, including higher capital requirements against "low doc" loans, to shield the banking sector against a housing downturn. Mortgage insurance protects lenders, not borrowers, from defaults on mortgages.
February 2005 - Low-doc takes off
Between 15 and 20 per cent of all mortgage lending is low-documentation. "Low-doc" loans are for those who work for themselves, or have a poor credit history, who would normally find it difficult to get a loan.
March 2005 - Brokers
A report by JP Morgan and Fujitsu shows that brokers account for 45 per cent of new loans and 30 per cent of existing loans (refinancing).
Feeling the pinch
Maree Ward wishes she had sold her two investment properties on the NSW Central Coast before she bought a house to live in. Fed up with renting, she bought her four-bedroom Kellyville house last year. The first of her two investment properties was purchased in April 1999 and the second in October 2000.
The 35-year-old Sydney accountant would like to keep her investment properties, but has to sell. Her plan was to refinance her principal and interest mortgage to an interest-only loan but, with the dip in property prices, she has not been able to find a lender, including her current one, to refinance her mortgage.
After the interest-rate rise this month, Maree had to find an extra $150 a month for mortgage repayments.
After being on the market for almost a year the properties went to auction the weekend before last. Not a single bid was made.
Maree believes she will still make good capital gains on the two properties even though she is "almost selling these houses in a fire sale". Last week, one of her tenants gave notice. The property is likely to stay empty, she says, because no one is going to want to move into a house that is on the market.
