The end of the party
By John Collett
March 30, 2005
From the SMH:The end of the party http://www.smh.com.au
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.
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).
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.
By John Collett
March 30, 2005
From the SMH:The end of the party http://www.smh.com.au
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.
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).
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.
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