Don’t be fooled

Date: Mar 18, 2018

And So It Begins

Don’t be fooled….. the (residential) property crunch is coming and it’s going to either hurt or create opportunity. I hear a constant flow of “opinions” from friends, colleagues and clients alike regarding property and seldom do they find common ground with the facts. Let’s face it if your in the market you’re apparently either a motivated seller or an astute buyer no matter what the cycle and yes that was actually meant to sound cynical. Regardless which side of the economic fence you sit, odds are you will have researched the positives and/or negatives to death to arrive at your final conclusion. You will have validated your logic over a few beers with the lads or while partaking of a good red at last weekends bbq and you will simply not be convinced otherwise. It doesn’t seem to matter that these people (we all know at least one or two) only researched the market for a couple of weeks, watched a few property guru webcasts on YouTube then jumped on to complete their thesis. Whatever outlook they’ve decided upon, for some unknown reason this completely trumps any professional opinion that was derived from decades of experience, never ceasing market immersion and a constant exposure to updates on economic conditions and interest rates. You know…..stuff the makes the markets tick!!! Failure to seek professional advice is often why people say they have “horror stories” when it comes to property but what it amounts to is that they just didn’t do it right.

The thing is right now……. both buying and selling arguments are equally persuasive. Especially here in the South East Qld corner, which by the way dances to an entirely different beat to mainstream media reports. If you listen to them that is!

The Negative Outlook  – we’re in a property bubble/spike, prices are too high and wage growth too low. This heralds a market crash and we’re sitting on our money waiting for an opportunity.

The Positive Outlook – we are moving into a new economic cycle that will see new benchmarks set. What appears overpriced now will become normal as wage growth and inflation catches up. The Commonwealth Games will bring national and international focus to the Gold Coast. Cashed up visitors will be on the coast and will be comparing our prices to their own where ours will be far cheaper, even at a local premium.

Generally things start with a reason to research meaning someone has decided to either buy their first home or to invest in or dispose of a property. Typically Google cops a hiding for maybe a few days or at most a few weeks, after which interest generally wanes under the sheer weight of information but not before an opinion has formed. The problem though is actually the internet itself. Once someone forms an opinion (the right time to buy or sell) there is a massive amount of supporting information available for either side of the prediction. The primary things to consider are;

  • Clearance rates                 –              are properties being placed on the market (at whatever price) actually being sold?
  • Prices                                  –              are they pressing higher, stagnating or dropping?
  • Causation                           –              in each of the price “cycles”, what is driving the current state of play for example if they’re going up, what’s making them go up?
  • Sustainability                     –              how long has the current cycle been going, is there sufficient momentum in the cycle for it to continue and if so, for how long?
  • Interest rates                     –              where are they heading?

The two biggest factors I see affecting property right now are interest rates and mortgage refinance. Interest rates will increase over the next few years, you can almost bet on that and due to the relaxed lending criteria of some banking institutions, this is going to present a big problem for those people who only just scraped in mortgage wise from an affordability perspective. Add to this, pressure from the regulator (APRA) on banks to reduce their interest only loan books whereby a very large number of loans will be up for refinancing from interest only facilities to principal and interest loans over the next few years and the problem compounds but may not stop there. Someone experiencing low to zero wage growth holding an interest only mortgage that they can only just afford under current conditions are going to be placed under significant financial duress when refinancing falls due. If the property in question is an investment, selling is an obvious option but selling under duress generally achieves a lower than expected sale price which has a knock on effect in the market, lowering other prices in the immediate area and so on it goes. Further, if the original mortgage had a high LVR (Loan to Value Ratio) and property prices do indeed begin dropping even slightly, the bank may be forced to request additional funds to top up the equity, causing further financial stress

$800,000 at 90% funding results in a loan for $720,000

$720,000 at 4% interest only = $28,800pa or $554pw

$720,000 at 4% principal & interest = $41,244pa or $793pw

$720,000 at 5% principal & interest  = $46,380pa or $891pw

Lets say property values begin to drop….. given the outstanding growth over the last 3 years, a drop of 5% is not unrealistic therefore;

Property value drops by 5% means $800,000 less 5% = $760,000 means the loan is now at 94.74% LVR means 4.74% additional ($36,024) is now required to pay back to bring the loan back to 90% LVR or $683,976 loan balance.

Even if you were able to keep the rate of 4% on P&I this is still $39,180pa or $753pw. An extra $200 per week to find from a wage that hasn’t grown.

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