The Australian property market looks to experience a shaky start to 2019. But how did we get here?
With the number of new homes expected to drop by 25% by 2023 from when construction peaked three years ago[1], the old adage of ‘safe as houses’ is not what it used to be.
Confidence in the Australian housing market is at a new low, with the NAB’s residential property index falling 11 points to -20 in December, with trust in the housing market[2] seems to be in a downward tailspin.
With Sydney and Melbourne’s prices falling over the year with median values around 11 and 7 percent respectively, it seems the fall looks far from being broken according to AMP Capital chief economist Shane Oliver as quoted in the Financial review saying ‘For Sydney and Melbourne, our base case has been that prices would have a top to bottom fall of around 20% out to 2020”[3].
Why did this happen?
There is a range of reasons the housing market became hyperinflated in 2017/2018.
Reasons can include the banks and lending institutions freely handing out money to people who could not afford it, increased property investor purposes, overseas investors and an economy with a positive outlook all drove the prices up, pushing to people borrowing more, or as much as they could take to get their bricks and mortar.
$360 billion of interest only loans!
Interest only loans, or those that allow the borrower 3 years paying the interest off their loan, not the principal, were provided to a wide range of borrowers including owner occupiers and investors. Those loans are set to have a combined total of around $360 billion and will be rolling over into principal+ interest, putting increased financial stress on the Australian housing market.
This leads to more people having a false sense of their ability to pay back loans, while investors often held interest-only loans with one institution, then switched to another bank or institution so they could extend the interest-only period. The situation is certainly a sticky one as consumers lend more than they can afford and the banks look to cash in on defaulted home loans and mortgages as principal and interest payments cause havoc on many Australian homeowners.
Foreign investors and Australian real estate
From 2009/2010 through to 2015/2016 the level of foreign residential real estate went from under 5,000 properties to 40,149 properties in total over 72.4 billion[4]!
With all this new money entering the property industry from China, India and many other countries with an established and growing middle class, the Australian housing markets – especially Sydney and Melbourne – saw a boom in value.
In 2014, 16.8% of the new housing market was foreign money, in 2013 almost 10% of established homes purchased were from overseas. This put upward pressure on prices, as homes were not even going to auction, often paid in cash and selling for premiums year after year.
SMSF property purchases
With the level of borrowing up three-fold between June 2013 and June 2016, trustees of self-managed super funds, were buying up properties, often in ideal retirement locations for their future retirement plans, or in high rental yield areas such as Melbourne and Sydney[5].
This form of investment by many financial planners and real estate pundits was seen as safe and a great plan for the future goals of the trustees.
This brought a false sense of security for investors, as the home couldn’t be lived in by the trustee – unless through a complicated rental arrangement run by their accountants. This strategy was only seen prudent if there was a significant amount of money in the superannuation account to hold the mortgage and make the payments.
For the smaller accounts, this is where the cracks started to appear, as the trustees of the SMSF, who had put all their super into the purchase of the property, needed to fill their homes with willing tenants and ensure they met not only their primary home or property portfolio payments but of their SMSF property as well.
Then came the top of the cycle
All of these indicators were positive and then housing price indexes began to flatten, to now being in a systematic fall – with 20% in some areas.
What does that mean for the people in the above categories that helped push the prices north in the first place?
Foreign buyers have pulled right back from the market, dropping to just 6.5% of new homes and 3.4% in established markets.
In 2017, the Australian Prudential Regulation Authority put the brakes on, limiting interest-only lending by the banks to 30 per cent of new home loans[6]. This slowed the rate of loans issued and stopped many homeowners able to refinance.
However, with around 40% of all loans in 2015 interest-only, the Australian housing market prices were destined, the damage has already been done, as the holders of these loans are beginning to find out, having on average thousands added to their monthly repayments.
“The kind of nightmare scenario is where a lot of people need to sell at once, and that’s when you see a kind of fire sale mentality and could see very significant downward pressure on prices,” said Professor Richard Holden from the University of New South Wales Business School.
This is happening in most areas around the country as homeowners and investors bail to relieve the increased costs of their mortgages and their now inability to refinance thanks to the review of the lending criteria by the Banking Sector Royal Commission.
The banks became subject to the Royal Commission into the Banking & Insurance sector, and put a clamp on the number of loans, in particular, the interest-only loans that they issued.
This clampdown not only stopped new entrants into the market but also stopped investors from jumping around between institutions to keep the interest-only payments going.
And while SMSF trustees may have secured an asset, that asset is rapidly depreciating far more quickly than the rate of most retail superannuation funds, shares or other asset classes.
Where to from here?
According to many experts, the bottom is 20%, some say less, while others say more, the truth of the matter is, no one really knows. The key is to ensure you have the means to pay a mortgage, on time, every time with the anticipation of interest rate changes, P&I, fees and ongoing maintenance.
Secondly, when it comes to your long-term investment strategies, they should be diversified, and geared depending on your adversity to risk, your ability to service debts and the length of time before retirement.
Finally, when looking to delve into SMSF, share trading or investing, it is paramount you have the right advice before you begin and you understand enough to make informed decisions and ensure that your investments are diversified.
If you are looking to explore this area further a great place to start is with the Smart Money Company’s free investor education evening. This Brisbane-based event provides market insights, tips, tactics, techniques and tools to create a well-founded and rounded financial future for you and your family.
Find out more online and book in your free spot at one of our upcoming events.
References
[1] https://www.afr.com/real-estate/number-of-houses-and-units-built-across-australia-forecast-to-drop-by-25-per-cent-20190124-h1afod
[2] https://www.afr.com/real-estate/housing-market-confidence-sinks-to-new-low-nab-20190124-h1af5m
[3] https://www.afr.com/news/economy/downturn-in-sydney-and-melbourne-home-prices-may-not-even-be-half-way-through-20190124-h1aex5
[4] https://www.businessinsider.com.au/official-data-reveals-the-collapse-in-foreign-investment-activity-in-australias-housing-market-2018-5
[5] https://www.smh.com.au/money/borrowing/smsf-property-royal-commission-diy-super-20180926-p5061w.html
[6] https://www.abc.net.au/news/2018-06-19/fears-as-interest-only-loans-roll-into-principal-plus-interest/9886430