All in the short space of 6 months, the Australian economy has been turned on it’s head and consumers are running for cover. The cause is twofold, firstly, the cascading residential property prices in Sydney and Melbourne and secondly, the upcoming Federal Election.
On the East Coast the property boom is over and prices have already dropped 10% since early 2018. Apart from the challenges posed by the BRC, banks are now in recovery mode to protect their mortgages. Here is the dilemma. A buyer pays $1m for a property and borrows 80% (no mortgage insurance required). The value is now $900,000 and the 80% factor reduces the maximum mortgage to $720,000. This means the borrower is required to top-up the loan with a further deposit of $80,000 or risk having to take out mortgage insurance. That is $80,000 less for discretionary spending. The market is still falling and the trend indicates another 5% to go by the end of the year. There will be instances, and many of them, of owners with no equity in their properties. If they don’t have the funds to top-up then the property must be sold into a market on the slide.
Another issue is to do with “home expenses”. The BRC discovered that banks were treating home expenses on a generic rather than a borrower specific basis. In September last year we had a pre-approved loan declined because the bank insisted on re-assessing expenses to find that they were far greater than what was originally disclosed. Were mortgage brokers doing their job or were they and the banks ignoring the obvious all in the name of greed?
In addition, banks are not interested in investor loans whilst they are sorting out the mess with home owners. Banks are nervous of the implications associated with a shift in the application of negative gearing. A new Labor Government is going to “grandfather” existing arrangements, however buyers of “not new” properties are not going to enter the market until prices settle and the future is clear. If investment properties are not as popular then the supply will drop and rents must rise. In the meantime this sector of the market is dead in the water.
For the Labor Government to suggest that negative gearing will be allowed for new properties is a sham and verges on even being a con. My advice is NEVER buy a newly built apartment off the plan in a high rise development unless you are an owner/occupier. The reason for my emphasis is that rarely is a high rise development sold out at the date of settlement. If the developer is working on a 15% profit margin then the cashflow from the first 85% of apartments goes to repay the bank debt. It is in the last 15% of apartments that the developer makes a profit and it is in that final sell off that prices are discounted. When you invest in a high rise development the market is only as strong as the weakest vendor. If the average price of the apartments is $500,000 and the developer decides to discount the price of the last few down to $450,000, then all owners are 10% behind the eight ball. Owner/occupiers can ride out this disruption but investors can’t so therefore it’s a con for the Labor Government to allow negative gearing on only new properties. Besides, a “new” property is not so to the next buyer.
I can give you an example, in Place on Brougham where investors lost 25 - 40% of their money. And that was after the benefit of negative gearing. Some help Billy Boy.
The turmoil from the property markets and the BRC is now rippling through to the retail sector which reported their worst Christmas figures since the GFC and this week car sales were reported to be down by 9% as well. Household budgets are at their limit. The first thing to go is discretionary spending. Later in the year we might also see the ripple into education and overseas travel. Watch this space.
If you want to be heartened, then I refer you to my previous 2 blogs and ask you always to keep the big picture in mind. South Australia is well placed to be the first state to recover but we will have to wait awhile.