Of course, it’s not just about the big personalities or grand veneers. Part of the appeal is a suspicion that buyers of luxury properties pay for the prestige and social licence that comes with a trophy house, rather than the investment potential of the asset in question. 

And that’s partially right. Exclusivity does drive the price up. But it’s also not the whole story. Like Gucci or Versace, the luxury nature of prime Melbourne and Sydney real estate means that overpaying a little to get in yields long-term dividends. Blue-chip property isn’t an ego buy that drops value when trends swing the other way. It’s a resilient asset that’s ideal for storing and growing wealth over time. 

And it’s one that is increasingly hard to acquire. 

A History of Buoyancy 

Top-end homes in Sydney and Melbourne (the top 5% of each market by value) have a history of being resilient to economic tides – even when industry sources, like CoreLogic, might seem to indicate otherwise. The very top percentiles are so in demand and so rarely on the market that the normal rules simply don’t apply.  

It also helps that the buyers of luxury property are typically high-net-worth or ultra-high-net-worth individuals with multiple income streams. Short of a widespread recession, Melbourne and Sydney’s best suburbs won’t be short of buyers.  

According to John Sommers, a director of buyer advocacy firm McRae Property, those two traits mean luxury properties hold their value well over time. 

“From my 35 years of market experience, I can say with total confidence that ‘blue-chip’, premium-quality properties have historically outperformed the broader market,” said Sommers. “And there is absolutely no evidence of that trend slowing down”.  

McRae Property is one of Melbourne’s most established buyer advocacy firms, having been created over 20 years ago and operated by its two directors, John Sommers and David McRae, who (uniquely in this industry) are both qualified valuers. They specialise in high end homes in all inner and bayside suburbs. 

Scarcity Matters, Not Interest Rates 

At the top end of the Melbourne and Sydney property markets, “interest rates are not even discussed”, says Sommers. “The conversation is centred on ‘where or how do I find the asset that will suit my requirements.’” The reason is the same one we discussed earlier: the level of exclusivity in luxury real estate means that the normal rules of nature don’t apply. It’s about scarcity, not external factors like interest rates.  

At the time of writing, that immunity to market forces has been further reinforced by Australia-wide issues with the construction sector: a string of builder collapses, chronic material shortages, and widespread labour constraints. In the vast majority of cases, the replacement costs of luxury homes exceed the cost of new purchases – which means there’s a serious supply issue. It’s why both luxury markets have defied analyst predictions and continued to perform well over the past year. 

“In my view, [this] will continue […] unless there is a significant alteration in stock availability. I am not holding my breath,” says Sommers. “Frankly, there is no simple solution. Buying prime real estate for fair market value is quite an achievement in the current environment. So be prepared to step up and pay market value if that will secure the asset. That is a win.” 

Don’t expect demand to subside, either. According to Knight Frank’s Melbourne and Sydney Prime Residential Insight (Q2 2023) reports, Melbourne’s ultra-high-net-worth population (people with net worths of $30 million or more) grew by 5.8% YoY, and Sydney’s by 7.8% YoY. The millionaire class of each city grew by 6.4% and 7.7% respectively.  

Blue-chip Melbourne and Sydney real estate has never been more desirable, and there’s never been less of it to go around. 

When to Invest in Blue-Chip Melbourne and Sydney Properties 

The reality is that most high-net-worth individuals can’t afford to purchase a prime Sydney or Melbourne property – and probably shouldn’t even be thinking about it.  

It’s not about being able to drum up a deposit or secure a loan. Virtually any mortgage broker can find a lender on their panel who’ll give you approval. But buying a blue-chip property isn’t something to tackle lightly. 

For example, when you purchase an asset worth $3 million in Melbourne – which is at the lower end of what could be called ‘blue-chip’ – you can expect to pay around $200,000 in stamp duty. Servicing your home loan can be equally demanding, especially if you choose to live in your new property (as the vast majority of blue-chip buyers do). Rather than ‘stretching’ to acquire a blue-chip property by shouldering an uncomfortably large non-deductible debt, acquisition should feel natural, an extension of years of strategic property investing.  

For many investors, that process is simple: buy low, sell high, repeat. Good execution comes down to working with the right buyer’s advocates and brokers – knowing which areas are forecasted to experience high growth, buying at the right time with correctly structured loans, and then divesting assets at their cyclical peaks so that you can reinvest capital into the next batch of high-opportunity properties. Each property might take three to five years to offload, so building up to buying a blue-chip property can seem like a slow journey, but it’s one that will ultimately pay dividends.  

And if your net worth is already at a level where inner-city Melbourne and Sydney assets are comfortably within reach? 

It’s time to talk to your broker and buyer’s advocate, because acquisition can be gruelling, time-consuming, and deeply difficult. You’ll need a team that understands how to source assets that match your requirements. You’ll need to time your entry correctly, and you’ll need a loan structure that aligns with your current financial situation. 

“Sourcing options off-market can and does lessen the competition,” says Sommers. “Last week, we bought a Bayside home for north of $9 million with limited competition. Don’t look online for photos, however, because there aren’t any. [It was] all done very quietly … just the way we like it.”    

Of course, it isn’t all doom and gloom. 

“If you want a sugar hit, then stick with Gucci or Versace,” Sommers advises. “Buying that [blue-chip] real estate will […] probably cost you more than you expect. Then again, if you do succeed in securing one […], it should outperform the general market and become an asset that is retained to foster long-term wealth growth.” 

The lessons here are three-fold: one, you probably can’t afford that Rose Bay villa you’ve been eyeing off – at least, not comfortably. Two, working up to a blue-chip property is a methodical process, not a spur-of-the-moment decision. Three, you can’t just step up and expect to be served. You need the right people, a tolerance for paying more than you expected, and a decent stroke of luck. 

But, if you do get into the exclusive blue-chip club, you’ll have a high-performing asset that you can rely on in perpetuity. 

The post Good as Gucci: Why You Probably Can’t Afford Sydney and Melbourne’s Best Homes appeared first on The Australian Lending & Investment Centre.

The best attitude is that purchasing a property is a long-term investment with 10- to 20-year horizons, not a short-term purchase vulnerable to market swings. Most people are aware of the classic boom-to-bust cycle of property markets and how they recover before then starting the entire process again. You might be thinking, “but, wait a minute, the last three years have seen some ridiculously high value increases”, and you’d be right.

In 2020–21, rising property values were pushed along by a mix of strong demand and historically low interest rates. But, today, rising interest rates are cooling prices across most Australian property markets. Property investment has many moving parts, but, for buyers with a long-term focus – whether investors or first home buyers – 2023 could prove to be a good time to take out a mortgage. 

House Prices Are Starting to Rise

After 11 consecutive cash rates rises precipitated plunging housing prices – which dropped by as much as 15% in some areas – the slowdown appears to be over. CoreLogic found that national averages went up by 0.6% in March and 0.5% in April. New South Wales, Victoria, Queensland and Western Australia all saw increases in capital city values, with Queensland, South Australia, and Western Australia recording regional lifts as well.    

In other words: we’re moving out of the darkness, and back towards more positive market conditions. That’s good news for prospective homebuyers, especially if you’ve been holding off, wary of tying up your capital in a years-long housing slump. 

Property markets do move in cycles, though – the ideal time to invest is before they peak. With the national downturn over, values may stabilise and increase over the coming months. Buyers that want to take advantage of the current prices should seek advice about whether investing now is the right move for them.   

Rising rental costs may also be a consideration. Vacancy rates aren’t likely to improve in the short term, and, for some tenants, that could be an incentive to put high rental payments towards a mortgage instead.

Interest Rates Have Been Worse

The never-before-seen interest rate of 0.1% during November 2020 resulted from a once-in-a-lifetime occurrence. From 1990–2023, the average Australian cash rate was 3.85%; between 1990 and 2008, the rate barely dipped below 5%. Economists from the Big Four banks predict the current cash rate will hold at 3.85% until the end of 2023 , followed by a cooling period in early 2024.  

It’s important to understand that the cash rate isn’t spiralling out of control. Instead, we’re seeing a return to baseline – and there’s no reason for home buyers to put off purchases in anticipation of 2020 rates returning. 

There Are Smart Places to Invest

The ‘Australian dream’ of a large house, a big backyard, a clothesline out the back, and a verandah out the front is changing. As a nation, we’re  slowly moving towards smaller housing – and that’s not just in metropolitan areas either. 

As our properties shrink, people will demand quality amenities within walking distance – an urban planning concept known as the 15- or 20-minute neighbourhood. Finding areas where there is substantial infrastructure spending may help you identify desirable locations for potential future renters. 

Let’s not forget about renting, either. Australia is experiencing a rental crisis, and our markets are set to remain tight for the next few years. Returning international students, immigration, and a  resource-strapped construction sector are adding to already high demand, making it likely that rental properties will continue to rise in value. 

You Have All Your Ducks in a Row

Regardless of what is happening in the markets, long-term investing is about making the right decisions for your portfolio. If you have a sound investment strategy with ownership structures to protect your assets and minimise your tax obligations, there’s no real reason to hold off in anticipation of slightly lower interest rates that might materialise in a few years’ time.  

Residential housing price declines, soaring rent demand, and relatively low competition aren’t bad things for any property investor – and, if you’re in it for the long haul, it’s time spent in the market, not timing, that counts most.  

Conclusion

Buying an investment property in 2023 is far from a bad idea. Many Australian markets are still shaky, but, if you’re approaching property with an investor’s mindset, buying now could deliver 10-year better returns than holding out for marginally lower interest rates. 

Declining property values and the ability to refinance in the future mean that there are opportunities out there for buyers who do their homework. Conduct due diligence, seek the advice of professionals like brokers and buyer’s advocates, and keep abreast of big infrastructure developments to get in early on investment hotspots.  

The key is to have a solid investment strategy and not get too caught up in trying to time the market. Property, after all, is a long-term game. 

The post Four Big Reasons to Buy a House in 2023 appeared first on The Australian Lending & Investment Centre.

How did interest rates on SMSF loans get so high? 

After the 2017-2019 Financial Royal Commission, many of the big banks ceased lending SMSF loans, where once they had been tremendously active. The biggest blow was by Westpac and all its subsidiaries—which includes St. George, Bank SA and Bank of Melbourne—announcing they will no longer lend to SMSF property investors. Other institutions to shun SMSF lending include ANZ, NAB, Commonwealth Bank and Macquarie. Although SMSF loans represented only a small portion of each bank’s overall lending portfolio, they were considered high-risk and therefore attracted high interest rates. The banks likely made this decision as a result of the increased scrutiny and regulatory pressure on lending practices following the Financial Royal Commission, which exposed numerous cases of misconduct and unethical behaviour by financial institutions in Australia. 

Which Banks Have the Highest SMSF Loan Interest Rates 

The Big Four banks’ cessation of SMSF mortgage approvals led to a halt in almost all competition, and internal refinancing came to a stop. Thus, these pre-existing “grandfathered” loans were left untouched without competition! Many such established loans have retained rates of up to 9%, which borrowers may not even be aware are well above the current market rate. From our point of view, this means that anyone holding a grandfathered SMSF loan with Westpac, ANZ, NAB, Commonwealth Bank, Macquarie, St. George, Bank of South Australia, and Bank of Melbourne should not postpone checking how much they are paying in interest!  

“How can I climb out of this high-interest hole?” 

Although setting up an SMSF loan was once a way to take control of one’s financial future, many Australians are currently experiencing the negative effects of being locked into high-interest rates on their grandfathered SMSF loans with the Big 4 Banks. While this situation is hindering their investment and returns, there is a way out. 

Switching to a smaller lender who offers lower interest rates can help save money in interest payments and increase investment returns – but be aware – the lending criteria is stricter than ever. The process of refinancing an SMSF loan is lengthy, and involves a number of steps: researching different lenders and comparing their interest rates, fees, and loan features; gathering all necessary financial and legal documents; applying for pre-approval and submitting a formal application; completing a property valuation and arranging for a new loan contract to be drawn up; and finally, refinancing the old loan and paying off any outstanding balances.  

If you find yourself in this position, ALIC’s financial professionals can provide guidance on the best options for refinancing, to help you understand the associated costs and risks, and ensure that you meet all the necessary criteria and regulations. Speaking to a financial professional is crucial and can ensure you are getting the most out of your loans so that you and the other members of your SMSF can enjoy a comfortable retirement. 

The post The Big 4’s Complacency with SMSF Loans appeared first on The Australian Lending & Investment Centre.

What Is Rentvesting?

Rentvesting is a portmanteau of ‘rent’ and ‘vesting’ – it’s a wealth creation strategy that involves purchasing an investment property while continuing to live in a rental property.

At first, rentvesting can seem illogical. Why would anyone want to waste money on rent if they could afford to buy their own home? Done correctly, though, rentvesting can help you pay off your mortgage faster and more comfortably than a traditional owner-occupier approach. 

How Does Rentvesting Work?

The process for rentvesting is more or less the same as buying a normal home.

Start by saving for a house deposit. Although 20% of a property’s value is an ideal deposit size, your mortgage broker may also be able to help you secure a loan with less (although you may have to pay LMI and face less favourable loan conditions).

Once you’ve accrued a reasonable deposit (think $40,000–$60,000), talk to your broker about your options. They’ll be able to help you set up the best loan structure for your situation, and can also direct you to other relevant professionals, like buyer’s advocates. 

Remember: don’t romanticise your first property purchase. Buying a house is an incredibly exciting step in your financial journey, but this isn’t your dream home – take emotion out of the equation and instead focus on finding a property that represents good value for money and is likely to appreciate. Broaden your search beyond local markets, too. Even if your home city seems unaffordable, there might be opportunities in other states.

Once you’ve secured a mortgage for your new investment property, you can use a property management agency to find tenants. Ideally, the rent you charge for the property should be more than what you’re paying in rent. That way, rentvesting can help you pay off your mortgage faster than owner-occupying.

For example, let’s say you currently pay $500 per week in rent. You save up $50,000, giving you a 10% deposit on a $500,000 house, so you take out a mortgage with a term of 30 years and a rate of 5.64% per annum. 

Your principal and interest repayments would come to $599 per week – $99 more than your rent. Instead of paying that extra money as an owner-occupier, you’re passing the cost onto another renter.

Now, let’s compare rentvesting to owner-occupying over a 30-year term (we’ll ignore inflation and rate rises for now). Over 30 years, your mortgage will cost you $932,416, whereas rent will cost you just $780,000. Even without considering appreciation or home improvements, you’ve saved $152,416 – enough for three additional mortgage deposits at $50,000.

Rentvesting does have some detriments, which we’ll talk more about shortly, but, from a purely financial perspective, it can be an extremely effective strategy.

How Does Rentvesting Work?

Rentvesting Pros

Earlier Market Entry

One of the biggest reasons to consider rentvesting is that it allows you to step onto the property ladder sooner than owner-occupation.

When you’re purchasing an investment property, you don’t need to worry about location constraints. While you might need to live in Melbourne CBD for the foreseeable future, for example, you might choose to buy a much more affordable property in Perth, giving you earlier access to capital gains.

You also don’t need to worry as much about affordability. Even if you couldn’t afford to step up from $500 a week to $599 a week in the example we gave earlier, rentvesting allows you to enter the market while still maintaining your current expense levels (excluding, of course, property-related costs, which come with both investment and owner-occupied properties).

Tax Deductions

Expenses incurred by investment properties are, unlike those for owner-occupied homes, tax-deductible. That means you can write off everything from property management fees and insurance to building improvements and rates.

The most significant deduction you can claim is the interest on your mortgage. In the example we gave earlier, your home loan interest would come to around $16,080.50 per year, which means, at a tax rate of 37%, you’d save $5,949.785 per year in tax. 

Flexibility

Rentvesting also affords you huge flexibility. Rather than staying tied down to a specific location or home, you can experiment with different lifestyles in different suburbs and change jobs more easily.

Alternatively, if you’re lucky enough to hold a remote-work role, you can even use rentvesting as a gateway to digital nomadism, journeying across countries and continents as your investment property keeps appreciating.

Appreciation

When investing, there are three key wealth-building mechanisms: value storage, passive income, and appreciation.

Value storage is a way of protecting your money from inflation. By buying assets that don’t decrease in value or have their value diluted over time, you can preserve the wealth you already have.

Passive income comes in forms like rent, dividends and distributions. It’s money being generated passively (without your input) by your investment.

Appreciation is the difference in your investment asset’s value between the purchase price (combined with any improvement costs) and what it’s worth today. For example, if you bought a property in 2020 for $700,000 and it was worth $1.05 million today, it would have appreciated by $350,000 (50%). Appreciation is only realised when you sell the asset. 

Investment properties leverage all three mechanisms to help you build your wealth, but you can make the most money through appreciation. Rentvesting allows you to get into the market earlier, which, in turn, means you’ll likely earn more through appreciation.

Property markets do move in peak-and-trough cycles, but, over the past sixty years, Australian property prices have been steadily moving away from CPI inflation, indicating that demand for housing has increased and that house prices will keep going up – and, with an ever-growing world population, there’s no reason for that trend not to continue.

Rentvesting Cons

CGT Liability

Under Australian law, the property that is your main residence is exempt from capital gains tax (CGT) when you sell it. CGT exemptions are granted under a few conditions:

1. The property must have been the home of you, your partner, and other dependents for the whole period you have owned it.
2. The property can’t have been used to produce income (for example, via house-flipping, renting, or running a business from it).
3. The property is a block of two hectares or less (you can choose which part of your property is exempt from CGT if it is larger than two hectares).

As a rentvester, you are renting out your investment property, which means you’ll incur CGT when you sell it. CGT applies to your capital gains – the difference between how much you bought and improved the property for (the cost base) and how much you sold it for. Capital gains are taxed at your marginal tax rate (that is, added onto your income tax), but, if you owned your investment property for more than 12 months, you’re eligible for a 50% CGT discount.

Remember that the cost of any improvements to the property (such as renovations) are added to the cost base, so always keep track of any value-adding changes you make.

First Home Owners’ Grant

Rentvesting also means you can’t use the First Home Owners’ Grant to buy your investment property, a subsidy for Australians who have never owner-occupied before. Provided you didn’t own residential property before 1 July 2000, you can apply for the grant under certain conditions.

Importantly, though, rentvesting doesn’t exclude you from ever applying for the First Home Owners’ Grant. If you do decide to buy a home to live in at a later date, you can apply for a grant (assuming you meet all the relevant conditions).

Lifestyle Compromises

One of the biggest detriments to rentvesting – at least, for some people – is the lifestyle compromises that need to be made while renting. You can’t make improvements to the property without the owner’s consent, you may be limited in what you can and can’t do with the property, and you’ll have to deal with quarterly inspections and any conditions in your rental agreement.

You also could be given notice by your landlord under a number of different circumstances, leaving you with 30 to 90 days to find a new home.

Many rentvesters feel that those impositions are minor in comparison to the financial benefits rentvesting can deliver, but, if you’re someone who values home stability and freedom of choice, it’s worth weighing up the potential issues.

Extra Costs

As an investment property owner, you’ll be responsible for improvements, repairs, council rates, water rates, building insurance, landlord insurance, body corporate fees, land tax, property management fees, and maintenance costs like pest control. Although these asset costs are tax-deductible, you’ll still have to pay them up front.

You might also have to shoulder the cost of mortgage repayments if there’s ever a gap in tenancies. Australia’s rental market is incredibly hot at the moment, but it may cool once housing affordability improves and the issues facing the construction sector ease. You can minimise the risk of tenancy shortages by making your property as desirable as possible, investing in good marketing when you need new tenants, and pricing rent relative to the market.  

Leveraging Rentvesting for More Investments

The example earlier in this article showed that, by rentvesting instead of owner-occupying, an investor in that scenario could theoretically save $152,416.

One overlooked benefit to rentvesting is the use case for those extra savings. In that example, you could buy an additional three properties with deposits of $50,000 each, two more expensive properties with $75,000 each, or even look at subdividing your existing property with a development loan.

Leveraging your savings to build your investment portfolio can help you quickly accrue a suite of different properties that all benefit from the same wealth-building mechanisms: value storage, passive income, and appreciation.  

Why Do Some People Think Rentvesting Is Bad?

The argument against rentvesting is mostly an emotional one. Many Australians still view paying rent as ‘dead money’ – paying off your own mortgage can feel like a more sensible decision. CGT can also be a big deterrent. Losing up to 45% of your capital gains to the government is never fun, but, provided you hold your investment for at least 12 months, you’ll only have to pay a maximum of 22.5%.

For other people, rentvesting may not be the right pathway to building wealth. Everyone has individual circumstances that need to be factored into their financial planning, which is why discussing your options early with professionals like mortgage brokers, financial planners, and buyers’ advocates is so important.

Rentvesting vs. Owner-occupying

When you weigh up rentvesting against owner-occupying, the key consideration should always be how far you come out ahead. Leave emotion out of the picture. Get the help of your accountant and financial adviser to crunch the numbers with the input of your broker and advocate, and see which option is most likely to lead to the best financial outcomes.

You also need to take into consideration factors like work, family, and lifestyle. For some people, the lifestyle flexibility that rentvesting affords might trump any financial benefits. For others, rentvesting can be a way to get into the property market early while still living in expensive suburbs close to work. 

If you’re interested in talking through how you can use mortgages and property strategies like rentvesting to build wealth, book a free consultation with one of our industry-leading brokers. As one of the top brokerages in Australia, we’ve delivered more than $6.389 billion in loans to over 14,000 Australians. One of our principals, Mark Davis, has also been recognised as Australia’s top broker multiple times, and we’ve won dozens of awards since we opened in 2011.

Book a meeting to find out how we can help you find the right loan for your situation.

The post Rentvesting: A Guide for First-time Investors appeared first on The Australian Lending & Investment Centre.

As property markets cool across Australia, investors are beginning to stir.  If you’re weighing up your options, you’re probably asking the question on every Australian’s mind: is now the right time to invest in property, or should I wait?

To answer that, we’ll explore the idea of booms and glooms – how property markets swing from upturns and peaks to downturns and troughs, and the difference that good timing can make to investments.  

Understanding Property Price Cycles

Over a ten-, twenty- or thirty-year timeline, Australia’s residential property prices are on a steady upwards trend – but that movement is far from linear.

Instead, housing prices move in four-stage cycles: peak, downturn, trough, and upturn.  The upturn and peak phases are part of a broader ‘boom’ phase, while the downturn and trough phases represent a ‘gloom’ phase. 

It’s a model driven, fundamentally, by supply and demand. When demand is high and supply is limited, prices go up (the boom).  To take advantage of increased prices, developers and builders begin to produce more properties.  Then, as market supply outpaces demand, prices slump (the gloom), which stimulates demand, driving prices back up again.    

There’s No Such Thing As ‘the Property Market’

Of course, ‘supply and demand’ is an oversimplification. Property markets are incredibly complex, with price being driven by a number of different levers, including:

• Interest rates
• Household income
• Building approval and construction rates
• Housing stock
• Population
• Depreciation and demolitions
• House ownership cost

Some of these factors, like interest rates and household income, exist at a national level. Others, like building approval and construction rates, are regional. These regional levers are responsible for geographic discrepancies in property prices, which is why bundling different urban and regional markets together as ‘the Australian property market’ is an unsound approach. 

Other trends can also contribute to price movements. For example, one of the drivers behind long-term demand for rental stock is smaller household size, which has decreased from 4.5 people in 1911 to 2.6 people in 2020.  Another contemporary trend is the chronic material and labour shortages in the construction sector, which is impeding the delivery of new housing stock into the market.  

Even within geographic confines, there are sub-markets – apartments, townhouses and houses, low-, mid- and top-tier price stratifications, urban properties and suburban properties. Each can be affected by a multitude of different factors, including occupancy-related trends (like the drop in international students over COVID) and government policies (like the federal government’s proposed ‘Help to Buy’ scheme).  There are always broad national market trends, but sub-markets may deviate or even move in opposite directions.    

The Current Australian Property Situation

Across Australia, most capital city housing markets are entering the gloom.  According to CoreLogic’s September housing pack, the Melbourne and Sydney markets are continuing to fall, accelerating a downturn that’s spanned the last 12 months. Hobart, Brisbane and Canberra are also slumping, although 12-month indicators suggest that they’re further behind in their cycles than Melbourne and Sydney.

Technical downturns are present in Adelaide and Perth, with 0.1% and 0.2% decreases in dwelling values over August respectively, but their quarterly changes are both positive – it remains to be seen whether they’re experiencing transient dips or are actually heading into the gloom.

Only Darwin is still firmly rooted in a boom phase. With an 6.3% twelve-month uptick and a 0.9% increase over August, prices seem to still be holding at the peak.

Given how closely housing values correlate with interest rates, it seems likely that housing markets will, on average, continue their downwards spiral over the next few months.  The RBA is predicting a CPI inflation peak of 7.75% during 2022, which means further cash rate increases are probable – September’s RBA board meeting saw yet another 50-basis-point bump, which pushed the cash rate to 2.35%.  Higher interest rates mean home buyers have lower borrowing power, decreasing demand and leading to more available housing stock and lower overall prices.      

Considerations for Investors

Investors need to look at two key factors when deciding when to invest: potential for appreciation and rental income.

Potential for Appreciation

There’s a saying common among investors in all markets: “buy in the gloom, sell in the boom.”  Investment appreciation is realised when an asset is sold – the greater the positive value change between the buying price and sale price, the more money the investor makes.

As such, buying property during a boom phase may be less than optimal, because the asset is likely to depreciate once the boom is over, which can impact the investor’s ability to unlock equity.  Of course, this is entirely dependent on individual investment strategies – investors with a focus on passive rental income or long-term investment horizons may not be affected by a short-term drop in asset value.    

Across Australia, most capital city housing markets have entered a gloom phase, opening up opportunities for investors (especially those with shorter investment horizons).

Rental Income

Rental income is also a key consideration for residential property investors. If your investment strategy involves consistent revenue streams, holding a positively geared property is critical; similarly, if you’re investing for capital gains, finding tenants to cover repayment and maintenance costs is still important.  

In Australia, rental growth rates are still sitting at 10.1% YoY as of August 2022, and the slowdown in property prices means that, in most markets, gross rental yields are actually recovering (up to 3.29% in August from 2.96% in February).

Those statistics – combined with the interest rate bumps that are keeping housing affordability low – mean that demand for rental properties is still incredibly high.  Investors are unlikely to have difficulty finding tenants in most Australian markets.

Is Now the Right Time to Invest?

There is rarely a ‘right’ time to invest. Purchasing property is always a highly individualised decision that should take into account your investment strategy, your personal circumstances, and the recommendations of your property or financial adviser.

Generally speaking, though, there is an opportunity for some investors in the current national market.  With interest rates predicted to peak towards the end of 2022, house prices will likely reach the bottom of the trough sometime in 2023. After that, the ascent out of the gloom will begin, so investing now and in the coming months may yield better capital gains than investing after the national market begins to upturn.

Exactly which markets and sub-markets hold the greatest opportunities is a matter for individual investors to discuss with their property advisers.  Based on three-month trends to August, the top 25% of residential properties have suffered the sharpest declines in value across every capital city except Hobart, which indicates that this stratification may have higher appreciation potential than the bottom 75% of properties.     

There is also still strong lender appetite for home loans (both investor and owner-occupied). Despite tightened lending requirements earlier in 2022, APRA data indicates that interest-only loans and high LTI/DTI loans are currently being originated in volumes either equal to or above March 2019 numbers.  With the right broker assistance, investor loans have a strong chance of being approved.  

Ultimately, though, the most important thing to remember that property, like all markets, is cyclical.  Boom and gloom. Peak and trough.  Upturn and downturn. Investing at certain times might be more preferable than investing at others, but it’s the asset, not the timing, that you need to get right.

Invest according to your personal circumstances and investment strategy. Choose a good property that is likely to increase in value over the next decade. Work with your mortgage broker to set up an optimal loan structure. Maintain and renovate your property to increase its value and attract the right tenants.

Those are the fundamentals of property investment. The ephemeral nature of cycles should always be a secondary consideration, not a driver of decisions.  Focus on your investment goals, listen to qualified advice, and don’t obsess over booms and glooms.

The post Boom and Gloom: Is 2022 the Right Time to Invest in Residential Property? appeared first on The Australian Lending & Investment Centre.

Home loan terms are regularly 25 to 30 years long – but that doesn’t mean you should stay locked in to the same loan for the whole time.

Switching your current loan for a new one with better conditions can help you free up equity for new investments, reduce your repayments, and even consolidate other, higher-interest debts into one loan.

Knowing when to refinance, though, is key. Changing home loans comes with its own risks and costs, so it’s important to think carefully before making a decision. In this article, you’ll learn about the pros and cons of refinancing, when refinancing can be a good idea, and how the process of refinancing works.

What Is Home Loan Refinancing?

Home loan refinancing is when you replace your current home loan with a new home loan (generally by switching to a different lender).

Like taking out your first loan, you’ll have to apply to the new lender for a mortgage, which involves getting a property valuation. If they approve your application, they’ll buy out your existing lender, and all subsequent mortgage repayments will be made to your new lender under your new loan conditions.

Can I Refinance With the Same Lender?

Yes, you may be able to refinance with the same lender.  If you meet certain conditions, like having more equity or a better credit score than when you first took out your mortgage, you might be able to get more favourable rates or better conditions.

Benefits of Refinancing Your Home Loan

There are plenty of reasons to consider refinancing your home loan.  Most home buyers find that, after a few years with their current mortgage, they’ve unlocked more equity and have improved their credit score – which means refinancing could help them reduce their repayments or start investing.

1. Refinancing Can Help Reduce Mortgage Repayments

One of the most common reasons to refinance is the potential for lower repayments.  The interest rate on your mortgage is calculated based on a variety of different factors, like current interest rates, loan term (shorter means lower rates than longer), repayment frequency (more often is better than less), debt-to-income ratio (a DTI over 6 can mean higher rates), loan-to-value ratio (a higher LVR means higher interest rates), and your credit score.

If any of those factors have changed since you took out your first mortgage, refinancing could be a good way to reduce your repayments.

Here’s an example.  Let’s say you took out a mortgage at 90% LVR and a loan term of 30 years.  You bought a property worth $450,000 with a $50,000 deposit.  Because your LVR was above 80%, your original loan had a fixed interest rate of 4.75%. You also decided on monthly repayments.

Now, three years later, you’ve accrued enough equity in the property to take out a new home loan at 80% LVR.  That means you can refinance to a lower interest rate of 3.9%.  Under your original loan, you were paying $2,345 per month; under your new loan, you’re paying $2,120 per month – that’s a saving of $225 per month or $2,700 per year.          

And what if you switched to weekly repayments as well? You’d pay $490 per week ($1,960 per month), leading to overall savings of $385 per month or $4,620 per year.

Refinancing can be a powerful tool, especially if you’ve accrued equity in your property or have the capacity to make more frequent repayments.

2. Refinancing Can Unlock Equity

You can also use refinancing to unlock or release the equity you’ve accrued in your property.  Equity is the difference between your property’s market value and your loan – for example, if your property is currently worth $450,00, and your mortgage principal is $200,000, you have $250,000 in equity.

This equity is essentially value that’s tied up in your property, which means you can, under certain circumstances, ‘unlock’ it and use it to purchase things. For example, you might want to use your equity to fund home renovations (which, in turn, could help create more equity by raising the overall value of your home). You could also use equity for purchases like medical procedures or vehicles.

To access your equity, you’ll need to talk to your lender. They’ll conduct a valuation of your home, then determine how much equity you can access.  Keep in mind that refinancing to unlock equity is no different to taking out a normal mortgage – refinancing to an LVR of higher than 80% may attract higher interest rates and lenders mortgage insurance (LMI).

Using the previous example, let’s say you wanted to borrow up to 80% of your property’s value when you already have $250,000 in equity.  Eighty percent of $450,000 is $360,000, and $360,000 minus your current loan ($200,000) is $160,000.  That means, if you refinanced at 80% LVR, you could unlock $160,000 in funds that you could use for other purchases.

Keep in mind that your lender will ask you what you’re using the funds for.  You should generally only access your equity for two reasons:

• If your situation is critical (for example, if you need a medical operation)
• If you’re reinvesting the equity (for example, into improving your property)

It’s also worth remembering that using equity for purchases is not like using cash.  The price of whatever you purchase will be added to your home loan and paid off over the term of the mortgage.  For a small purchase, like a car or a holiday, repayment over a mortgage-length term (20–30 years) can result in paying much more interest on that purchase than you would have otherwise. 

3. You Can Consolidate Multiple Debts

Refinancing can also be used to consolidate your debts into your home loan.  This means adding any other loans you have (like a car loan or credit card debt) onto your mortgage and closing the old accounts.

There are a few benefits that can make consolidation worthwhile. Firstly, streamlining several different loans into one loan means repayments are easier to keep track of – you just have to pay back the one loan, rather than keep track of several loans and lenders.

Secondly, home loans have a much lower interest rate than personal loans.  For example, your credit card might have an interest rate of 20%, whereas your home loan might have an interest rate of 4.75%.  If you have significant personal debts, consolidating them into your lower-interest home loan could help you save on repayments.

Debt consolidation does come with risks, though. Just like purchases made through equity, adding debts onto your home loan means you’ll pay them off over your mortgage term – which will probably result in you making more repayments than you would have otherwise. 

Consolidation will also affect your LVR.  If you had a $450,000 property with equity of $90,000, you’d have an LVR of 80%. If you added $50,000 of personal debt to your mortgage, you’d have an LVR of 82%.  With an LVR of more than 80%, your interest rate would likely increase, and you’d also have to pay LMI.  If you do decide to consolidate your debt, make sure it doesn’t impact your home loan rates.   

4. Equity Can Be Used for Investment

Although accessing the equity in your property has risks, it can also be used to help you build wealth.  For example, if you used your equity to renovate your home, the capital gains you make could outweigh any financial loss from refinancing.

Equity can also be used to buy investment properties. If you choose your investment property correctly, you can pay off that property’s mortgage through rent – while also building your wealth through capital gains over time.  

There are three ways you can use your current property to buy an investment property:

1. Lump-sum equity access.  This involves accessing your equity and using it as a deposit on an investment property.
2. Getting approval for a line of credit. A line of credit works like a credit card – once you’re approved, you can draw down on your credit until you reach your pre-approved limit (which might be up to 80% of your property’s value, depending on lender approval).  You don’t need to get approval for each drawdown, and you only pay interest on the amount of credit you actually use.
3. Cross-collateralising your property. Cross-collateralising involves using your current property and your investment property as collateral for the loan on your investment property.  This is very different to drawing down equity and comes with a number of complexities.  You should talk to your financial advisor or mortgage broker before considering cross-collateralisation as an option.   

Detriments of Refinancing Your Home Loan

Like all debt, refinancing your home loan comes with its own set of risks.  Make sure you give each detriment thought before moving forward with refinancing.

1. Refinancing Impacts Your Credit Score

When you refinance, your credit score will be impacted.  As part of the loan application process, lenders will perform a hard credit check (in the same way they do for normal mortgage applications). 

You can minimise the number of hard checks performed by refinancing through a mortgage broker.  Your broker will help you find the most suitable lending option, improving the chances of your loan application being accepted by that lender.

Your existing loan account will also be closed, which temporarily impacts your credit score. 

2. Refinancing Costs Money

The actual process of refinancing your home loan also costs money.  Your current lender and the lender you’re switching to both have administrative fees that they charge, which include:

• Discharge fees (paid to your current lender to close your existing loan account)
• Application fees (paid per new loan application)
• Valuation fee (paid to your new lender to valuate your property)
• Land registration fees (paid to your current and new lender to transfer your debt from the former to the latter)
• Break fees (only charged if you refinance during a fixed-rate home loan)
• Other fees (includes things like ongoing fees for packaged homes and LMI)

Depending on your lender and property, refinancing typically costs between $800 and $2,000.

When You Shouldn’t Refinance

Whether you should or shouldn’t refinance is a question you should discuss with your financial advisor or mortgage broker. There are, however, some situations that make refinancing a bad idea.

When You Have Less Than 20% Equity

If you have less than 20% equity in your property, avoid refinancing unless there is a good reason to do so.  Normally, your interest rate won’t improve much (if at all) if you have less than 20% equity, and you’ll also have to pay LMI.  You also probably won’t be able to unlock any equity.

When Interest Rates Are High

If you’re thinking about refinancing, look at the current interest rates.  Are they higher or lower than your current interest rate?  If they’re higher, refinancing could result in your repayments going up.  It’s important to consider whether the benefits of refinancing outweigh increased repayments. 

When You’re Planning to Sell    

Planning to sell your property in the next few years?  You need to calculate whether the savings from refinancing will exceed the fixed costs.  Often, it’s not worth refinancing if you’re going to sell in the next four years or so.  Of course, this only applies if you’re seeking refinancing for reduced repayments rather than refinancing to unlock equity.

Refinancing With Big Banks vs. Digital Banks

When you’re researching new home loan options, it’s important to find a lender that gives you more affordable interest rates, low refinancing costs, and favourable loan conditions.  You also need to make sure your application can get approved, preferably on your first try – each refinancing application will cost you up to $1,000 to lodge, and will also negatively impact your credit score when your new lender performs a hard credit check.

Refinancing with the Big Four (ANZ, CBA, NAB and Westpac) and other traditional banks can be the right approach for some people.  If you feel comfortable with a particular institution and have a strong credit history and a stable, medium-to-high income from full-time employment, then there’s no reason not to refinance with a bank.

In many cases, though, a digital bank (online lenders without physical branches, like Aussie, tic:toc, ubank and Athena) can be a better choice.  Digital banks normally have lower interest rates, faster loan approval times, and lower fixed refinancing costs.  They’re also more open to self-employed borrowers, borrowers with high LVR or DTI, and borrowers with suboptimal credit scores.  If you’re refinancing as an investor or to reduce your repayments, these traits can make digital banks a good choice.

It’s worth noting that both digital banks and traditional banks are heavily regulated.  Digital banks are required to have an Australian Credit Licence, must comply with ASIC and ACCC regulations, and adhere to relevant legislation like the National Consumer Credit Protection Act 2009 (Cth) and the Privacy Act 1988 (Cth).  Both types of bank are exceptionally safe, although traditional banks are also regulated by APRA, which adds a layer of legislative security.              

How Does Refinancing a Home Loan Work?

Here’s a step-by-step guide to the refinancing process.

1. Do your own research. Before you do anything else, learn about refinancing by reading guides like this one.  Having a basic understanding of the pros, cons, and risks will make things easier when you talk to your lender or broker.  You’ll also need to work out why you want to refinance, and, if you’re looking to access equity, how much you want to draw down.
2. If you have a financial adviser and/or mortgage broker, book a meeting to get their professional advice.  Refinancing is extremely complex, so it’s important to get recommendations that are tailored to your individual situation.  Make sure you tell them why you’re refinancing – if they know what your ideal outcome is, they can help you find the best way to get there.
3. If you’ve spoken to your broker, they’ll research lending scenarios and present you with an option that’s right for you.  If you don’t have a broker, you’ll need to research new loans yourself.  This step will also involve calculating your repayment capacity and accounting for any potential risks.
4. Apply for your chosen loan.  This is a multi-stage process that involves a number of different approvals.
5. If you are approved for your new loan, your broker and/or new lender will contact your current lender to begin the loan changeover process.  This is also when a number of fixed refinancing costs are incurred.
6. Once your existing loan is paid out, you’ll receive documentation about your new loan. All repayments from this point forward will be based on your new loan and made to your new lender.

On average, refinancing a home loan (from steps four to six) takes a little over a month.  Refinancing through a digital bank is typically faster, while traditional banks with complicated approval processes can take longer.  Your mortgage broker will be able to give you a more accurate estimate of timelines once you begin the application process.

Summary

Deciding whether you should refinance your home loan is complicated. Ultimately, it comes down to three questions:

1. What are you hoping to accomplish by refinancing?
2. Will the benefits of refinancing outweigh any potential risks/costs?
3. Are there any reasons you currently shouldn’t refinance?           

Refinancing can help you do things like lower your repayments, consolidate debts, unlock equity, and start investing, but it also comes with fixed costs and impacts your credit score. 

To find out whether refinancing is the right way to achieve your ideal financial outcome, talk to your financial adviser or mortgage broker.  They’ll give you personalised advice specific to your situation – and, most importantly, that advice will be unbiased and in your best interests.    

The post Should You Refinance Your Home Loan? appeared first on The Australian Lending & Investment Centre.

In Q3, though, there were rumblings. Consumer confidence dipped. CPI climbed even higher. Banks began predicting cash rate hikes and the accompanying slowdowns. Then, in Q4, it happened – the dip turned into a freefall, the housing market plateaued, and the RBA raised the cash rate by 75 basis points over a single quarter.

For mortgage brokers, a cooling breeze became full-blown headwinds in an uncomfortably short time span. Lenders were tightening their standards, fast, and the halcyon days of two-week approvals were over. If company performance slowed, there was a good reason for it. 

But it was in exactly this environment that ALIC managed to reach more than $1 billion in annual gross settled loans – a milestone achieved only by the best-performing brokers in Australia. To find out exactly how the team did it, we sat down with Damian Brander, ALIC’s chief executive officer.

ALIC: The Four Pillars

The Australian Lending and Investment Centre is a company built around helping Australians build wealth through property.

“What we aim and aspire to do, and what we’re extremely passionate about, is helping our customers develop wealth enablement strategies through lending scenarios,” says Damian. “We typically deal with people who have a desire to invest, a disposable income that allows them to invest, and who are really needing the support of specialists to learn and really understand how to do that effectively and efficiently.”

That purpose rests on four pillars: ALIC itself, Prime Mortgage Managers (affordable housing loans), ALIC Blue (specialised equipment financing and chattel mortgages), and ALIC Black (development and construction loans). All four brands have found fertile ground in dealing with lending scenarios in which the main banks have overly complex, time-consuming lending processes.  

ALIC Black, in particular, is focused on finding more favourable non-bank pathways to funding. “We see a lot of opportunities where customers are definitely able to acquire funding, but they’re put through a real disadvantageous process by banks,” Damian tells us. 

“That then leads them to look at alternatives to the main banks putting them through the wringer.  So we look at opportunities to assist them in ways where they don’t necessarily need to do things like pre-sales, they can go for a higher LVR, and they can leverage completed products to secure funding for the next development.”   

Passing the $1B Mark

ALIC has been helmed by Damian since September 2021. Before stepping into that role, he served as Bank of Melbourne’s regional general manager for business banking – a position that primed him for pushing ALIC past $1 billion in settled loans, up 10% from the $923 million settled in 2021.

“The market was buoyant, and we were always going to be able to expect an uplift [in settlements].  But to achieve $1 billion in gross settled lending, which the business had never done before, we knew we had to do things differently to capture the opportunities that were present. The market was favourable, the environment was right, but we still needed to be really disciplined, efficient, focused and determined.”

ALIC’s revitalised modus operandi was based on three key strategies: widescale digital adoption, rapid back-office scaling to match demand, and increased investment in marketing and brand.

Digitisation, of course, was partially a product of the pandemic.  With clients and brokers isolated in their homes – Melbourne was the most locked-down city in the world – ALIC’s team still needed to arrange meetings. The solutions were Zoom, Microsoft Teams, and Google Meet, the unified communications platforms that went mainstream during COVID.

“Brokers leveraging video conferencing technology was a massive efficiency gain,” says Damian.  The technological shift, combined with more flexible hybrid work schedules, meant that brokers could accommodate additional meetings.  Traditional chokepoints – before work, lunchtime, and after work, where clients competed for calendar space – were distributed more evenly across the day, improving onboarding efficiency.

But more clients meant more paperwork, and that wasn’t something ALIC’s existing capabilities could deliver. “We had a back-office operation in Manila, and we knew that was an advantage for us in capturing more opportunity.  We basically doubled the size of it in the [2021/2022] 12-month period.”

Those numbers meant that the Manila team could use one-on-one training to quickly upskill new hires.  More experienced staff were paired with entrants, which facilitated a kind of ‘experience transference’ – an ongoing exchange of ideas and knowledge that helped expedite the back-office expansion.  With enough administrative capacity to accommodate the influx of new clients, ALIC was free to grow.

To keep broker pipelines full, ALIC also increased its marketing and brand expenditure.  New websites for all four brands supplemented leads from specialist industry partners, with investment in digital distribution channels like organic search and social media expected to deliver ongoing results.

“We became much more efficient with what we had,” Damian says.  “And we were always looking for ways to improve that efficiency.  That was how we hit the $1 billion.”

The Storm on the Horizon

ALIC might be heading into the new financial year on the back of an excellent 2021/2022 performance, but that doesn’t mean it’s smooth sailing ahead.  The economic outlook is increasingly ominous, and lenders across the board are shoring up standards as consumer confidence continues to plummet.

Damian, though, is confident that the company can navigate the headwinds of the next year.  All the factors that made $1 billion in settlements possible are still present.

“I strongly believe that the work-from-home environment will continue on for some time.  Flexibility working arrangements now are and will be the norm, so we can expect that our customers will continue to have the ability to meet us,” he says.  “We’re seeing that now.  Our brokers are still booking back-to-back meetings all day long, because customers are accessible at any time, rather than just at the times they used to be.

“What we are seeing is that the market environment – the war in Ukraine, rising interest rates, a softening in the east coast populated areas like Melbourne and Sydney, and depreciating property values, along with factors like headline inflation increasing beyond 7% – will have an impact on consumer confidence and property buying activity.

“To offset that, we’re looking to leverage brand consideration and marketing activities.  We’ve never really utilised that in the past, so we’re hoping it will help combat the cooling off in the industry, and even help us grow at a time when our competitors are contracting.”

He’s equally positive about helping borrowers navigate higher interest rates and lower housing affordability.

“There’s an old saying that’s very pertinent to people with an investment focus: ‘You buy in the gloom, and sell in the boom’.  It’s hard to make returns on your investment when you’re buying at the peak of the market.  We’re foreseeing a period for our customers where they start to enter back into the markets, because the buying opportunities and more stable and the forecast investment prices are more accurate – our investor customers are already becoming more active.”

Borrowers are also beginning to exit fixed-rate loans into a much higher-interest markets, Damian tells us.  They’ll need the expertise of property brokers to find the best possible market prices – especially given some borrowers may be facing the prospect of doubled or tripled repayment costs.

For ALIC, it’s an opportunity to help their clients build wealth in a time of deep economic uncertainty, to deliver on the promise of ethical lending that underpins the brand.  That means always putting client interests foremost – revenue is a secondary, almost incidental result of delivering exceptional service.

“In an environment where there’s uncertainty, volatility in markets, we still see an extremely exciting time for ALIC’s growth agenda,” Damian says.  “There are opportunities to work collaboratively with other businesses to achieve $2 billion in written loans.  There are market opportunities that are continuing to evolve, such as the private lending space. 

“And, in all of that, there’s a desire to expand our footprint further across Australia, knowing that our brand and our current client base will allow us to service new customers.  There’s more pessimism entering the landscape, but we’re extremely excited about the opportunities for ALIC across the next 12 months.” 

Fortunes are made in down markets, and it’s equally true of companies as it is of investing.  There might be a storm on the economic horizon, but, when other companies are battening the hatches, ALIC is preparing to capitalise on a year of wins.  More clients served, more loans written, and more offices opened – it’s all on the cards for 2023.     

The post ALIC Reaches $1B Gross Settled Loans Milestone In FY22 appeared first on The Australian Lending & Investment Centre.

The trigger?  A Consumer Price Index (CPI) inflation spike, which the RBA is now projecting to peak at 6% by December 2022.  Their projections for the trimmed mean inflation (the average inflation rate of the middle 70% of contributors in the CPI inflation ‘basket’) are a little lower, sitting at 4.75% by December. 

The goal of the RBA’s cash rate hike, of course, is to help bring down inflation – but, with headwinds in the form of COVID-19 outbreaks, China’s ongoing lockdowns, and the war in Ukraine, that hike might stay in place longer than expected, and the interim will be uncomfortable for borrowers across the board.

Context of the Cash Rate Hike

To understand the implications of the cash rate hike for developers, it’s important to first understand why the hike is happening and what the general economic impacts will be.    

Let’s start by defining the cash rate.  According to the RBA, the cash rate is the market interest rate for overnight loans between financial institutions.  In other words, when banks borrow money from the RBA at the end of a business day to cover temporary cash shortages, the RBA charges them the cash rate – it’s the lowest interest rate available.

Because the cash rate underlies all other national interest rates, any fluctuations in the cash rate mean those other interest rates respond accordingly.  When a cash rate hike occurs, as it is now, other interest rates go up.

The speed at which those interest rates match the cash rate varies depending on the type of loan; for instance, the current hike has already been passed through to consumers with variable loans, but those with fixed-term loans will not be affected until their loan term expires.      

Although higher interest rates might seem undesirable, they’re normally associated with a drop in inflation.  Spending is curbed, suppliers respond by cutting production, and general economic activity decreases.  Appreciation of the Australian dollar also decreases prices for imported items and can incentivise domestic suppliers to lower prices on similar items, which, ultimately, can lower the prices for related CPI expenditure classes (subsequently decreasing inflation).      

That’s the basic rationale behind May’s cash rate hike – but there are a couple of other factors that make the current situation noteworthy. 

One, the RBA revised its inflation predictions in its May 6 statement on monetary policy.  The predicted peak of 4.75% is 200 basis points above the previous prediction of 2.75%, which means, undoubtedly, that more rate hikes are on the way (CBA is predicting 25-basis point rises up to a cash rate high of 1.25% by February 2023).    

Two, central banks hiking the overnight/cash rate isn’t limited to Australia.  It’s a global trend, with the Bank of Canada, the Bank of England, and the Reserve Bank of New Zealand delivering 50-, 25-, and 50-basis point increases respectively.  The global economy is walking a fine line between curbing inflation and a severe economic downturn.

Impact on Property and Development

For developers, the situation is relatively simple: the economy is moving forward in a precarious state, overall economic activity will drop, and lenders will be more reticent than ever to fund new projects.        

Small to mid-sized residential developers, though, are likely to be affected differently to bigger developers.  If the cash rate reaches the RBA’s predicted peak of 2.5%, home values could fall by around 15%, even as interest rates skyrockets.

That means housing affordability could actually decrease even as property values go down.  There are already signs – CoreLogic’s Home Value Index, a lagging indicator, recorded a slowdown in housing value growth, which dropped from 2.8% in May 2022 and 1.1% in January 2022 to just 0.6% in February 2022.  Combined with the supply chain and labour shortage issues that led to building approvals tumbling 18.5% in May, residential developers may face challenges in getting financing from banks. 

For larger residential and commercial developers, the outlook is more hopeful.  As borders open and transient populations return to urban centres, the demand for apartments and rental accommodation is likely to increase.  The hotel sector is also recovering – Baring Private Equity Asia’s $530-million acquisition of Hilton Sydney is an indicator of good things to come.  With those considerations in mind, financing will be comparatively easier to obtain for bigger developers, although general economic uncertainty and construction sector issues may still make lenders skittish.

Moving Forward Under the Hikes

When economic conditions fluctuate, timing is critical.  As 2022 rolls onwards, developers will have to assess their project pipelines and balance the impact of interest rate rises and funding difficulties with projected delivery timeframes. 

For many, taking out loans as quickly as possible will be the right move.  For example, a bank development loan might currently have a 4.5% interest rate – on a $3 million residential development loan, repayments would work out at $11,250 per month.  Increase the cash rate by just 50 basis points, and, assuming there’s a near-instant pass-through, repayments are up to $12,500 per month.  For developers light on capital, operating in a cooling market, that kind of difference can be fatal to project viability.

However, delivery timeframes are a very real consideration, especially with the construction sector’s ongoing problems.  Some developers might decide that taking out loans pre-emptively is too risky – better to weather heightened interest rates than make a bad gamble.

For those that do go ahead with locking in lower-rate loans, the issue will be actually finding lenders willing to finance them.  The major banks are beginning to tighten lending requirements, which can make funding harder for new or cash-light developers.  Private lending, despite higher interest rates, might well be one of the few viable pathways for companies that are essentially being locked out of projects by a brutal combination of macroeconomic trends, industry conditions, and shaky business footing.

They say fortunes are made in down markets.  As Australia moves towards a grim economic horizon, it remains to be seen whether that holds true for developers. 

The post How Australia’s Rising Cash Rate Will Affect Developers appeared first on The Australian Lending & Investment Centre.