It’s a shame that the misdemeanours of church figures, politicians and other identities have taken up so much of the press this year. The infighting and personal vendettas of our politicians as ever, adding low levels of confidence amongst the populous.
To compound the issue, it gives our low-level media outlets easy targets to twist the dagger into.. another angle to their usual sell the fear tactic; get the eyeball, sell the click, alas now so common within the online media. Sadly, this approach has seeped through the traditional media like an illness, proclaiming doom and gloom, citing in many cases one off examples and making them sound like they are prevalent in our community.
In many cases these events are reported by people with little or no experience; only too happy to get air to their opinions, snapped up for next to nothing by the ‘noise media’ whose accountant driven boards, decided that their qualified journalists where surplus to requirement.
The rise of the self-proclaimed genius adding further distortion spread through the social networks like a virus; inciting hate, division and in some cases violence, vandalism and destruction as we’ve recently seen in Paris.
Seems we are not alone, one only has to look at what’s also happening in the USA, UK and other countries.
Wasn’t the economy ticking along nicely. We had easy access to funds and low interest rates helping those who have worked hard to get ahead, to get ahead. Let’s face it bar our own government squabbles, we are not facing Brexit or the uncertainty of having a reality TV star as President.
I will try and make sense of it..
We’ve had APRA lurking in the corridors since 2014, when they supressed the major banks lending by limiting investor loan growth to 10% and then more recently in 2017 capping interest only loans at 30%. Then to really slow things down requested the banks get more detail to verify investors living expenses and run interest rate calculations at 7%. Whilst I agree with stress testing (being ultra conservative when it comes to running risk management scenarios, ultimately insuring that investors can survive the troughs in the market), they then on July 24th stated:
“if unemployment rose to 11%, House prices fell by 35%, and the Chinese economy tanked, that the Australian banking system would be able to withstand the economic stresses associated with this type of economic destruction.”
With this kind of criteria it’s surprising they haven’t asked all borrowers to join a doomsday cult and dig a survival bunker before they agree to lend to them.
To compound it we have The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services now adding fuel to the media fire; a commission one wonders called too late? I’m the first to agree that the banks and their financial advisory businesses do need to be brought into line and made accountable for their misdemeanours. Sadly though, as yet it seems penalties have been served by feather duster, when the 'cat-o'-nine-tails' might have been more appropriate.
The knock-on effect is that the mortgage broking industry is now taking a hit. I for one am in favour of having accessibility to ‘independent’ brokers not tied to just one bank or lender, allowing them to provide a tailored solution to our lending needs. Imagine the banks control when you are dealing with a ‘one stop, can’t get off shop!’. It wasn’t that long ago that the banks were chasing the brokers for business and now it seems all they want to do it cut them off. In a submission to the inquiry's interim report, mortgage broking business Loan Market Group argued that asking banks to redesign the mortgage broking system was "like asking the fox to design the hen house!”
Broker renumeration has also been under the spotlight. Possibly as the increased property value increasing the value of percentage fee paid. Borrowing money has always had a price and as far as I’ve ever known this was charged at a percentage. One wonders if this is a banker initiative to claw in more money at the expense of the independent broker? Whilst a few less scrupulous providers will chase a higher fee, this is quickly resolved when that is made transparent to the borrower. Many will appreciate it’s not all about the fee, again these are conversations that will be highlighted when made transparent. Let’s look at a real-world scenario; I’m sure the supermarket sells twenty brands of washing powder all with a varying percentage of profit.
One would have thought that in this age of business disruption, if it can be solved by a better business model then bring on the competition! Please don’t just put it unnecessarily under the spotlight and cause more negative consumer sentiment.
On the plus side the economy in Australia has been tracking fairly well; growth up 2.8%, inflation an easy 1.8% and employment growth up 2.5%. There’s even been a little 2.3% wage growth, (been a long time coming for sure). Population growth was up 1.6%, meaning close to 400,000 new residents that need housing, work, food, healthcare and education. That’s a huge amount of contributors to Australia’s future, you can guarantee there will be many more to follow.
Melbourne and Sydney are the major beneficiaries of our population growth and accordingly where the property price gains have been the largest. No surprises here where prices have helped induce more supply. Victoria and New South Wales account for all of the upward movement in the national housing price to income ratio, together they comprise approximately 60% of the national value of housing. In all other states, the ratio of housing prices to income is below previous peaks, so there is not a single story across the country. Factors other than interest rates were clearly at work.
Until early 2018 many found it attractive to borrow to invest in property with investors accounting for 30-40% of new loans. Investor lending made 32.9% of the October total, a far cry from the 45% it accounted for in May 2015 and the lowest since November 2011. All approvals now down 14% this year, the worst decline since 2010.
October (the most recent figures I could get my hands on) showed an 0.6% monthly gain in investor loan commitments, boosted primarily from loans for newly constructed dwellings. This is the first gain since February but did little to stop investors retreating spurred by lower appetites from the banks to lend to a previously strong component of the market.
Talking October the recent by-election highlighted electoral weakness within the squabbling coalition. The polls now show them traling the Labor Party ahead of next year’s federal election. This uncertainty no doubt could cool investor sentiment and escalated trade tensions could take a toll on growth. With all this in mind the experts are telling us that “our economy should continue to expand at a solid pace in 2019, even if it softens somewhat as expected.. thanks to robust demand for commodities and sustained business investment”. From what I’m reading they are expecting GDP to expand 2.8%.
As you will know negative gearing and the existing capital gains tax discount has been in the spotlight with the Labor party including it as part of their manifesto. I think we all agree that for most young families in Australia, the dream of purchasing and owning their own home is almost completely out of reach. Ownership rates for young people aged 25-34 have spiralled downwards in recent years from 60% to 48%, with levels of debt unimaginable from just a few decades ago.
Their official line goes something like this:
‘With first home buyers making up just 1 out of 7 of all home purchases, we have to do better. It’s well and truly time someone did something about making housing more affordable in Australia.”
‘Labor will reform negative gearing and the capital tax discount effective from a yet-to-be-determined date after the next election, a policy which will help put the Australian dream of home ownership back within the reach of middle and working class families.’
Let’s look at the real issue in Australia. Whilst I appreciate some property is hugely expensive in this country the same could be said for all developed nations and that shouldn’t skew how we address the issue. It was the same issue In London when I left the UK nearly twenty years ago. You can’t afford to buy in central London, so what do you do? You find somewhere that suits your budget by moving further out, leaving those with deeper pockets to play the I want it at (almost) any cost game in the centre. The same applies in the better suburbs of Australia, harbour or ocean view, close to the beach etc. etc. Say again… how much?!
Restricting investor loan growth and stress testing borrower’s capacity to the max is not going to solve our problems. I’m really at my wits end when I’m told that less investor activity means more opportunity for first home owners. Codswallop! To bring down prices you either have to cut the cost of land or cost of build and I don’t know any economy that has survived by doing this.
After days of travel around the new suburbs and subdivisions of Australia it appears to me that there is a simpler solution to the band aids provided currently by our incompetent planners and governments. I’ve seen subdivision upon subdivision with little to no amenity, infrastructure, or community space, bar a Bunnings and a supermarket of equal size. In some places where you need to drive many kilometres just to get subsistence goods such as milk and bread. Just where is the community element we need to live happily? I am old enough to remember the growth of Milton Keynes a newly planned town of England, which under its present guise is as old as I am. As a youngster we’d drive from roundabout to roundabout, vast empty spaces in between. Vast empty spaces attached to a transport system that would grow into the metropolis it is today. Love it or hate it the plan worked, a plan perhaps the powers that be should take a lesson from.
The closest thing to this is what I’ve seen up at Leppington in NSW. Where a wonderfully grand railway station opened in 2015 sits in hobby farm wilderness, surrounded by arterial roads providing access to Camden, Liverpool and the Westlink M7 (a pay to play road providing a ‘relatively’ quick but expensive connection the Sydney CBD and other parts of greater Sydney). A position primed to take advantage of Badgerys Creek airport. The problem around here is that the plot sizes are just too big to provide affordable housing. Why are we intent on the ‘vanilla’ cookie cutter housing treatment dished up by council where everything looks the same, when obviously the inhabitants are not. Think 4/5 bedroom houses with two car garages on larger blocks, an entry point ill afforded by the local population.
My suggestion is to learn a trick or two at more evolved environments, where communities live comfortably regardless of wealth or status. Where housing is unique to requirements, rather than the endless banal housing that we seem so set on delivering. It is now time to allow developers to create terraced houses and such like on smaller plots, proving affordability and importantly diversity within the communities. Communities require this diversity; without which there are no business or job opportunities, the fabric that stitches us all together.
So where has that left us as we see the tail of 2018 disappear as we put our feet up for Christmas?
Yes it’s true, property prices have fallen in certain areas, in many cases where they rose too quickly and in many outer ring suburbs as a knock on effect from the expense of living close to the cities. Yes there are also new areas of concentration; multiple new builds stacked high in a bid for financial efficiency rather than the infrastructure to support it. Quick half thought out solutions for a growing population, skewed towards financial reward rather than a solution. Yes immigration is down a fraction, and yes to everything I’ve previously written, and yes markets do move, both up and down so expect it to fall and plateau before going up in the next cycle.
But rest assured this is just a blip. I think we all agree there needed to be an adjustment of sorts but with all the recent activity and negativity one wonders if we (the country as a whole) are contributing to the mess by shooting ourselves in the foot by listening to all the negativity and procrastinating enough to stop us in our tracks.
Just as with the Global Financial Crisis the vultures will swoop, the rich will get richer as they take advantage of those in weaker positions. The hard working amongst us will have to hold our ground, and those with the means will no doubt profit.
There is opportunity, lots of it. What’s more from where I’m sitting, with a bit of activity, we can clearly take advantage of it. We can solidify our position by being confident and not making rash decisions based on the fear we hear, see and read every day.
Every Positus client did the stress testing before committing to their investment journey, a great foundation for success. We picked good stock that will provide the return over time, we just have to give it time.
Happy Christmas to you all,
Rob
Ps. It appears APRA are listening, they’ve just announced that it will be removing its 30 per cent speed limit on interest-only lending from 1 January 2019. It was only a temporary measure they say. One small step at a time 😊.