Opportunities in the cooling property market

Things are looking up for first home buyers for the first time in years as house price growth begins to slow across the country. While prices have been on the slide for some areas in the West and the North since the end of the mining boom, the housing market in Sydney and Melbourne also appears to be losing steam. 

At a national level, house prices were unchanged in October and up just 0.3 per cent over the quarter according to the latest figures from property research group CoreLogic. Significantly, the over-heated Sydney market fell 0.6 per cent over the three months to October, joining Perth and Darwin which have been falling since 2014.i

Hobart is the top performing market, fuelled by mainlanders searching for more affordable housing. Prices for Hobart dwellings rose 12.7 per cent over the past year, although price growth slowed to 0.09 per cent in October. It’s easy to see why people are flocking to the Apple Isle; the median dwelling value of $396,393 in Hobart is less than half what you can expect to pay in Sydney ($905,917) where prices are up 74 per cent since the boom began in early 2012. 

Melbourne is the second most expensive city, with an average dwelling price of $710,420. And while the Melbourne market isn’t falling, it also shows signs of cooling with growth of 1.9 per cent in the three months to October and annual growth of 11 per cent. Other capital cities show little change with Brisbane up 0.6 per cent over the quarter while prices in Adelaide rose just 0.1 per cent. 
 

Tighter lending begins to bite

The Australian housing market is a tale of many markets, each with their own supply and demand issues. But there are some common factors at play. At a national level, concerns about rapidly rising prices, risky lending practices and worsening housing affordability prompted regulators to act. 

In late 2014, the Australian Prudential Regulatory Authority (APRA) announced that lenders were to limit housing finance to investors to 10 per cent of their total home lending. Then in March 2017 APRA announced a 30 per cent limit on new, interest-only home loans to dampen risks in the housing market. 

In April the Australian Securities and Investments Commission (ASIC) signalled a crackdown on lenders and mortgage brokers recommending more expensive, interest-only loans to customers who were often unaware of the risks. 
 

Investors paying more for credit

Lenders responded to the regulators’ concerns by lifting interest rates on interest-only and investor loans. According to comparison site Canstar, the average standard variable rate for investors has grown to around 0.5 per cent higher than the equivalent rate for owner occupiers. 

And it seems these measures are working. The number of investor home loan approvals dropped sharply in 2015 and again in 2017, while owner occupier loans have shown a significant uptick in 2017.ii

While tighter lending policies have undoubtedly taken some of the heat out of the housing market, other forces may also be playing a role. 
 

Understanding supply and demand

So far there is little sign of a housing bust in Australia, with significant unmet demand from first home buyers, high levels of migration and land shortages in major urban areas. But when house prices rise as far and as fast as they have in markets like Sydney and Melbourne, it’s natural to expect periodic corrections. 

Commentators have been warning of an oversupply of apartments in Melbourne as well as in Brisbane. The Brisbane market has been cooling for some time, and now property values in Melbourne are rising at their slowest quarterly pace since 2016. 

Despite the slowdown in price growth, Australian housing is still far from cheap. But with tighter controls on investor lending and continuing low interest rates for owner occupiers, the tables may be finally turning in favour of first home buyers. 

 All price data from CoreLogic, 1 November 2017, https://www.corelogic.com.au/news/growth-conditions-remain-flat-national-basis-while-sydney-values-fall#.WgEZ3uQUnIU

ii ABS; RBA

Home ownership in the spotlight

Housing affordability continues to be a major concern in Australia and not just for would-be first home buyers. It also affects pre-retirees forced to work longer to repay bigger mortgages and older Australians unable to downsize from large family homes due to a lack of affordable options.

The latest 2016 Census revealed a gradual decline in home ownership over the past decade from 68 per cent of all Australian households in 2006 to 65 per cent in 2016. And those of us with mortgages are more likely to be stretched to the limit, with over 7 per cent of home buyers paying more than 30 per cent of their income on mortgage costs.

It’s not only homeowners feeling the pinch. Rising house prices mean more of us are renting in the private market. Almost 25 per cent of households are renting privately, up from 21 per cent a decade ago; a further 4.2 per cent are in public housing. This puts upward pressure on private rents and increases demand for public housing.

Price growth easing

The national debate about housing affordability is understandably loudest in Sydney and Melbourne where the median price of houses and units is $880,000 and $675,000 respectively.i But residential property is always a tale of many markets.

While the constant warnings from some quarters that Australia’s housing boom is about to bust has not yet come to fruition, the rapid price growth of recent years appears to be slowing.

According to the CoreLogic Home Value Index, annual price growth eased from 12.9 per cent in March to 9.6 per cent by the end of June. In Perth and Darwin prices fell, while Brisbane and Adelaide posted modest gains. Hobart remains our most affordable capital city with a median price of $355,000 despite annual capital growth of 6.8 per cent.

Retiring with debt on the rise

The census also revealed that fewer of us own our homes outright. Mortgage-free home ownership is down from 32 per cent to 31 per cent over the same period. This could be due to more of us borrowing against the mortgage for renovations or investment, and higher home prices resulting in bigger mortgages that take longer to repay.

If this trend continues it could have implications for our retirement income system, which assumes that most people will retire with a home fully paid for. In a little over two decades the incidence of mortgage debt among people aged 55-64 has more than tripled from 14 per cent to 44 per cent.ii As more of us delay buying our first home until later in life, this trend is likely to continue.

To tackle housing issues at both ends of the age spectrum, the federal government announced some new measures in the May 2017 Budget.

New government incentives

The first of these is the First Home Super Saver Scheme. If the proposal is passed, first homebuyers will be able to make voluntary contributions of up to $15,000 a year to their super fund which they can withdraw to use towards a deposit, up to a maximum of $30,000.

In a move designed to free up more housing stock for young families, the Budget proposed allowing people over 65 to downsize and put up to $300,000 of the proceeds into super without it counting towards existing contribution caps. Couples could contribute up to $600,000. This may make downsizing more attractive for some, but it may not be the best strategy for everyone because the family home is exempt from the age pension assets test while super is not.

State governments have also stepped up assistance for first home buyers, with grants and stamp duty savings.

It remains to be seen whether these measures will significantly improve housing affordability for first home buyers or encourage Baby Boomers to downsize to a smaller nest.

Whatever your stage in life, we can work with you to help achieve your version of the Great Australian Dream.

i All housing prices from CoreLogic ‘Capital City Dwelling Values Rise 0.8% over June Quarter’ https://www.corelogic.com.au/news/capital-city-dwelling-values-rise-0-8-over-june-quarter

ii ‘Australians are working longer so they can pay off their mortgage debt’ http://theconversation.com/australians-are-working-longer-so-they-can-pay-off-their-mortgage-debt-79578

What will the budget mean to you?

This year’s Budget aims to ease cost of living pressures while ensuring the nation lives within its means. While aiming for ‘fairness, security and opportunity’, the budget offers a welcome emphasis on affordability and infrastructure.

Health

The National Disability Insurance Scheme will be fully funded beyond 2019. Medicine prices will fall (partly thanks to generic brands being used wherever possible), with additional drugs also added to the PBS.

The cost of visiting a GP will fall as a freeze on Medicare rebates for bulk-billing doctors is lifted. Bulk billing incentives for diagnostic imaging and pathology services will also be reintroduced. The catch is that the Medicare levy is being bumped up from 2 to 2.5 per cent from 2019. This is especially painful for high-income earners looking forward to the end of the deficit levy they’ve been paying for three years.

Education

The government is ploughing an extra $18.6 billion into schools over the next decade. In most cases, this will reduce the need for private schools to raise fees and public schools to demand greater ‘voluntary’ contributions. Nevertheless, a small proportion of private schools will have their funding cut under the Gonski needs-based-funding formula the Government has now embraced.

The price of university degrees will increase 7.5 percent between 2018 and 2021. As of July 2018, graduates will need to start paying back their HELP loan at the lower threshold of $42,000. This will impact the after-tax incomes of university graduates but not for at least a year.

Housing

A range of initiatives is being offered to address the issue of housing affordability. Those saving for a home deposit can salary sacrifice up to $15,000 per year and $30,000 in total into their super. They will enjoy all the tax benefits of super (such as a 15 per cent tax rate) while still being able to withdraw the money when they find their dream home. Older Australians over 65 and wanting to downsize, will be able to make a non-concessional (after tax) contribution of up to $300,000 into their super after selling the family home.

While the Government has made good on its promise to maintain negative gearing, property investors have little to cheer about. They’ll no longer be able to claim a tax deduction on the costs involved in travelling to inspect their properties. There will also be a tightening of depreciation deductions. Deductions for plant and equipment – for example, a washing machine – will only be allowed for the investor who purchased them. (Previously, subsequent owners of an investment property could also make deductions on these items).

Initiatives to limit foreign investment, will presumably ease demand and impact capital growth and rental yields. These include a 50 per cent cap on foreign ownership in new developments, as well plans to unlock surplus Commonwealth land. As a sweetener for those investing in affordable housing there will be a CGT discount of 60 rather than 50 per cent.

Seniors and small business

Small businesses with a turnover up to $10 million will be able to immediately write off expenditure of up to $20,000 on business equipment for another year.

There will be 92,300 pensioners delighted to learn they’ll be getting back the concession card they lost when the asset test came into effect earlier this year.

If you are finding that the financial pain is outweighing the gain in this budget, keep in mind Australia has long outperformed most equivalent first-world economies, pointing to what the Treasurer described as “better days ahead”.

If you’d like more information on how the measures contained in the Budget will affect you, please give us a call.