OPINION: A NEW optimism is starting to pervade the media, which should be creating a feeling of confidence about the future.
I have said numerous times in the last year that housing markets were ready for growth pending market sentiment improving. I think that time is now arriving as sentiment should improve significantly provided no shocks come out of Europe, and in particular Italy. It is time to dust off our housing investment skills and go out and see what we can find. From here, it is likely that there will be more competition for property and fewer bargains.
Given this new wave of positive sentiment and a much better investment outlook, I am hosting several small seminars to assist those who are looking to get back into the property market. I will also share with you details on my new project – Fantasy Real Estate, which I am very excited about. In a nutshell, Fantasy Real Estate is a game of skill based on the Australian property market where you use your knowledge for a chance to win $400,000.
If the events of the past few years have taught us anything, it is that even when a market crashes, if you can afford to hold your property and not sell, you will achieve what you anticipated in the longer term. Those who have lost out following the GFC are the ones who were excessively leveraged and forced to sell into a nonexistent market. People who had the capacity to hold have received acceptable dividends or rental returns, and now have an asset that is in all probability worth more than it was pre-GFC.
Those who invested in housing have probably not achieved anticipated long term yields; however, it is likely that they have achieved, or will soon achieve the normal long term return. The normal long term return is usually 1.5% real growth (a rate excluding inflation) plus a rental yield that is acceptable, which is also likely to be approaching lending rates which is the normal longer term trend. Overall, an acceptable outcome has been achieved. From here we are going to see some real positive gearing opportunities.
For housing values to increase significantly there has to be demand. This is driven by people who want to buy a home and having the capacity to do just that. The desire for ownership is natural given the security of tenure it provides. Hence, there are two basic issues that allow people to have the capacity to purchase a property:
· The availability of funds from banks.
· Their capacity to repay the loan.
In essence, banks are willing lenders but have been a little more conservative in recent times. Therefore, any restriction on the population’s ability to bid on property from this angle is probably minimal and not sufficient to substantially reduce buying activity.
Clearly, if there is a major impediment it is the capacity of people to make home loan repayments. Basic housing affordability may be the issue; however, if people cannot purchase a property then they rent, which bids up rental yields.
Affordability has been improving in recent times as house prices adjusted and interest rates decreased. It is likely that the position will improve even further as more interest rate cuts are anticipated from the RBA and/or the Banks lowering rates as a consequence of borrowing costs reducing. Both scenarios are likely but the magnitude of RBA rate reductions will be impacted on by the actions of the Banks.
When considering affordability, I prefer to think of it in terms of the percentage of after tax household income it takes to make mortgage repayments. Equally, it is important to consider the amount of funds remaining after such payments are made. Leaving a household with less than $900 per week after making loan repayments probably means buying a property is not worth the effort when compared to the better lifestyle available from renting.
Table 1 presents the calculated affordability for each capital city. The figures are based on the median house price and a home loan interest rate of 5.65%. It assumes an 80% loan and an average tax rate of 17.2% for the family.
Table 1
It is clear that all houses are basically affordable, except in Sydney. Melbourne is at the lower end of affordability and in reality, with the exception of Canberra, affordability in most markets is marginal.
While housing markets should now move forward, they are likely to have a greater tendency to provide moderate growth rather than quick gains. However, at this level of moderate affordability people will be driven to lower cost properties and rentals.
In the event of a further 50 basis points reduction in interest rates, the position will be improved; however, not significantly enough to send housing markets into a period of exceptional growth. In Sydney, this rate of reduction would add about $50 a week to a borrower’s available cash position after tax.
I leave you with a question to ponder – given the position Canberra is in, should we all be immediately moving to buy an investment property there?
I look forward to seeing some of you at my seminars over the next few months.
Until next time, happy investing!
By John E Edwards, founder of and consultant to Residex Pty Limited.*
Property Reviewer on Property Review
