Expert Advice by Todd Hunter
I may stand-alone here, but Sydney’s done – there I said it!
Normally, locations go flat when they become unaffordable or major infrastructure projects are abandoned but this time it may be at the hands of the banks, the governing bodies and the ATO.
Now making a statement like this is bold. Firstly, you need fundamental facts to back it up and these are the things I research – knowing where and when to invest, along with when to stop investing in an area. And lastly, we need an alternative place to invest.
So, here we go:
The first sign for me that Sydney was on the cusp of a change was on April 23rd. This was the day that two major banks announced a fundamental bank policy change that stated that effective the next day at 5pm, Loan to Value Ratios (LVR) would be reduced from 80% of purchase price to 70% for all Non-Resident lending. Meaning borrowers must have another 10% cash to put towards the purchase.
One of those banks also happened to be the biggest lender to Chinese borrowers. The myth that the Chinese are all paying cash for Australian property is simply not true. The best Business Development Manager (BDM) at this bank told me he has seen an immediate drop of 25% in mortgage volume since this change.
There is no question the overseas buyers are pushing our prices up, and it’s not just the Chinese. They accounted for $27.7 billion in property transactions last year but Americans also purchased $17 billion, Canadians $15 billion and Malaysians another $7.2 billion. Recently, the falling Aussie dollar has made our property even more attractive to them, along with our buoyant property market.
But as usual, when there is money, there are Sharks prowling the waters on the hunt for loopholes. And who do you think is showing me the light? The ATO. Yeah, you won’t hear me say that too often. They are currently investigating 150 cases of unlawful purchases from overseas buyers. Foreigners navigate the loopholes through trusts and companies. There appears to be a loophole in the FIRB’s (Foreign Investment Review Board) approval process for developers too. The great thing is that the ATO are a big enough player to bring this behaviour to a halt and prosecute those offenders. Definitely watch this space!
“But wait,” you might be thinking, “won’t the historic rate drop in May encourage more buyers to pay more?” But the funny part is that even though interest rates dropped, your borrowing capacity hasn’t increased. wHy?
You see, even though rates dropped, banks are still servicing your loan application at the old 7% mark, as a safeguard for when interest rates rise in the future. This 7% mark hasn’t shifted in the last 3 to 5 interest rate drops. So no matter how much the rates still go down, your ability to service more debt will not increase unless your income does.
Banks must now also hold more funds in managed accounts per mortgage they approve. This amount has doubled in recent years and led banks to increase deposit rates to attract consumer money – but it has also decreased bank profits. Just recently that interest rate war came to an end with at least one bank no longer discounting interest rates for investment loans. Others will surely follow, especially as other recent rule changes discourage banks form being loose with their investment loans.
The Median house price in Sydney has topped $900k. Insane, I know. Now according to the ABS, the Median income is $80,048 per annum. So a couple with two children, who each earn $80k, have a maximum borrowing capacity of between $800k – $1m. Quite simply, they have reached their cap.
So to summarise:
- The banks are slowing up lending to Non Residents
- The ATO are stopping illegal overseas transactions, plus reversing illegal purchases
- Interest rates have dropped, but you can’t borrow any extra funds
- The banks are stopping interest rate discounts to investors
- The Sydney property market has seen fantastic capital growth for over 2 years
- Property prices are unaffordable
Now given that investment loans now account for 50% of all mortgages written, the above corrections will see a drastic decrease in investor activity. This decrease will significantly impact consumer confidence across the board. And the end of the Sydney property boom will be here.
Think about it… You have been inspecting houses for the past 2 months and you’re used to a high volume of purchasers inspecting and turning up to auctions. Then, the next week the volume is halved. Would that get you thinking? Is there something going on that I don’t know about? Your consumer confidence has just been shot.
So, after all this doom and gloom, wHere and wHat do we invest in?
And so now that I’ve laid out my argument for why Sydney is done (Click here if you missed part 1), the question is: wHat next?
The key to investing is buying in great locations in the low part of the property cycle, where consumer confidence is at its lowest. And wHere is this the case?
South East QLD is an emerging market where those who get in RIGHT now will benefit. But if you wait until Christmas, you will have missed the boat.
But the market to really focus on right now is Perth. Currently Perth is on the “No Go” list for a lot of investors, which is exactly why I am there.
With no-one buying, consumer confidence is non-existent. Hence, we have seen some significant price decreases. This makes for some great buying.
But why is Perth not performing currently?
The reason is that most people consider Perth as purely driven by mining, like it’s a giant mining town. I laugh when I hear this, as Perth is a capital city with over 2 million people. The same size as Brisbane – yes, that’s right!
Sure, Perth has mining influence (as does Brisbane) but it has a whole bunch more too. The fall of the mining boom has made for some great buying though. Discounts off list price we have not seen in a few years. In fact, we are buying most of the properties at pre 2006-07 prices.
There are two points to be wary of though. Firstly, the rental market is also seeing a correction with rents dropping around 10% in the last year. Do your numbers with a low 5% yield, and not 5.7%+, and adjust your purchase price accordingly.
Secondly, Perth is winning across the country in the ‘smallest residential blocks’ award. They are down to 200m2. No, that’s not a typo! Stick to blocks over the 400m2 and above, as these will be the properties to see land value growth in the years to come.
So, I will be monitoring the property market in Sydney over the coming months, as property data is all past tense. And a change now won’t be reflected for another 3-6 months.
But one thing I know for Sydney is this: get ready for a significant correction, the writing’s on the wall.
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, visit the wHeregroup blog.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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