Our home prices are among the world’s highest and still haven’t peaked.
But if you’re thinking of buying there’s no need to rush, because from here on the rises are expected to be more sedate as the surge in building approvals kicks in and real incomes falter.
At the same time, rents for units are more than keeping up with inflation in Sydney and Melbourne though at best are flat in the other capitals.
Independent property commentators are tipping values will rise an average 6 or 7 per cent in the next year, compared with about 10 per cent last year.
‘‘Normally property prices keep going up until interest rates start to rise. There’s more upside ahead with very low rates, in fact fixed rates have been coming down but the gains will slow down a bit,’’ Shane Oliver, head of investment strategy and chief economist at AMP Capital says.
So when might rates rise?
Not for ages. Economists don’t expect the Reserve Bank to lift rates before its US counterpart, the Federal Reserve, which is planning to but hasn’t set a date as such, apart from making it clear that it won’t be until well into next year. In any case the smart money is even gambling that the Reserve has another cut in it.
Despite (or by pushing up prices perhaps because of) record low rates, affordability is a real issue.
Then there’s Sydney, described as ‘‘one out of the box’’ in the past year by Andrew Wilson, senior economist at Australian Property Monitors.
‘‘That has been due to low interest rates and investor activity, which is half the market,’’ he says, predicting 2 per cent price rises in each of this and the next quarter for Sydney.
‘‘Pent up demand has been released through lower interest rates, especially for investors in Sydney. Once it works its way through the system it wanes in impact,’’ Wilson says.
The other places to be in the next year are Adelaide and Brisbane, mainly because they have some catching up to do after last year’s under-performance.
‘‘Melbourne is likely to record half the growth it did last year – so that will be about 4 to 5 per cent,’’ Wilson says.
‘‘Perth is looking flat this year,’’ he says, and it wasn’t a reference to the city's topography.
Just as record low mortgage rates have boosted demand, an unusually long home building slump has limited supply. No wonder prices have been shooting up.
Although there’s a boom in housing construction under way it still has a lot of, um, ground to make up.
‘‘It’s the strongest in more than a decade but isn’t enough to make up for the under-building in the previous 10 years,’’ Oliver says.
In fact the adult population is still growing faster than new homes are being built, especially in Sydney, Melbourne and Brisbane.
St George Bank estimates the housing shortage is running at 101,300 dwellings a year.
Even so, there’s no getting around the problem of affordability.
Caught in the middle between low rates and high prices, both records, are household incomes. Wages fell in real terms over the past year and rising unemployment isn’t about to turn that around for a while.
Over time property prices rise on average by the growth in household disposable incomes.
These rose strongly after the global financial crisis as Australia’s export revenues soared thanks to China’s massive spending program, which concentrated on resource-hungry infrastructure. This filtered down to the neighbourhood as jobs, cheaper manufactures and wage increases.
Those days are over, though property prices have been the last to adjust to the new reality.
That’s why once interest rates start increasing, it seems around 5 per cent annual average rises will be the best that can be expected. That suggests real growth of only 2 per cent a year.
The return for investors will be higher when you add a gross rental yield of about 4 per cent on average. This probably won’t change much because even though prices are expected to rise, which would reduce the yield, rents will also be going up.
But remember costs such as maintenance, council rates and strata levies typically knock 1.5 per cent off this.
Also more than half of recent building approvals have been for units, suggesting a looming localised glut, since new apartment blocks tend to be built near each other. Buying off-the-plan also means you’re paying a developer premium.
Anyway there’s no chance of a property bubble while affordability is so constrained – potential first home buyers are staying away in droves – and bank lending is subdued.
The latest QBE annual survey of intending buyers in the next five years found a distinct cooling in sentiment.
Taken in late June, it showed 36 per cent thought the next 12 months would ‘‘be the best time to buy’’ compared with 42 per cent at the same time last year, mainly the result of the budget.
But come to that nor is a correction likely. The market is underpinned by interest rates that will remain low into the foreseeable future, because economic growth is relatively subdued and the housing shortage will take years to overcome.
- Get your finances in order before you see the bank.
- Save for a deposit with the same lender for the best deal, or see a mortgage broker.
- Don’t be fooled by a cheap interest rate. Check the comparison rate that will take into account fees.
- Choose a mortgage with an offset account and use it.
- Fix some of your mortgage as protection but not all of it.
- Have your loan approved before you buy.
Case study: Property performers
Paying rent can be dead money but sometimes so can earning it.
Yet doing both may be the easiest way of building a property portfolio.
Former pre-school teacher turned flight attendant, Melinda Lee, and store manager partner, Kabe Franklin, are looking for their fifth property, while renting themselves.
Nor do they do negative gearing - all four properties pay for themselves.
To refinance one of their properties they even broke a fixed-rate, two year loan with eight months left to run that dropped the rate from 6.33 per cent to 4.69 per cent for three years. Although this cost $1500, it only took five months to make up from the savings in interest.
Lee, 29, bought her first property – a two bedroom unit in North Parramatta – at 22 putting to good use the fact her father Kevin Lee is a buyer’s agent and doubles up as a mortgage broker. Its value has since doubled.
Originally it was an interest only loan but she subsequently switched to a normal one, which has become a winning strategy.
‘‘I lived there for a year because of the first home owner grant. After I moved out and when the rent was high enough to cover the whole mortgage repayment, I switched to a principal and interest loan. That way the tenants pay it off.’’ She and Franklin have been renting ever since, though they tried living in one of their properties but found they didn’t like the area.
‘‘It’s rented by uni students. They pay $530 a week and we pay $545 a week for which we get tax benefits and get to live in a nicer area,’’ Lee says.
The couple use the equity in one property as collateral for the next.
Their cardinal rule is that the rent must at least cover the monthly principal and interest on the mortgage.
‘‘It must cover the whole repayment. A lot of investors buy to just cover the interest payment and rely on capital growth but I don’t think values will double again like they did for my first unit, because wages won’t be going up as much,’’ Lee says.
They prefer two bedroom units though number four was a house in Albury.
‘‘There’s a bigger range of potential tenants with two bedroom units. We wouldn’t live in a one bedroom flat – there’s no space or storage. It wouldn’t suit a single mum with a kid for instance,’’ Melinda says.
They always fix. ‘‘The tenants are paying off the loan and it’s a long-term investment, so the rate doesn’t matter. It’s just good to lock in,’’ she says.
Financing your dream
Lining up a home loan starts well before you set foot in a bank, let alone look for a property. ‘‘It takes the average couple 4.1 years to save a 20 per cent deposit for their first home, if they save 20 per cent of their joint income,’’ Kevin Lee, director of Smart Property Adviser says.
‘‘The best way to develop a savings plan is to allocate two weeks to keeping a detailed record of what and how you spend,’’ he says.
That 20 per cent wasn’t plucked out of the air either. Lenders want to see an 80 per cent loan-to-valuation ratio. And yes, the first home buyer grant counts as saving.
While you can get a loan with a slightly lower deposit, you’ll pay for the privilege.
That comes in the form of mortgage insurance, widely misunderstood as protection for you. It’s anything but.
In fact mortgage insurance protects the lender against you. Since you have to buy it upfront it’s usually spread over your loan, which lifts the cost again because you’re paying interest on it. So you end up with higher repayments.
The premium escalates exponentially for every dollar you’re above the 80 per cent.
‘‘Budget for costs such as stamp duty (about 2.5 per cent to 3 per cent of the purchase price) as well. If your parents can give or lend you a few thousand that can save $10,000 in mortgage insurance,’’ Tony Harris, director of themoneystore.com.au says.
And don’t forget properties have to be maintained. Even units come with ready made expenses such as strata levies and sinking funds.
Loyalty is the new black for banks.
‘‘You look more favourable to a bank if you have an account or a credit card with it. Pick one and build up a history with it,’’ Harris says.
And get your house in order so to speak, before you see a lender.
‘‘A loan will be knocked back on one overdue payment on a credit card in the past three months. And don’t swap jobs half way through the application,‘‘ he says.
Then there’s the question of which loan will suit you best. Mortgages come in all shapes and colours.
That’s easy: pick the one that you can pay off fastest. Oddly enough it may not be the one with the lowest rate.
‘‘Non-bank lenders can look cheap on the surface but there are establishment, valuation and solicitor fees. Banks charge an annual $395 package fee only,’’ Harris says.
As well, a basic no-frills loan will be very restrictive when it comes to paying it off sooner. A more expensive one with an offset account may have you debt free sooner.
Offset accounts are up there with the magic of compounding. In fact, there’s a connection. Extra repayments go in a special account earning the same rate as the mortgage costs. One cancels out the other, so the mortgage falls and you’re not taxed on the interest you earn.
The beauty is you can re-draw the money if you need it again.
This is also why you shouldn’t fix the whole loan; most fixed rate loans don’t have offset accounts or allow extra repayments.
Even so, when starting out there’s a case for an interest only loan just to get you on your feet.
‘‘The repayments are lower and you can swap to a principal and interest one any time. It gets you started but don’t stay on it,’’ Harris says.