Over
the past few months there has been so much talk about what the RBA
should do, how they should move, over what period of time and…the
banks being b*stards!!
Today I
would rather focus on what the RBA has or hasn’t done and the way
things are playing out for the 95% of the property buying market in
Australia.
The RBA
decided to leave interest rates on hold this November, and this was the
first time in six years on Melbourne Cup Day that the RBA decided to
not move the official cash rate.
The
official cash rate currently sits at 3.25%, just 25 basis points for
the historic lows during the financial crisis (GFC) of 3.00%.
There
are many commentators that say we should not be looking at the current
cash rate of 3.25% and comparing the “emergency lows” of the 3.00% cash
rate at that time - it's simply nonsense.
In fact Stephen Koukoulas, the Managing Director of Market Economics and Senior Economic Advisor to the Prime Minister, Julia Gillard had this to say: “People
talk of near 3% emergency cash rate now with no idea: during the GFC,
AUD 65c, fiscal stimulus, 5% GDP; now AUD 104 cents, fiscal cuts 4% of
GDP”.
Those figures are not at all disputed from my point of view. However, I’m sorry, but I do
look at the current cash rate and ask questions. I also look at the
figures during the GFC but I am more focused on what we are experiencing
today.
Newton’s law
I personally use a very basic principle when investing (predominantly) in property. I use the principle of Sir Isaac Newton's 3rd law – every action has an equal and opposite reaction.
So it brings me to this point. Notwithstanding
the fact that we are at or close to historically low interest rates, we
see articles that highlight matters of concern and I quote:
“Almost 16 per cent of the nation's first-home buyers are in severe mortgage stress.
Those
in Tasmania are leading the crisis with 17.2 per cent falling behind in
repayments, being driven to refinance or pressured by banks to sell.
This was closely followed by Northern Territory (17%), New South Wales
and South Australia (both 16.4%), Victoria and Queensland (both 16%),
ACT (15.2%), and Western Australia (14.4%).”
Now, reading that comment, one would have to ask: “Why are these people in severe mortgage stress”?
We are just 25 basis points from the historically low interest rates since the GFC. This week on the Property Observer website, John McGrath has gone on to say and I quote:
“The real recovery has been limited to the first-home buyer markets. Above $1 million there is no real depth.”
Now, this is where my issues begin.
The
very fact that a high profile agent/entrepreneur/celebrity agent is
willing to identify the fact that the property market has been
recovering thanks to the first time buyers in the market, is a real
concern to me, in particular when you take in to account the article
that was released by the Herald Sun,
even if we assume there may be 10% margin for error, the figures remain
extremely high in terms of mortgage stress for the first home buyers.
Now,
let’s be real for a moment. How many of you reading this article is out
in the market place looking for a $1,000,000 plus property to purchase?
According to statistics, only 5% of property transactions per annum are
sold above the $1,000,000 price range in Australia. Yep, just 5%!
Let’s focus on the 95%!
Have a look at these comments from Christopher Joye on 1 May 2012:
“The
problem was that these folks, who were typically punters from the
financial services industry, were looking at house price falls in, say,
Bondi, Bellevue Hill, and Vaucluse, and using these suburbs as a
benchmark for the rest of the country. Yet with a median price of more
than $1 million, these areas are representative of only around 5% of the
national housing stock. They therefore tell us little about the
remaining 95% of homes”.
I
spoke with Christopher Joye a few days ago regarding the comments he
made in May 2012 and he informed me that the numbers remain the same.
Only 5% of property transactions are above the $1,000,000 mark per
annum.
Why
there is so much focus on this million plus market is beyond me. The
affluent markets typically see auction campaigns and not private treaty
sales. When we look at the sub-$600,000 property market, the potential
purchasers usually have a pre-approved loan based on their borrowing
capacity subject to the size of deposit they have available for the
property transaction.
Purchasers
looking at $1,000,000 plus properties cannot borrow 90% of the value of
the property as the LMI (lenders mortgage insurance) providers will not
assist and they typically draw the line at $750,000 in borrowings - and
if you have experienced trying to deal with LMI of late, we are pretty
close to having to provide a DNA sample to get the loan over the line.
The moral of the story – let’s focus on the 95%!
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