Interest drawing your attention?

For Indians in Australia looking to invest in property, here are the market trends of 2018

Colin Lee

With 2017 just behind us, it is natural for potential buyers, property investors and homeowners to take stock of what has gone before with a view of what’s expected ahead in 2018.

Last year saw a cooling-off period after a five-year rising streak in Australia’s hottest property markets. That run saw the median house price increase more than $530,000 in Sydney and $352,000 in Melbourne.

In Sydney, this meteoric rise took a downturn and Melbourne slowed in response to regulations and new policies designed to cool property prices and debt levels—considered as cornerstones of the economy.

Several trends will emerge as these regulations and policies flow through the market, banks and buyers:

1. Mortgage rates to rise

Interest rates draw a lot of attention, and for good reason. They determine the cost of your home loan and what you pay back each month, which impacts on how much you have left to spend. Even a small rise in rates can make a big difference to your repayments. When an investor has several properties in their portfolio, this impact is multiplied.

Financial markets predict the RBA will lift official rates in late 2018 from a record low of 1.5%. In fact, mortgage rates have been on the rise despite the cash rate not having moved in 15 months. There has been a focus on raising rates on both investment loans and interest-only loans in an effort to reduce the risk profile of major lenders’ portfolios in compliance with regulatory requirements.

In August 2017, the big banks increased their interest-only home loan repayments by 0.3% on average. This is in addition to increases that were passed on earlier in the year. Likewise, investor rates have also been increased by non-banks and smaller lenders, who have followed the big four’s lead in enforcing tougher scrutiny of income and raising minimum deposit requirements. These small rate rises are a result of APRA’s new lending rules requiring banks to cut back on interest-only lending to less than 30% of new loans.

These changes have affected property investors who now find themselves forced to pay hundreds of dollars more in repayments each year. With financial markets and experts predicting further interest rate rises, investors will be potentially hit even harder this year.

A rate hike will always hit hip pockets and impact household spending, with a flow-on effect on the overall economy. “Higher RBA rates mean repayments will also increase, typically $50 a year for every 25 basis-point rise on a $400,000 loan” says Patrick Nolan, head of loans at ME Bank.

Even if that does not happen, borrowers should brace themselves for higher mortgage rates. The rate cuts delivered by the RBA in 2011-13 and 2015-16 have not been passed on in full to borrowers by the big banks. In view of APRA’s tightening of lending policy, banks have been compelled to lift interest rates out of sync with the Reserve Bank. This translates to a gap between the RBA official interest rate and a standard variable mortgage rate that’s the widest since 1994.

Morgan Stanley analysts conclude that “Banks have been using their oligopoly pricing power to lift home loan standard variable rates relative to the RBA’s cash rate since 2008, primarily by cutting standard variable rates less than the cash rate during the RBA’s easing cycles”. It looks increasingly likely that the trend is for rates to go up in the foreseeable future.

2. Cooling of property prices to continue

Experts predict that the cooling of property prices in both Sydney and Melbourne will continue in 2018 after years of solid double-digit gains.

Mr Nolan reiterated that “Banking regulators want to see a slowdown in house price growth, and that’s what we expect in 2018.”

ANZ economists predict multiple RBA rate hikes in 2018 and say that the policy tightening by APRA has caused weakness in the property sector but that declines will be localised. Senior economists Daniel Gradwell and Joanne Masters said that “APRA’s tightening on investor borrowing and interest-only loans has resulted in higher interest rates for those borrowers, and lowered demand for housing”.

“Weaker auction results point to further slowing as we move into 2018. Our forecast that the RBA will increase rates will also work to lower price growth. But if the RBA doesn’t tighten, prices will likely slow less than we forecast. Importantly, there is still nothing to suggest to us that prices are going to enter widespread declines.

3. A comeback by first home buyers

“With investors taking a step back, first home buyers will find more opportunities in 2018. They will continue to benefit from competitive interest rates, new concessions and ample apartment stock, although checks should always be made to ensure quality buys,” says Mr Nolan.

ABS data do indicate first home buyers leaping at stamp duty concessions in New South Wales and Victoria, but still need a leg up according to ANZ. Mr Gradwell and Ms Masters concede that “the deposit burden for first home buyers continues to rise, and more people require assistance getting the deposit together. But once they are in the market, low interest rates mean that repayments are affordable, and the interest bill has been falling”.

4. Renovation as an option, upgraders to stay put

Costly stamp duty taxes on property transfers act as both a deterrent and an anchor from moving out of their present homes for most Australians. As a rough guide, stamp duty on a median-priced Sydney and Melbourne home loan hovers around $50,000. Homeowners are increasingly opting to stay put and renovate or upgrade existing homes. Mr Nolan noted that “Upgraders are avoiding costly moving costs such as stamp duty. We’re also seeing some more top-ups as people take advantage of lower interest rates and leverage the extra equity in their property in order to finance renovations.”

Soaring annual house price gains has further impacted this trend. Specifically, the stamp duty on a median-priced property in Sydney 20 years ago, adjusted for inflation, was $10,916 but is now $50,302. This big rise bears significantly on homeowners’ minds in shaping their behaviour. This thought process is causing a shift to upgrading of existing homes. Recent Westpac research showed 14% more homeowners considering renovating in the next 5 years compared to 2015. HIA economists also predict the renovations market and industry to experience strong growth into the early 2020s.

5. Owner occupiers set to gain from competitive lending rates

In 2017, mortgage repricing has mainly been focused on investor loans, leaving fewer investors seeking bank finance. As a result, owner-occupiers are taking advantage and making their way back in. Mr Nolan points out that “With limits on investor and interest-only growth, banks are competing over a smaller piece of the lending pie, and are offering some great deals for owner-occupiers”.

Morgan Stanley analysts also confirmed that while investor interest rates have been significantly tightened, smaller rate rises apply to owner-occupier principal and interest-only loans. “We have argued that differentiated home loan repricing (for owner-occupiers) would continue, but it has actually become even more pronounced. In the past year, the major banks’ interest-only investment property loans have been repriced around 90 basis points, while principal and interest owner-occupier loans have been lifted just 10-15 basis points,” said an analyst.

It would be wise for savvy home owners to take note, to jump in and research comparison sites for interest rates on their loans to secure the best rates given the competitive environment lenders are in.