Property Finance Made Simple: How to get the loan you need for the house you want

By Andrew Crossley

This latest book in the Made Simple Series contains so much valuable information, you won' be able to put it down.
Property Finance made Simple is the latest book from best seller, property guru Andrew Crossley.

Want to you buy your first home?
It looks at the challenges of the A

• Language: English
• Publisher: Busybird Publishing
• Release date: Sep 9, 2016
• ISBN: 9780995383531

Book preview

1

Housing Affordability

Australia’s Property Market

The following are key influences on property prices around the country:

• APRA

• Foreign investment

• Owner occupiers: emotion leading to inflated prices

• Banks acting irresponsibly

• Self-managed super fund borrowing (SMSF)

• Negative gearing and capital gains tax discount

This chapter is designed to provide the backdrop for the problems facing Australians in buying their first home, and the lack of affordability due to the massive growth in property prices seen in parts of Sydney and Melbourne. You will see that negative gearing is not the culprit and is just a small part of the puzzle.

The housing affordability, and now the rental market affordability crises, are highest on the list of topics being thrown around in the media by economists, politicians and consumers alike.

Some have argued the so-called ‘self-entitlement’ attitude of the Millennials and Generation Y has fuelled this debate. Many are not willing to live further out — they want to live further in. One of the downsides being argued, of living further out is that it leads to a lower quality of life. This I tend to agree with if there are limited amenities or far fewer choices of amenities than further in. If there was sufficient supply and choice of amenities, including transport and all the rest that goes with it, then quality of life may not be as diminished as some may think.

First homebuyers are not all Millennials though or Generation Y. There is a shift in the characteristic of a first homebuyer over the last 7–10 years. Many first homebuyers are actually over 30-years-old, and some are in their 40s. So some difficulty of affordability, some would argue, should have been somewhat mitigated, due to more time over which money could have been saved, and incomes increased. In fact, the general manager of broker sales at CBA has been quoted as stating: ‘There is a gap in perception and reality when it comes to affordability.’

It is difficult to deny that Baby Boomers were able to buy a house for around 3–5 times their income, but the younger generations are paying approximately 5 times the average wage now across the country. It’s up to 12 times in Sydney and 9.7 times in Melbourne. Some suburbs are up to 20–30 times the average wage.

Recent surveys on whether Australian economic and social policies are disadvantaging the younger generations showed that 80% of people surveyed agreed that they were. Let’s consider something else though. Whilst the cost of a house in relation to wage is higher now than for Baby Boomers (hence the argument of affordability) things were not necessarily much easier for Baby Boomers.

Figure 1.1

All generations face up to 30 years paying off a loan, more if they keep refinancing to interest-only loans, but there’s no difference between any generations on this aspect. These days though, people need to save a higher deposit, and this is one of a few problems. They’re also having to borrow more money, but, Baby Boomers paid up to four times higher repayments, with interest rates getting up to 17%, toward the end of the 1980s.

The true problem currently getting into a property is having to save more money for the deposit, which is not actually any more difficult to afford the repayments on a loan, when comparing incomes and interest rates now to the incomes and rates applicable 20 years ago!

According to finder.com.au, based on the average size loan and wage for the Baby Boomer era, the average repayments were around 45% of the weekly earnings back then, compared with now being 31%.

First homebuyers, as a topic of conversation, are an ongoing ‘terrible news story’ made worse when people like the ex-treasurer say the solution is simply ‘to get a better job, to earn more money’. Talk about being detached from those he served. Mortgage brokers could be a first homebuyer’s best friend, as it would be difficult to believe any government would want to be involved in affordability of housing debates any time soon after the impassioned and fervid reaction to Labor’s desires for negative gearing. Some potential solutions are provided in this book for first homebuyers, such as parental guarantees, parent support, parental gifts and property share products.

ME Bank’s research indicates that properties were purchased jointly with friends on 4% of occasions and with family or parents on 12% and 14% of occasions respectively.

The ease in which developers assault an area by mass developing it with high density structures, constructing ‘apartment building’ after ‘apartment building’ with seemingly no checks and balances in place by council, is also to blame. Developers though are just part of the equation. The other part of the equation leading to developers feeding this infinite and insatiable demand is foreign investors. But it’s not just foreign investors either. It’s also those who have succumbed in a ‘zombie-like’ fashion to the stories spruikers tell and continue to buy ‘off-the-plan’ developments.

Consider, according to some commentary: renters are spending up to two-thirds of their household income toward rent. Higher rents make it more difficult to save for a deposit. The bottom line is that a compromise needs to be considered as to where a first homebuyer is prepared to live while renting, and therefore improving their chances of saving for a deposit. Additionally, they might need to compromise on where they’re prepared to purchase, which in turn lessens the amount of deposit required.

Victorians, at least, could soon be the lucky ones. The government is considering a proposal to introduce a 5–10 year rental lease scheme. In some European countries, long-term renting is far more common, providing guaranteed income for owners and security for tenants.

Nationally, the problem that needs to be solved is inequity, so more people can have a dignified life, rather than working until the age of 80 then preparing to die. We have all heard and begun to believe that there may not be a pension in 20 years time. I believe there will be, but the criteria that must be met will eliminate many from receiving a pension. Now there is evidence to support the ‘soon to be reality’ that people will have less to live on, if they are asset rich and cash poor.

In 2017 there are some major changes to the means testing of pensions. The asset test taper rate increased from $1.50 to $3 per fortnight for every $1000 above the minimum asset threshold. The maximum asset threshold has dropped. The impact of this will depend on whether someone is asset or income tested, his or her homeowner and relationship status as well.

In plain English, a person’s pension reduces by $3 every fortnight for every $1000 in assessable assets (and where assets exclude the principle place of residence and superannuation).

The upper threshold for a homeowning couple will reduce from $1,163,000 to $823,000; this threshold is where the pension no longer applies. Single homeowner threshold reduces to $547,000 from $783,000.

What this means is that 91,000 part pensioners will no longer qualify for the pension, and 235,000 will have their part pension reduced (Source: ANZ).

There are a number of influences on the current Australian property market.

Firstly, let’s briefly cover market sentiment. This is not an influencer on prices, or number of properties being purchased, as first homebuyers only account more recently for roughly 12–15% of the market. It’s more the young first homebuyers’ attitude, it seems.

This is a contentious issue; some commentators out there have confronted Generation Y with the opinion that it is the first homebuyer’s attitude which is the problem, and one of having self-entitlement issues (and more so the Millennials’), who are very ‘self-centric’, as some have described them. Yes, the prices in many areas are rising, and it has become much more difficult for younger people to purchase within a more convenient distance to their family, friends, and places of work, or close to a CBD.

There are many suburbs where first homebuyers can afford to buy. Sydney of course is not one of them, nor are many of the surrounding suburbs of Sydney, and this is a major problem. But what has happened in Sydney should not be used as the benchmark, or more general example, of a lack of affordability for the rest of the country, like some are trying to do.

Most suburbs in Queensland, whilst they may be rising in price, are still very affordable, i.e. under 400K. Many outer suburbs in Melbourne have not had the growth of inner suburbs and are priced below 400K.

Some younger people are saving money by living at home. This would be better than renting if they wish to save money. It’s fair to say that 5% ‘funds to complete’ plus stamp duty is a fair bit to save for many people, the difficulty is of course compounded if these people are undisciplined or enjoy a certain lifestyle, and made much more difficult if buying closer in to the CBD of a capital city, due to rising property prices.

Six Influences on the Australian Property Market

1. APRA

With the Australian Prudential Regulatory Authority’s (APRA’s) restrictions placed on deposit taking institutions, in respect to investment lending growth, many would say this has become necessary, possibly due to loose lending standards by the DTIs (deposit taking institutions) over more recent years, hence the need for changes to bank investment lending policy in response, in order to meet the requirements by the regulator.

There are several forces at play here that will continue to influence the property investment landscape as well, so a solution will require a multifaceted approach if it is not going to disadvantage first homebuyers and first time investors.

The Sydney market saw significant growth in 2013 to early 2016, but APRA waited until near the end of this cycle to actually take back some control. Unfortunately, this was seen as too little too late. At least now it has stemmed the growth. The damage however has been done.

Looking at Table 1.2, prices are 18% above the long-term trend for house price growth, and the trend has already been excellent for property owners, but not for the roughly 30% of people that don’t own a property.

Figure 1.2

Lenders, on the back of the pressure applied by APRA, have implemented a number of changes that have directly affected the finance market.

Increasing rates on interest-only loans secured against owner-occupied properties and/or rates on investment loans, freezing approvals for investment loans, reducing LVRs (loan-to-value ratios), abolishing discounts for larger loans, increasing qualifying rates on servicing calculators, servicing existing debt at a higher rate than the current rate or current repayments, and increasing the applied living expenses in their borrowing capacity calculators, these are some of the mechanisms through which all lenders have to some extent implemented.

This has impacted in a number of ways, but primarily the borrowing capacity for all borrowers; it will price out or eliminate many borrowers from the market.

There are three elements that influence the level of affordability for a borrower: price, the income of the borrower, and interest rate. The pressure APRA are applying to deposit taking institutions, leading to tougher lending policy, will be ineffective with higher income earners; they simply have more money to better deal with these changes. If rates do not increase significantly it would still be relatively easy for the higher income earners to continue to borrow. It makes little difference to these borrowers if lenders add a quarter or half a per cent to rates.

APRA chairman Wayne Byers naturally supports what APRA have done. He said, whilst speaking at the House of Representatives Standing Committee on Economics inquiry into home ownership, the moves APRA have made were ‘common sense’.

‘Our objective has been to ensure that in the broader environment of high house prices, high household debt, historically low interest rates and subdued income growth — along with strong competitive pressures within the financial system — sound lending standards are maintained across the board.’

The problem is that one size does not fit all, and should not be applied to all.

2. Foreign investment

Tightening policy on foreign investment is an appropriate strategy. Foreign investment numbers suggest that in Melbourne in particular, foreign investment has made up more than 20% of investment lending. Other figures suggest that one in six property purchases were from foreign investors through 2014–2015.

Current loopholes in Australia have the potential to allow for the registering of companies or trusts in Australia via a relative living in the country, mediums through which foreign investors can plough money to buy property, money that could be from dozens of friends, relatives and others.

Until very recently, the federal government had no handle on who owned what, as each titles office in each state was run by the individual state. Thankfully awareness at the federal level is a fair bit better now.

The insatiable foreign appetite for Australian property (primarily apartments) has led to figures that suggest Brisbane, Sydney and Melbourne could end up being a disaster for the inner city unit markets (i.e. CBD, Southbank and Docklands). Anyone buying in these areas for any reason should be very concerned.

Foreign demand in property is, of course, largely for investment. Some reports suggest roughly 40%, foreigners coming here for an education accounts for around half this percentage, then migration.

Mum-and-dad investors buying ‘off-the-plan’ apartments through property marketing companies have a great deal to fear, with some suggesting there will be a massive shortfall in both rentals and valuations looming. When combining this with body corporate costs, and competing against hundreds of other buyers in these locations, the landlords will have to drop rents to compete for a tenant. These properties could very well end up being overly negatively geared, and when rates rise, which they will again at some point, not years away, many of these investors will be dead in the water.

For owner-occupiers, the news is terrible for these areas, because when they eventually try to sell they’ll be competing against dozens of the same or similar properties being sold around the same time. Given the sheer number of apartments, it’s likely there could be many dozens of properties on the market for sale at any given time.

Foreigners have also been buying in areas like Tarneit and Point Cook in Victoria. It is suggested that it’s on the back of developers flogging this stock by marketing it to foreigners, as a change to the high-rise apartments. Busloads of these, primarily Chinese property investors are taxied around these suburbs and they buy, sadly unknowingly on the back of alleged two-tier pricing. Victoria has increased stamp duty and land taxes for foreign investors (so the new shiny ‘toy’ area to buy in) it seems, will also be Brisbane).

First-hand experience has also demonstrated to me that there are companies in China specialising in producing fraudulent pay slips and other documentation. Most lenders have now pulled out of providing finance to foreigners, given the high prevalence of systematic fraud. The one or two remaining lenders will now only lend up to 60% of purchase price and perhaps only use 60% of overseas income for servicing. In some cases, only rental income is factored in, for the proposed purchase in Australia. I dislike fraudsters as much as the next person, so this is good news. Alas, the downside of the tightening of lending policy when it comes to foreigners is that Australia benefits less from an inflow of capital, so time will tell what the consequences will be.

If China changes the rules of the game for their citizens, for example, by reducing the amount of money able to leave China (they’re already applying some pressure in reducing capital leaving its shores), pandemonium could follow, in these high-density locations, with a massive rise in re-sales. With the volume of properties owned by foreigners in a number of locations, the potentially large shortfall in the value of these properties could very well become even worse. My opinion is no Australian should buy a high-rise inner city ‘off-the-plan’ apartment for investment purposes in the coming few years.

3. Owner Occupiers: Emotion Leading to Inflated Prices

Some commentators have suggested that owner-occupiers, as distinct from first homebuyers, are also partly to