Finance advice
Pay down debt, interest rate hikes,

Amid possible interest rate hikes: Pay down debt instead of leveraging

By Bianca Dabu

Economists have recently been working with property experts and professionals to forecast the possible scenarios should interest rates start to hike following the amendments to lending regulations implemented by the Australian Prudential Regulation Authority (APRA).

While most experts agree that rates will start to rise soon, there are still those who believe that major banks like the Reserve Bank of Australia (RBA) will be on hold for the next couple of years.

According to Momentum Media’s James Mitchell: “Bill Evans from Westpac ... thinks that RBA [will have] … no rate increase at all … It's not going to go down, but it's not going to go up.”

Based on historical data of property market cycles, every time Australian property dips, the RBA cuts interest rates before it increases them again, and then lowers the rates once it got too high—and so on. James said that it has already been used as a lever before and it worked effectively, particularly when there was a dip in properties six years ago.

However, the mortgage expert does not expect the bank to do the same thing this year because cutting rates will most likely create problems that might be too much for them to handle at the moment.

He said: “Bill Evans from Westpac … goes, ‘But if [I am] wrong and they do increase … it's going to be a problem because there are people who are already stressed with the level of debt they've got even though it's held up by an appreciating asset [and] they're stressed with servicing that debt.’ ”

“Rates are at record lows. They've never as low as they are now,” James added. 

‘It could only get worse’

A lot of economists are worrying about the neutral rate set by the RBA, which is 3.5 per cent—”200 basis points higher, than where we are now,” James said.

According to him, it has been a bit bearish in the mortgage business particularly because property buyers, holders of the mortgage, and other customers in the market for the past five years have never known rates at normal levels.

He said: “If you've been using that time to pay down debt, that's great. But if you've been using it [for] leverage, then it could be a problem.”

Most people have done well in property over the last five years following the influx of new property investors who are putting positive pressure on prices to go up.

However, due to “record low-interest rates”, investors who used the period to leverage and overextend may start to encounter problems when interest rates hike.

Smart Property Investment’s Phil Tarrant said: “That said, APRA has pulled a lot of levers to persuade, influence, cajole … the banks to say, ‘Slow down on interest-only lending. Under 10 per cent growth, that's all cool, but serviceability ... for borrowers, banks … or lenders are looking at sort of [around] 7 per cent now.’”

“Hopefully, because of the way banks have been looking at borrower's potential to borrow money, they've put enough fat in it so, at [a] certain time, in terms of serviceability, if it does go up to that, that should be okay,” he added.

Investors’ education

Overall, the strong banking system of Australia is expected to withhold any scare tactics put out by the government or the central bank. Recent historical data will show that, essentially, the major banks are “too big to fail”.

Phil said: “One of the reasons we didn't fail during the JFC [Japanese financial crisis] is because of a very, very strong banking system, which was relatively risk-averse.”

Moreover, Momentum Media’s Aleks Vickovich explained: “We had less exposure to the economy and where the problems were. We also had lucrative stores of bulk site nine, or that we would flood into the China east.”

“The point is that the risks that we talk about … I think there's far more risks on the investor themselves than there is in for the banks,” he added.

The government ultimately backs major Australian banks, which are considered as key parts of the country’s economic stability. For this reason, experts advise all investors to take their education seriously in order to avoid making wrong financial decisions even if they essentially don’t have anyone looking out for them.

Many property investment journeys have been derailed over the years simply because of lack of education.

According to James: “Education is so important, and I've learned that through speaking to mortgage brokers and just through speaking to people who've recently bought property in the market.”

“The RBA and APRA [and] all those different bodies have said … ‘Don't get into the illusion that property only goes up. It can go down,’” he concluded. 

 

Tune in to Aleks Vickovich and James Mitchell’s episode on The Smart Property Investment Show to know more about politics, power poverty, rebalancing mortgage books and interest rates, as well as the recent policies by major banks hurting the property market, current monetary policies, and the reasons why there is a disparity in rates.

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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
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Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds
object(stdClass)#1203 (52) {
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  ["title"]=>
  string(38) "From pirouettes to property investment"
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  ["introtext"]=>
  string(381) "

If Mark Hodge’s face looks familiar to you it could be because of his time working as a professional entertainer which saw him working with the Australian ballet, appearing on multiple seasons of Dancing with the Stars and touring in musical theatre for 17 years. What you may not know is that Mark is also heavily involved in the short-term property rental marketspace.

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Mark joins host Phil Tarrant to discuss his transition from entertainer to investor, a journey pushed forward by dance related injuries and even a hit and run which saw him needing to find alternate methods to bring in an income. Mark shares how bad long-term tenants and a gang member guided him to the short-term rental market, and how this pushed him into helping others to realise the same benefits.

Mark will also address the common concerns, discuss what his company Maisonnets specialise in and unpack how they are making the process of filling short term rentals easier for investors.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

The hard-to-swallow truth: The prickly points of the Airbnb reforms
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AREAS MENTIONED:

Melbourne
Sydney
Rushcutters Bay
Maroubra
Potts Point

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From pirouettes to property investment

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