A Case Of Wait And See For Property

Friday, March 01, 2019
A Case Of Wait And See For Property

Written by Hudson Adviser Kris Wrenn

Property prices are certainly fluctuating across the country. According to realestate.com.au the year on year change (to January 19) in median house prices has seen negative growth of between 10% and 13% for most regions of Sydney. Conversely areas such as Ballarat have experienced positive growth of over 7%. What we are NOT seeing a lot of is SALES. Both buyers and sellers seem to be just waiting to see what is going to happen.

This is arguably understandable given the impending general election, especially on account of multiple (potential) proposed changes discussed by the (favourites to win the election) the Labor party – removal of negative gearing for established property, reduction to the capital gains tax discount from 50% to 25%, etc.

Another reason activity may be low is that we are not seeing a lot of “forced sales”. Normally when prices are falling, as they are in Sydney and Melbourne, it’s because there are a lot of people being forced to sell. Falling prices are usually linked to poor economic conditions and rising unemployment levels etc, and this was certainly the case during the GFC. In the current climate however, if anything, we are experiencing the opposite, and Australia currently enjoys a National unemployment level of just 5%.

It could also be argued that forced sales are not occurring due to the historically low interest rate levels, however I would have to refute this one, on the basis that loan sizes are rising and as such the actual cost of paying for a home is rising, and what’s known as “mortgage stress” is very high in some areas. It’s tricky because there’s no technical definition of mortgage stress per se. Historically it’s been considered that if one is paying more than 30% of their income on their mortgage (or rent), then they may enter into mortgage stress territory. We are certainly seeing above this in Sydney, but not so much in areas such as Adelaide. A similar measure used is to consider your house price as a ratio to your income. In the past a general rule of thumb was your house price should be 3 times your annual income. A recent study by Demographia revealed figures in Australia are closer to Times 6 for Brisbane, Times 10 for Melbourne and an unbelievable Times nearly 13 for Sydney. This puts Sydney as the 2nd most expensive city in the world (taking into account income), with Hong Kong in top spot.

So could there be a storm brewing when it comes to property?  As stated, it’s likely going to be a waiting game until at least the election, in order to give buyers and sellers more clarity on political implications. But beyond this? Mortgage stress is very high compared to historic levels. Furthermore, Australian household debt levels compared to disposable income at are historic highs (see appendix  A). Finally, and this may well be a concern you share, many investors are being faced with interest only loans coming to term and having to think about the implications of those loans going to Principle & interest if the banks won’t extend.

If you have any concerns about your Property portfolio and/or your lending arrangements, give Hudson a call and review things with your adviser.

Appendix A



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