Borrowing Is A Scarce Resource, Use It Wisely.
This is the final installment of a 4 part series on what the experts we’ve interviewed on The Elephant in the Room property podcast think is really going to happen in 2019.
In the first two parts of this article, we reflected on varying market conditions and expected growth areas for 2019. We also looked at how quality property performs very differently from the rest. Now we’ll cover how to best take advantage of current market conditions by understanding the impact on borrowing.
Investors caused the boom, the credit crunch killed it.
Easy lending practises fuelled an investor boom and now APRA restrictions have had their desired impact of taking the heat out of the investor market overall. The flow-on effect of the Royal Commission into Banking has meant that for the past 18 months owner-occupiers have also felt the credit squeeze. So that’s impacting demand.
Yet even though consumer sentiment is taking a beating, anecdotal evidence from mortgage brokers shows there are plenty of people willing to buy property. They are having trouble getting access to finance and even people who are deemed low credit risks are having to jump through hoops. The feeling “on the ground” is that this will have to ease soon, at some stage the pendulum will swing back and some level or normality will return. But some changes to lending practices are expected to stay.
The big difference that property buyers need to get used to is having their spending scrutinised. My co-host, Chris Bates, is a mortgage broker and he’s put together a guide for how to prepare before submitting a loan application and explained the steps in detail in episode 48.
1. Get your documents:
a. Prove WHO you are
b. Prove what you EARN
c. Prove what you OWN
d. Prove what you OWE
e. Prove what you SPEND
2. Go debt free - reduce your credit card limit, don’t use store credit.
3. Be good with spending - show 3 months evidence.
4. Build up as much saving as you can.
5. Make sure your income story is solid - if you have been out of work for any period of time explain why and demonstrate that there is no future risk.
6. Use a broker to pick the right lender for you - the interest rate matters only if everyone will lend you the money.
There’s always speculation around when rates will go up and it’s also part of the big fearful commentary around “what if”. We talked about “jawboning” with Steve Koukoulas, “The Kouk” in episode 43 and how the Reserve Bank will use this to quell consumer sentiment.
“One of the last things that they'd want to see is a rebound in house prices. So at the moment, they are quite comfortable with falling house price. We've seen Reserve Bank Governor Philip Lowe and other officials saying that after there's such a big run-up in prices… a five or 10% fall's neither here nor there.
“They wouldn't want to see the discussion being, ""Oh lower interest rates"" so that people, when they go to the next auction, say, 'Well, I'm currently paying about 4%, but if there's a rate cut, I'm gonna pay three and a half. So I'll bid an extra 20 grand, 30 grand, 40 grand on the house.'”
The Kouk doesn’t think that interest rates will rise in 2019 and someone else with decades of experience and a real macro understanding, Frank Gelber, discussed this with us in episode 37.
“I don't think interest rates, at least from the reserve bank, are going to rise any time soon. Because the economy's soft. Actually, the residential downturn will keep the economy soft for another 2-3 years before we start to get stronger growth coming through early next decade.”
Towards the end of 2018, we started to see media reports indicating that official rates might, in fact, come down by the end of 2019. At least, for the time being, we may be able to expect stability in one aspect of the property market.
Nevertheless, even if prices fall and interest rates rise, we’ve heard time and time again that investing in property needs to be done with a long term focus. Short term thinking results in poor decisions and we exhort all of our readers and listeners to take their time to select quality assets. We interviewed financial planner and author of “Investopoly”, Stuart Weymss in episode 39 and to paraphrase him, there’s never a bad time to buy a quality property and never a bad time to sell a poor asset.
Bring on 2019 - for many property buyers, this is exactly what you’ve been waiting for.