Aus Royal Commission To Shrink Blue Chip Property Sales
The Royal Commission into Financial Services [RC] is a game changer for Australian real estate. Blue chip properties, affordable properties, and all inbetween stand to be impacted. For anyone looking to understand Aussie real estate as it exists today, it’s vital to understand this.
Index results as at 31, May 2018 Source: Corelogic
Right now Australia’s property market is in a great period of change and uncertainty. In a nation with over 25 million people spread across 8 states and territories, rarely would such a general statement make sense. After all, Australia is not just one property market, but many of them.
Then there’s ‘markets in markets’. Just because one area of a major city isn’t performing strong, doesn’t mean the whole city is in a slow down. Yep, usually there is a lot of nuance when talking Aussie property. Even if one state does something like remove stamp duty for first home buyers buying homes under $600,000, other parts of the country might not change at all.
This time it’s different. The RC is at heart a national investigation into the Aus finance industry.
Established in December 2017, the months since have seen revelation after revelation surrounding misconduct among banks, mortgage brokers, and other financiers.
There’s no suggestion everyone is a bad apple in this field. But because of the bad apples exposed, there’s going to be some major changes ahead in the way home loans are assessed.
The Commonwealth Bank, ANZ, Westpac, and NAB – AKA ‘The Big Four’ – alongside other lenders – have indicated they will tighten up their lending practices.
So, what does this mean for the future of home loans in Australia? More importantly, what might it mean to an everyday Aussie looking to buy a home soon? Let’s look now in-depth.
Aussie Property as It Exists Today
Right now there are three really key market segments in Australian property. There are other groups beyond these three, but these are the major ones. The groups most likely to be putting in bids on auction day.
1) Aussie First Home Buyers
2) Local Investors and Developers
3) The Foreign Buyers and Investors
Each of these have many sub categories. Local investors could be a mid-40’s mum and dad looking to pick up a unit so their toddler has a head start in life once they turn 18. A developer group that earns millions a year could also be in this category. Or it could be someone in the middle, a investor looking here and now at property as a path to securing their financial freedom.
The same rule applies with first home buyers. Most will be younger Australians but some will be older, and keen to finally buy in. Foreign buyers and investors make up a very diverse group too.
They may be a citizen of another country who has never set foot in Australia. They could also be a foreign trust buying a home to house staff locally in a business, or even a cashed up uni student who is residing here on a student visa. Whatever their background, the core takeaway here is that the market is very diverse, and usually it balances these groups.
After all, each of these groups are in competition with one another, and so it’s no surprise that one will come to the fore if another steps back. For example, if foreign investment dries up due to some economic crisis abroad, local first home buyers will swoop. If first home buyers are timid right now because of a local issue, foreign investors may be willing to bet long-term and buy up.
Many believe the Australian property market operates best with a 2/3rds balance between local and foreign buyers, in the favour of Australians. Its true many Aussies struggling to buy a first home may be peevish at the idea of any foreign buyers in the market, but if all foreign capital was withdrawn it could be calamitous. Market stability means a mix of groups and property types.
That’s why the changes to come via the RC are a big deal.
What the Royal Commission Has Shown Us
Around the world Australia is praised for the stability of its economy, and housing is at the heart of it. We have never had a major property bubble burst like has been seen overseas. In fact, since the early 1990’s Australia has enjoyed a long-term period of continued economic growth.
In fact, while the GFC was tearing up the U.S. and Europe, Australia largely sailed through it.
They don’t call us the lucky country for nothing. Yet for years now murmurs existed around our finance sector. While we got through in 2008, in 2018 it’s clear the glory times are over.
Though the final report of the RC is not due out to February 1 of 2019 – pencil in that date as a blockbuster for finance news! – already a number of lenders have indicated they will place tighter restrictions on lending. The centrepiece of this is the law that requires lenders to make “reasonable enquiries” to confirm a applicant’s financial position, and that they can repay a loan.
The RC has shown many lenders were not doing their due diligence. In order to avoid a return visit and a (in some cases follow up) public shellacking, lenders are now expected to reduce the amount they are willing to lend to a home loan applicant. They will also make more detailed enquiries into the capacity of an applicant to repay a loan.
Already some of the new questions lenders will be asking entry level applicants (like first home buyers) are out, and they are pretty bad. If you are applying for a home loan now, it’s best you’re prepared to explain your Netflix use, commute to work costs, and even any money you spend getting Jim’s Mowing to come around on the weekend and cut your grass.
This is going to have some impact the lower end of the market. Many people who a year or two ago may have gotten a home loan right away could now face a knock back. Once they cut the Netflix and grab a lawn mower at Bunnings, they might get approved on the second try. But really, the biggest impact of these changes is not going to be seen at the entry level, but high up.
What It Means for Blue Chip Real Estate
While many Aussies have a plan to ‘one day’ get to a beach front property in Bondi, few first home buyers are going to be lining up to bid for a bluechip beachfront around the Junction. It’s here in the blue chip sector that investors run the show. It’s their activity and confidence that drives the rest of the market. If they don’t buy, a ‘knock on’ slow down effect can happen.
Lenders may not be fussed confirming a multi millionaire applicant is getting value for money from his gym membership. But they will now examine more critically the capacity of high net worth applicants to repay their loan. Many will clear this bar, especially because APRA recently removed the 10% cap on investor loan growth, which could negate a lot of new hurdles post-RC.
But others won’t. The reasons will vary, but it will result in the same outcome for all involved: fewer loans for investors seeking to buy blue chip properties. The implications of this should be clear to anybody who has ever been short $2 when paying for a large Happy Meal at Maccas.
You don’t just take your cash and put it back, you just downsize what you’re going to buy!
So where will these investors turn when they are unable to get financing for blue chip properties?
That’s right; to properties at the lower end of the market. The up and comers, the affordable bargains. Sure, they will also go strong in the middle. The exact areas these former blue chip investors will land in is not yet clear.
But it is clear they will be on the move. From a policy point of view this has real implications, especially for anyone seeking to make some inroads against the issue of housing affordability in Australia. Yes, lenders should lend responsibly, but ultimately property has some level of risk like any other investment.
If the ability for big hitting investors to get financing and have a crack at blue chip property eroded, then it could grow the pain on first home buyers in the market. Instead of already fierce competition in the market, these changes could really send it into hyperdrive. Especially as the hotter the market gets, the more people race in to buy early, whether investor or first home buyer.
For anyone thinking ‘oh as if, these speculators will just wait around for things to change again’, it must be remembered that foreign investors will still be able to get financing overseas. Blue chip will still be brought, just not by locals. This won’t help the housing affordability issue an inch.
What It Means for You as an Investor?
For many people looking to break into the market there’s the temptation to celebrate here a little. That’s understandable. Many who grew up in a regular suburb of an Aussie city today find when the time comes they can barely afford to buy a home in the whole city! But ultimately property is central to the Aus economy, so any crash here is bad not only for real estate but every sector.
What I want you to really understand here is two things. Yes, there are some significant changes coming to due to the RC, and this will have an impact on an investor’s strategy in the near term, within certain parts of the market. That’s point number one, point number two is that all these changes must be kept in context – they are significant – but they are also just one change.
Look beyond any glitzy magazines and slick YouTube videos and you’ll find real experienced heads in this field will all tell you the same thing: investing in property in a long, long process. I’m never afraid to mention this – I want everyone to read me and everyone is welcome to! – but I won’t spin things for you. Anyone wanting overnight success should try grabbing a lotto ticket.
The changes we are seeing here need to be recognised in this context. It’s a lot like a speedboat and a cruise ship on the ocean. A sudden change in tides can wreak havoc on a speedboat, but a cruise ship is big, strong, and steady. You have to approach your portfolio like it’s a cruise ship, it isn’t an agile as a speedboat, and once or twice you may regret you didn’t move faster.
But overall, a cruise ship is worth way more, can carry more, and will go the distance. Invariably, property values will rise over the long term in Australia, and buying affordable property is a great way to harness this growth without exposing a portfolio to unacceptable risk. Build a portfolio like a cruise ship, and even if it takes longer and is a little slower, it’ll withstand the waves that come.
Charting Your Course
Reading about this may leave you feeling like your journey to buying property just got harder. Much less rentvesting, or building up a portfolio of multiple properties. I understand this, because it’s true no journey in this space is ever easy. It doesn’t happen overnight, but takes time.
But what is important to know is that it’s not hopeless. Not now, and not ever. The changes we are set to see here will pose a new challenge to everyday Aussies seeking to land a property.
Yet these challenges can be overcome.
What these challenges require most of all is resolve. Every property investor knows the market will be turbulent at times. But truly successful investors know if they have a good strong plan, and have taken the time to get it right, then they can overcome any hurdles placed in their path.
After all, a speed boat might get battered by the waves – but a cruise ship powers through them.
