In particular we focus on getting the loan structure right the first time, choosing which lenders to use in the right order (yes this is important) and finally getting our clients the best deal possible.
What’s happening to house prices in Sydney?
Marty McDonald
As we all know the Sydney property market has experienced rapid capital growth over the last 5 years and in percentage terms is up by about 90% so a small pull back is to be expected at some point but I’m more interested in what is causing the pull back in prices. I think it’s a combination of general market fatigue (after such a long bull run), lack of new foreign capital and the biggest contributor in my opinion is APRA’s latest actions.
I anticipate a slight strengthening of the Sydney market again next year (from mid-year) as borrowers adjust to the new APRA regime (more on this below). The simple fact that there isn’t enough free-standing housing for the growing population can’t be overlooked. I also cannot see interest rates rising any time soon with anaemic wage growth and low inflation. That all said I think we are looking at a few years of steady as she goes and for investors there may be better opportunities elsewhere (see below).
In regard to APRA (the prudential regulator for banks) they have over time limited growth in investor lending, improved underwriting standards in general and decreased the amount of new and existing interest only lending in the system.
We feel the interest only changes have had the most significant impact on the Sydney property market. As borrowers were incentivised (in some cases forced) to take principal and interest loans the amount of debt that they could service (in the real world and not in banks servicing calculator) was reduced. This has had a flow on effect to the property market and we believe other areas of the economy as simply put borrowers had less money available to spend. We also believe it has resulted in a significant culture shift in borrowers, brokers and lenders with all parties focusing more on the debt and how it must be repaid over time. The days of never ending interest only loans are over.
We also noted that retail spending figures virtually fell off a cliff the month after these changes to interest only loans were implemented by lenders. Many borrowers seeing the banks raise rates for interest only loans decided to switch them to “cheaper” principal and interest loans to get a better interest rate. This significantly increased their repayments sucking a large chuck of cash out of the economy.
Typical Sydney loan - Principal & Interests versus Interest Only repayments comparison.
• $700,000 loan @ 4.85% pa interest only = $2829 / month
• $700,000 loan @ 4.05% pa principal and interest over 25 years = $3714 / month.
• Difference in cash flow = $10,620 pa more if P&I repayments.
• Difference in interest paid in year 1 = $5904 pa less if P&I and increasing each year.
Investment Property – Where to Consider
It could be a good time to consider buying in regional lifestyle coastal areas with decent infrastructure such as Ballina, Coffs Harbour, Noosa and possibly Yamba. All will be underpinned by migration of both young people who can’t afford Sydney and Melbourne but who have transportable skills and older people moving out of Sydney and Melbourne to retire. In the past these types of areas have benefited at the end of a cycles in Sydney / Melbourne.
In Ballina the median price average has grown by 18.89% in the last year. This has no doubt been affected by its neighbour Byron Bay which has had a median house price rise of a whopping 37.61% in the last 12 months. Coffs has had a median property value has risen by only 6.47% in the last 12 months. Yamba could be worth looking at as has only risen by 3.09% in the last 12 months and shares a lot of the same attributes as Byron once did. These are of course only suggestions please do your own research.
About the Author: Marty McDonald is principal of mortgage broker “Mortgage
Experts”. Marty specialises in assisting active property investors with loan structuring advice and
implementation as well as helping credit worthy borrowers with slightly outside the box income and employment
situations. Find Marty on
Facebook and
LinkedIn.
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