That Sinking Feeling
Have you heard the gag about property values? The one that says ‘prices only ever go up’? Well, according to Roy Morgan research, nearly 1 in 10 Australian households certainly aren’t laughing. That’s the number of Aussie mortgage holders who are thought to now have negative equity in their homes.
Negative equity describes the horrible financial scenario where your loan exceeds the value of your property, meaning that if you were to sell, you’d have to chip in money in order to move on. The combination of negative equity and negative cashflow (that is, when the expenses are higher than the rental income) is usually a precursor to a devastating financial outcome.
The graph below shows how the situation has deteriorated in the past twelve months and reveals that every state except Queensland is now experiencing more situations of negative equity than last year, with WA and SA leading the charge.
Source: Roy Morgan
First homebuyers are thought to be most at risk; mainly those that borrowed aggressively to get into the market and had only a small amount of ‘equity’ at the time of purchase. Whatever margin they had has since been gobbled up by values falling faster than their mortgage balance.
You probably saw that the opposition Liberal Party was smashed in the Victorian State election, suffering a defeat thought to be amongst its worst in the past 74 years. The Federal Government, which is now being overseen by a minority Liberal government, is surely living on borrowed time.
Federal Labor, now almost certain to win the next Federal election in a landslide, have policies pertaining to negative gearing and the wind-back of the capital gains tax discount.
If you thought they might change their opinion in the midst of falling property prices, think again. Backed by a paper titled Levelling the Playing Field – The Economic Case For Reforming Negative Gearing the think-tank that provided Labor with its basis for changing the negative gearing rules concluded that, despite recent property value declines:
After considering the facts, this report concludes that the policy is still the most appropriate approach to reforming negative gearing. It will level the playing field between owner-occupiers and investors, bolster financial stability, improve the budget bottom line, and encourage new construction.
Hope On The Horizon?
With the property market flat lining, who (or what) will be our saviour?
The REIA is calling for urgent ‘property CPR’ in the form of winding back the laws and fees that are currently a disincentive to foreign buyers purchasing real estate. The REIA believes we need to coax them back in order to breathe new life into the flagging property market. Times, and commissions, must be grim!
It won’t be the findings of the Royal Commission into bad banking behaviour. ANZ Chief Exec Shayne Elliott recently conceded that the maximum amount banks would lend an average household for a mortgage had fallen by about $110,000 or 20 percent in the last three years. Reduced borrowing capacity equals less money available to purchase property, which equals downward pressure on property prices.
One lesson we can learn from what happened in the US is that when liquidity froze, as it did in 2007, it took years to thaw. We ought to expect harder lending conditions for at least 12 months, and realistically quite a lot longer than that, from when the Royal Commission hands down its findings in February 2019.
Is There Any Christmas Cheer?
Perhaps the one bright spot on what might otherwise be a miserable Christmas for property investors is the announcement that Rio are going ahead with a new $3.5b mine in WA. This will stimulate WA jobs, not only at the mine, but also with respect to trickle down industries such as contractors, consultants, etc. Oh happy days! Viva la Perth!
What’s Ahead For 2019?
As I said back in my market update earlier in the year, if I was a risk averse investor looking for medium term generic gains (i.e. market appreciation), I’d focus on Brisbane, then Adelaide, then Perth. Melbourne and Sydney are off the list for the short term. Hobart is running too hot for me to want to take that risk. Here’s some guidance on what to target, and why:
If you are looking to invest, then remember that, in order to make money from capital appreciation, someone will have to pay you more for it tomorrow then you are paying today.
Target areas where you have sufficient deposit and borrowing ability to buy, without placing yourself in excessive financial stress.
- Houses, not homes
Buy the ugliest house, in the best street, as close to town or a train station that you can afford. Later add value by turning the house into a home.
Buy where there are features or amenities that are not valued highly today, but will be appealing tomorrow. Examples include new roads, planned train stations, job opportunities, proximity to amenities, etc.
As this is my last article for 2018, let me finish up by saying that I truly hope that you and your loved ones experience a peaceful blessed Christmas, and a happy New Year. See you in 2019.
– Steve McKnight
P.S. Remember that if you’d like to hear from me more often then be sure to connect with me at PropertyInvesting.com’s Facebook page. I regularly post links to interesting articles and provide my thoughts and comments on newsworthy things I see.