The link between lending and property; what’s in store for 2023?

The link between lending and property; what’s in store for 2023?

The correlation between lending approvals and property prices has long been established as providing a 4-6 month ‘crystal ball’ into future property prices. The relationship can be clearly seen in the following chart which plots each data series over the past 20 years.

 

The correlation between lending approvals and property prices has long been established with loan approvals generally providing a 4-6 month ‘crystal ball’ into future property prices. The relationship can be clearly seen in the following chart which plots each data series over the past 20 years. Source: ANZ      Property prices declining Let’s first establish where the property market currently sits. CoreLogic’s national Home Value Index (HVI) fell for the sixth consecutive month, as values across the nation retreated a further -1.2% in October. Annual declines are currently isolated to Sydney, Melbourne and Hobart yet there is some evidence the rate of decline is now gathering pace in the other capital cities, especially Brisbane.    Source: CoreLogic It was not only the capital cities which experienced the pullback. CoreLogic’s Regional Market Update showed residential property values in six of the twenty-five most popular lifestyle markets recorded falls of 6% or more last quarter. This included Richmond-Tweed (-11.7%), Southern Highlands and Shoalhaven (-7.1%), Sunshine Coast (-7.1%), Gold Coast (-6.4%), Illawarra (-6.1%) and Newcastle and Lake Macquarie (-6.0%). From September 2020 to April 2022, national house values rose 32.5%, while unit values rose by a milder 16.1% over the same period. Since peaking in April, house values are now reversing at a more rapid rate, falling -5.3%, while values across the medium to high-density sector have declined by a more moderate -3.0%.  How does borrowing capacity affect overall lending? The amount a bank will lend a prospective borrower is largely determined by two factors; interest rates and credit policy. In 2019, in response to the pandemic, The Reserve Bank of Australia (RBA) quickly cut its official interest rate to 0.1%. At the same time the banking regulator, APRA, removed the minimum 7.25% interest rate required to be used when banks assess the serviceability of a loan. In a short space of time borrowers had access to much higher levels of debt and overall lending accelerated to all-time highs. Since May, the RBA has raised the official interest rate by 2.75%. To put this in perspective, a joint household with disposable income of $150,000 and expenses in line with the Household Expenditure Measure (HEM) has had their borrowing capacity lowered by 20-25%. To further add to the tightening, the buffer used for the assessment of a loan has been increased from 2.5 to 3.0% above the offered rate.   What does the current lending data tell us? Whilst borrowing capacity is not an exclusive influence on overall lending, The Australian Bureau of Statistics’ September Lending Indicator’s report show that the value of new borrower loan commitments has fallen 18.5% over the first three quarters of this year, with owner-occupier loans contributing most to the decline. These falls are notably more than that seen in property prices over the same period.    Source: Australian Bureau of Statistics, Lending Indicators September 2022    Source: Australian Bureau of Statistics, Lending Indicators September 2022 During September 2022, in seasonally adjusted terms for owner-occupier housing loan commitments, largest falls were recorded in the Northern Territory (25.2%), Queensland (13.8%) and Western Australia (13.2%) further reinforcing that the softening is now spreading outside of the two largest markets of Sydney and Melbourne.   Source: Australian Bureau of Statistics, Lending Indicators September 2022  Investor lending also saw declines, however not to the degree of owner-occupied commitments. Tasmania led the way with a 26.6% decline followed by the ACT (12.2%) and Western Australia (8.7%). This goes some way to partly explaining the more modest declines in units versus house values across the nation.    Source: Australian Bureau of Statistics, Lending Indicators September 2022  Crash or correction? With overall property values now 6% lower than their peak and an aggressive interest rate tightening cycle, many commentators warn that a housing market crash is imminent.  For a property market to

Source: ANZ


Property prices declining

Let’s first establish where the property market currently sits.

CoreLogic’s national Home Value Index (HVI) fell for the sixth consecutive month, as values across the nation retreated a further -1.2% in October. Annual declines are currently isolated to Sydney, Melbourne and Hobart yet there is some evidence the rate of decline is now gathering pace in the other capital cities, especially Brisbane.

 

Core logic change in swelling values

Source: CoreLogic

 

It was not only the capital cities which experienced the pullback. CoreLogic’s Regional Market Update showed residential property values in six of the twenty-five most popular lifestyle markets recorded falls of 6% or more last quarter. This included Richmond-Tweed (-11.7%), Southern Highlands and Shoalhaven (-7.1%), Sunshine Coast (-7.1%), Gold Coast (-6.4%), Illawarra (-6.1%) and Newcastle and Lake Macquarie (-6.0%).

From September 2020 to April 2022, national house values rose 32.5%, while unit values rose by a milder 16.1% over the same period. Since peaking in April, house values are now reversing at a more rapid rate, falling -5.3%, while values across the medium to high-density sector have declined by a more moderate -3.0%.

 

How does borrowing capacity affect overall lending?

The amount a bank will lend a prospective borrower is largely determined by two factors; interest rates and credit policy. In 2019, in response to the pandemic, The Reserve Bank of Australia (RBA) quickly cut its official interest rate to 0.1%. At the same time the banking regulator, APRA, removed the minimum 7.25% interest rate required to be used when banks assess the serviceability of a loan. In a short space of time borrowers had access to much higher levels of debt and overall lending accelerated to all-time highs.

Since May, the RBA has raised the official interest rate by 2.75%. To put this in perspective, a joint household with disposable income of $150,000 and expenses in line with the Household Expenditure Measure (HEM) has had their borrowing capacity lowered by 20-25%. To further add to the tightening, the buffer used for the assessment of a loan has been increased from 2.5 to 3.0% above the offered rate.

 

What does the current lending data tell us?

Whilst borrowing capacity is not an exclusive influence on overall lending, The Australian Bureau of Statistics’ September Lending Indicator’s report show that the value of new borrower loan commitments has fallen 18.5% over the first three quarters of this year, with owner-occupier loans contributing most to the decline. These falls are notably more than that seen in property prices over the same period.

 

Lending indicators

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

new loan commitments

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

During September 2022, in seasonally adjusted terms for owner-occupier housing loan commitments, largest falls were recorded in the Northern Territory (25.2%), Queensland (13.8%) and Western Australia (13.2%) further reinforcing that the softening is now spreading outside of the two largest markets of Sydney and Melbourne.

 

new loan commitments owner occupier

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

Investor lending also saw declines, however not to the degree of owner-occupied commitments. Tasmania led the way with a 26.6% decline followed by the ACT (12.2%) and Western Australia (8.7%). This goes some way to explaining the more modest declines in units versus house values across the nation.

 

new loan commitment investor housing

Source: Australian Bureau of Statistics, Lending Indicators September 2022

 

Crash or correction?

With overall property values now 6% lower than their peak and an aggressive interest rate tightening cycle, many commentators warn that a housing market crash is imminent.

For a property market to “crash” a large number of owners are forced to sell into a falling market, with limited buyers, as they can no longer afford to make their mortgage repayments. The rate of delinquency loans, or loans in arrears for more than 30+ days, is a key metric in predicting a crash.

The latest data released by Fitch Ratings, show mortgages that are 30 and 90 days in arrears were down by 0.07% to 0.82% and 0.04% to 0.4% respectively for the 3 months to June 30 – the lowest level since tracking began in 2002. As more recent data is released, delinquency rates will be something to watch as the aggressive tightening cycle further filters through to the broader economy.

 

What will 2023 bring?

The value of new lending will be largely dependent on where the RBA take interest rates over the next year, however, if lending continues to act as a precursor for property, we can expect house prices will continue to ease at least throughout the first half of 2023.

If you’d like to discuss your specific circumstances, or simply interested in what lending options are available, please do get in touch.

To fix or not to fix

To fix or not to fix

The variable versus fixed mortgage rate decision will affect a homeowner for years to come and could be the difference in thousands of dollars of accrued interest. 

At its May meeting, the Reserve Bank of Australia acted to curb soaring inflation by raising the official cash rate by 0.25%. With Governor Lowe warning that this is expected to be the first of many rate hikes over the next 12-18 months, many are wondering if they should fix their home loan to safeguard against rising rates. The right answer depends on your unique situation and tolerance for risk. 

Let’s start by looking at the advantages and disadvantages of each.

Variable rate loans

Advantages
  • The main advantage is flexibility.
  • Unlimited extra repayments which will help you pay your loan off sooner.
  • It takes advantage when interest rates are decreasing by lowering interest repayments.
  • Allows you to refinance or restructure your loan at any time, for example, by accessing excess equity for renovations.
  • Variable home loans generally come with more features such as a redraw facility or offset account.
Disadvantages
  • When interest rates rise, so too do your repayments.
  • As interest rates can change at any stage you lack a level of certainty over what your repayments will be in the future. This can make detailed budgeting quite challenging.

Fixed rate loans

Advantages
  • The main advantage is payment certainty, allowing you to budget your repayments for the foreseeable future. This leads to a greater sense of financial security.
  • Your interest repayments will be lower if, during the term, the variable rises above the fixed rate.
Disadvantages
  • Most fixed rates limit extra repayments to around $5,000 per year therefore if you benefit from a lump sum of cash, like an inheritance or bonus, you cannot place this directly onto the loan without penalty.
  • You do not benefit when interest rates go down during the term of the fixed loan.
  • There are penalties for breaking a fixed rate before maturity which makes restructuring or refinancing to another lender much more expensive. These penalties also apply if you sell your property within the fixed rate term.
  • Fixed rates generally do not come with additional features such as a redraw facility or an offset account.

As you can see, there is a lot more to consider than simply a bet on where interest rates are heading.

After considering these characteristics, if the certainty of fixed rate repayments is still appealing you should then consider whether you will likely be better off with the fixed rates on offer.

A common misconception is that if the variable interest rate rises higher than the fixed rate over the term of the loan then you will pay less interest. Of course, there are periods during the term when the variable rate will be lower so you must instead consider the average rate over the term. Take an example where a rate was fixed 1% above the current variable rate for a period of 2 years. After 1 year the variable rate had steadily risen to meet the fixed. To break even, the variable would need to continue to rise another 1% (approx.) over the final year of the term. When calculating the exact breakeven point, you must also consider the timing of the rate rises and that the loan balance may steadily decrease over the term.

The calculations in the table above are based on a 30 year $800,000 loan with monthly principal and interest repayments.

Hedge your bets

Often borrowers are drawn towards the certainty of fixed repayments but do not want the additional payment restrictions that come with it. By splitting the loan, you can essentially enjoy the benefits of both. To calculate the variable split, you should consider how many extra repayments you are likely to make over the term of the fixed rate as well as how much your balance will reduce by your regular payments. A good mortgage broker can help you with this calculation. You may also consider an even split if you are undecided which rate will work best for you.

 

If you’d like to discuss your specific circumstances, or simply interested in what fixed rates are available, please do get in touch.

4 new super contribution opportunities

4 new super contribution opportunities

For older Australians, it has been more difficult to build up their superannuation balances. Once you are 67 years of age, there is a requirement to meet a ‘work test’ in order to continue to contribute. This work test forced you to work 40 hours over 30 consecutive days in order for you to make a lump sum contribution (known as a non-concessional contribution) of up to $110,000.

With these restrictions, it was important to carefully plan your superannuation strategy from a younger age.

However, the Federal Government sought to amend these restrictions.

May 2021 Federal Budget

In the May 2021 Federal Budget, the government announced a number of initiatives to assist Australians in building up their superannuation.

These included:

  • Removal of $450 monthly income threshold for super contributions.
  • Reduction in age to 60 for the downsizer contributions.
  • Removal of the work test for people aged 67-74.

It also increased the withdrawal limit for First Home Super Saver Scheme (FHSS).

Legislation has now passed both houses of parliament and will apply form 1 July 2022.

4 new super contribution opportunities

Removal of $450 monthly income threshold

The government has finally scrapped the $450 superannuation guarantee threshold. This should make approximately 300,000 people eligible for super contributions from 1 July 2022.

Lower Age for ‘Downsizer’ contributions

In selling the family home, couples have the ability to contribute $300,000 each into superannuation as a personal contribution. The age for this contribution was 65, however, it has been lowered to 60. As of May 2021, 22,000 Australians have taken advantage of this opportunity to boost their retirement balances. It should also be noted that these contributions are not restricted by the $1.7m transfer balance cap.

The lowering of age to 60 will come into effect from 1 July 2022.

First Home Super Save increased capacity

This is a great opportunity for couples who are saving for their first home. This scheme allows people to make voluntary contributions to superannuation to save for this purchase. The current caps on these contributions are $15,000 a year and $30,000 in total.

However, it has been passed to allow voluntary contributions (both post tax or through salary sacrifice) up to $50,000 in total.

So a couple will have access to $100,000. It’s important to remember compulsory employer contributions are excluded. Only voluntary contributions may be withdrawn.

This will commence from 1 July 2022.

Removal of work test for 67-74 year olds

The most significant superannuation opportunity announced in the May 2021 Federal Budget was to allow 67-74 year olds to make a personal contribution to superannuation without meeting the current work test. This has now been passed and will come into affect on 1 July 2022.

However, not only will older Australians be able to make a personal contribution of $110,000 pa, but they will also be able to take advantage of the bring forward rule and contribute $330,000 as a lump sum.

Open banking: What this means for you and your data

Open banking: What this means for you and your data

Open banking is widely regarded as the most significant change in the retail banking landscape for decades but many of us have never heard of it. So what is it and how does it affect me?

Whilst the term originated from Europe, Australia passed the Consumer Data Right (CDR) legislation in August 2019 which gave consumers exclusive right to their own data and enabled them to choose whether to share it with third parties. In the following years the banks and other lenders were forced to securely share some of their banking data with other accredited data recipients (ADR). The types of data include details of home loans, investment loans, personal loans, transaction accounts, closed accounts, direct debits and scheduled payments, as well as payee data. It’s important to reiterate that this data cannot be shared without the consent of the customer.

So how does this change things?

By ensuring that consumers have exclusive right to their own data, according to the Australian Banking Association (ABA), benefits to customers will include;

  • Streamlining the application process for certain financial products
  • Saving significant time and administration when switching from one bank to another
  • The availability of more products tailored to your particular financial circumstances

The changes are aimed to promote more competition within the financial services industry providing smaller tech based emerging companies the data to efficiently design products that better suit their customers. Imagine applying for a loan or credit card where, in a few clicks, your savings and credit data is used to immediately approve your application and determine the rate you are offered. There is no need to provide any supporting documents and the lengthy processing delays which have hampered the industry for years are a thing of the past.

How secure is my data?

To receive and share your data an ADR must become accredited by the Australian Competition and Consumer Commission (ACCC) to ensure they have the required level of security and data privacy settings. This process can take as long as 4-6 months and involves significant upfront and ongoing legal and labor costs. For a long time the cost of accreditation, and ongoing regulatory maintenance, was seen as a barrier for smaller companies to access the data. To overcome this, last year the Australian government approved a representative model which will come into effect this month.

As mentioned earlier consumers will need to provide consent for ADRs to access their data and the information will be deleted or de-identified after a maximum of 12 months unless permission is once again granted. You can also withdraw your consent at any time and your data must be deleted immediately. Each company that you grant permission should always provide you with the following information:

  • What information you’re sharing and how it will be used
  • Who will have access to your data
  • How long they’ll have access to your data for
  • How you can manage and withdraw consents

When will I see the benefits of this?

The type of data available has been rolled out in phases since July 2020 but open banking is still considered to be in it’s infancy.

An important milestone will occur this month when joint accounts are brought under the scope of CDR. As you can imagine this represents a huge change for the mortgage industry where a significant proportion of loans are held in joint names.

From November 2022 energy companies will also need to provide customers with access to their usage and connection data. This will kickstart a future where comparing energy providers based specifically on your usage can be performed at the click of a button. It also gives future providers the opportunity to tailor your energy charges specifically for you.

As the number of data sources increase the consumer will progressively see the benefit but until then, with many data sources such as superannuation and investment accounts still unavailable, companies utilising the data will typically operate under a hybrid model combining open banking and traditional sources of information.

What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.