Homebuyers will be disappointed in the Reserve Bank of Australia’s decision to leave the official cash rate unchanged again, after a tough few months in the market.

Real Estate Institute of SA President, Mr Greg Moulton, said that there is a real sense from buyers that rates need to drop.

“REISA members are seeing people at opens, but they are hesitant about making that final move to sign a contract and buy.  Interest rates do seem to be a little high at the moment which is stalling the market.”

“Last month, there was a sense of anticipation that rates would fall, but there hasn’t been a movement in 2012 yet and there is also concern that some lenders won’t follow the RBA’s lead if a change to the cash rate is made.”

Mr Moulton said that interest rates were top of mind when buyers were making the decision on whether to make a move and they can’t be ignored in the home affordability debate.

“Autumn is usually a relatively busy time for sales, but this year, REISA members are reporting that they are finding the market flat and people are sitting and waiting to see what happens in the economy in the coming months,” he said.

“We can see that people are finding it tough – we are not seeing the first homebuyers in the market in high numbers and investors are being very cautious.”

Commenting on the outlook for 2012, Mr Moulton said that South Australia was well placed to pick up fairly quickly if job confidence irises and finance conditions improve.

“Access to lending at a competitive price will drive the market forward and we hope that the RBA will consider dropping the official cash rate in the coming months,” Mr Moulton said.
Media comment – REISA President – Greg Moulton – 0418 661 888

Background information – Emma Slape – 0423 88 11 20

INTEREST RATES

From The Sydney Morning Herald’s Chris Zappone

Although most economists still forecast a Reserve Bank interest rate rise this year, markets are pricing in a cut in the official rate, which in turn has led lenders to lower their fixed mortgage rates.

Government bond yields in the US, Germany and Australia have been sinking in the past six months as investors, eyeing the ongoing disruptions in the euro zone, fear a halt to the already fragile recovery in the global economy.

Australia’s banks borrow and lend at a margin above government fixed rates. With the bond yields dropping, fixed interest rates on mortgages have fallen as well, presenting an opportunity for mortgage borrowers in the current market.

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Just 50,287 mortgages were granted to owner-occupiers in February, down by a seasonally-adjusted 1.8 per cent compared to January, the fifth consecutive month of decline, Australian Bureau of Statistics data shows.

Economists’ forecasts had centred on 1 per cent fall in February home loan commitments.

In trend terms – which the ABS says is a more reliable indicator of underlying movement in the data – the total value of dwelling finance commitments excluding alterations and additions decreased 2.1 per cent in February.

The trend for owner-occupier housing commitments fell by 3.1 per cent, while investment housing commitments increased 0.4 per cent, the ABS said.

Last year’s three interest rate rises and an end to the Federal Government’s more generous first homebuyer grant at the end of 2009 were blamed for the steady drop-off in mortgage demand.

The Reserve Bank of Australia has since raised the cash rate twice this year, the most recent being at last week’s monthly board meeting that took the cash rate to 4.25 per cent and 125 basis points above its 2009 trough.

First homebuyers made up 18.1 per cent of loans granted in February compared to 20.5 per cent in January, and down from a record high of 28.5 per cent in May 2009.

Source: http://www.adelaidenow.com.au/news/breaking-news/fed-demand-for-home-loans-falls-for-fifth-straight-month/story-e6frea7c-1225852690128

Resi Mortgage Corporation head of consumer advocacy Lisa Montgomery says many people are unaware of the types of insurance policies that can help pay the mortgage if you lose your job or can’t work because you are ill or injured.

“When you’re getting a mortgage you are usually very stressed and just focused on getting that loan approved and the whole moving process,” Ms Montgomery says.

“Insurance is something that most people decide to leave until later but many never get around to it. That could be an expensive mistake especially with repayments on the rise.”

The types of insurance that property owners and investors should understand include:

1. Income protection insurance, which will pay out a proportion of your income, usually up to about 75 per cent of your last job’s salary, if illness or injury prevents you from working.

However, it is a complex area if you take the wrong one you may very well find that it will not pay out when you need it.

2. Lenders mortgage insurance, a requirement by lenders where people do not have a deposit of more than 20 per cent for the property.

LMI covers the lender for the shortfall of the price of the property if the borrower defaults on their loan.

3. Mortgage protection insurance, which can be confused with lenders mortgage insurance potentially a costly mistake.

Mortgage protection is a hybrid of income protection insurance and life insurance.

If you’re ill or die, the policy pays out, but choose your policy carefully according to your personal circumstances.

For example, there is little point taking out any life cover if you are single with no dependents.

In these cases, most people would be happy for their property to be sold and any proceeds added to their estate.

4. Landlords insurance, which is a handy policy to have if your tenants default on their rent or damage your property.

Some will also pay the rent while repairs are carried out if the tenants damaged the property. Shop around online to see what policy suits you best.

Source: http://www.news.com.au/adelaidenow/money/story/0,26907,26606222-5015839,00.html

Regarding population growth, it’s simple supply and demand. Our population is growing due to an increased birth rate, decreased death rate, increased migration, and fewer people moving overseas (Australia maybe more attractive for job prospects).

According to RP Data’s most recent Property Pulse, almost 158,000 more babies were born than deaths in the past 12 months, and we had over 285,000 more immigrants arrive than emigrants leave our shores in the 12 months to June 2009; this represents a national growth rate of around 1.7% in those past 12 months. According to RP Data, Queensland for the first time since 2001, has been overtaken by NSW as the fastest growing state. Highest growth per capita is now WA with the lowest growth per capita in Tasmania.

The national disparity of new residences to population growth is staggering. Commencement of new houses are well behind with an estimated almost 46,000 home shortfall. Bear in mind that this number is significantly worse as it doesn’t account for new homes that actually replace existing homes, nor the homes that are commenced but not completed (due to shortfall of finance), nor the fact that many people have a second residence in the form of holiday homes and lifestyle properties.

I was asked recently as to whether properties can grow in value any further given that households are already borrowing large proportions of their incomes.

My crystal ball is in for repairs but it makes sense to me that if residents can’t afford to continue buying, then we’ll pay more for rent. For the investor, rent is an income, so they can afford… more…

If tenants pay more for rent then the rental yield is increasing, which means that investors from other asset classes will find property more attractive, bringing more investors into the market which still spurs demand. This‘ll partly explain why nationally we’ve had median house price growth of almost 10% year to date.

Unless we suddenly decline in population plus we suddenly have an enormous amount of new properties built, this housing shortfall will continue on for some time.  Given that Australia is apparently a shining light in the GFC and very attractive to foreigners, plus lenders are still conservative about funding large developments, that pressure is unlikely to ease.

If you are contemplating investing in the property market or buying a home, give me a call on 0411454656 to discuss your finance and investing options.

The property purchasing costs in SA are pretty easy to calculate; for properties under $500K (most homes), the purchasing costs will be ~5%.

For instance, a $450K 3bdrm home purchase attracts:

Land Transfer Stamp Duty = $18830, Land Transfer Registration fee = $2809, Conveyancing costs (including searches) = ~$750, Mortgage Registration fee (if applicable)= $117, Total fees = ~$22,506 or 5%…

Above $500K, the fees increase incrementally up to ~ 5.5% for $900K purchase.

Above $1m, just hand over the shirt on your back…  Of course, there may also be lender fees, insurance fees etc but they are all incidental depending on individuals and can apply across all states.

For someone buying a $450K home interstate, here are the respective fees for them: NSW: 4%, Vic: 4.7%, WA: 3.9%, Tas: 3.9%, ACT: 4.3%, NT: 4.3% and wait for it… QLD: 2.1%

But before you pack your bags and head for the sunshine state, remember that it’s all relative. An equivalent property in any other capital city (excluding Hobart) will be much more expensive in real terms.

For instance, $450K buys you a cupboard in Sydney and an equivalent 3 bdrm home could be $650K+ in Melbourne. Purchase costs in Melbourne for that equivalent home are ~$36,300. In real terms, that’s almost $14,000 more expensive.

Plus for populated areas in QLD the Council rates are enormous adding substantially to the ongoing holding costs. Made worse by the fact that many properties are apartment complexes which also charge hefty strata/building management fees.

Then there’s the argument that ‘wages’ are greater in other states, which in some cases may be true. However, a Melbourne dual-income couple dropping to a one-income family with 20% equity still needs to pay the extra $910/month in loan repayments compared to the equivalent property in Adelaide (as above).

SA may not have the cheapest purchase costs but the concept that it’s cheaper to invest interstate is not necessarily true. It boils down to the property location, type and also your situation as a property owner.

If you’re interested in having a conversation about owning or investing in property, whether you’re a first timer or an existing investor, please get in touch with me via the details below – now is a great time to get into the market and I can help you make a smart decision.

With kindest regards,
Will Chapman
will.chapman@brockharcourts.com.au