The end of the world....or Not?
Sydney and Melbourne house prices have now fallen +10%, and Hayne’s Royal Commission released their report which had 76 recommendations.
Headlines are becoming more and more alarming, and any nut job wanting publicity who will predict that price falls could double, and that banks will tighten lending, is getting their 5 seconds of fame.
During the GFC, said nut job, who was a professor at one of our most esteemed universities, was saying property prices would go down 40%..!
So what will actually happen?
Banks will now start lending again, and even ramping it up, whilst property prices in Melbourne and Sydney will turn around. Kim Cannon, head of Firstmac, confirmed that on our kickstart webinar in January.
More to the point does it affect us as Custodians?
Short answer is yes and no.
Yes - The banking crack down made serviceability hard. Even though you’re borrowing at 4.5%, banks had to calculate your payments based on 7.5% interest. Also rather than accepting your statement of living expenses, they used the last 3 month’s credit card spend. And then of course add on principle and interest.
I expect, and so do many of our lenders, that this will peel back now that the Hayne report is out and everyone feels better that the banks have had a bashing. Talk is that the servicing calculator could drop to 6% which will make a huge difference to your borrowing capacity.
No - Sydney and Melbourne prices going down 10% is confined to the middle and top end of the market as history repeats itself. The bottom quartile (where we invest in) just bumps along, or as a matter of fact in many suburbs we have real estate, showed gains against the trend last year.
The graph below is a good one to study as it tells the whole story across the market segments (low 25% being affordable, top 25% being premium property).
“The trends across each decile suggest stronger housing market conditions are persisting across the most affordable end of the valuation spectrum, potentially being supported by a surge in first home buyer activity and mounting affordability constraints at the higher value end of the market” (Corelogic, January 2019).
Smart and on track
Amidst all the hoo-ha, one of our top clients settled his 11th Custodian property in February.
He started with us in 1999 and has a Land Bank of 6,157m2 in 3 states, has a rental income of over $230,000, and has built equity of over $2.7m.
Why he was real smart is that he organised his finance for his next property as a redraw facility so he could pounce quickly. That got him a $20,000 discount to valuation still with full depreciation.
Lesson in life; always keep moving forward despite the obstacles. That’s a success mindset.