With interest rates dropping to record levels, finance goes to the top of our dashboard. Remember Step 4: Finance to build – critical.
Let’s drill down to the actual numbers
First half of 2015 fixed rates were at a cosy 4.8%. Today that rate is just under 4% and appearing to drop further. Rates have dropped by 0.75% but fixed rates have done slightly better than the variable. The cost effect is that an average loan of $600,000 on the east coast has seen payments drop from $28,800 to $23,400. That’s nearly a 20% drop in interest payments.
The banks got real tough on finance in the second half of last year as APRA limited loans to investors. What exactly happened? The banks pushed LVR (Loan Value Ratio) to 80% and DSR (Debt to Service Ratio) calculator to 7.5%. That means you needed 20% equity (on a tough valuation) and would only be able to service the loan if interest rates were 2-2.5% above the variable rate. That has eased now. The banks have shut down foreign lending (targeting Chinese buyers) so now they need to stimulate the business at home.
First home buyers have started to wake up and enter the market as they are now up 21% for the year.
What does it all mean?
Since the rates have dropped – auction clearance rates have exploded to 86.4% and 76.1% in Sydney and Melbourne, respectively. To put this into perspective, this time last year the clearance rates were at 79.9% and 73% in Sydney and Melbourne (that’s an increase of 6.5% and 3.1 %!).
It means it’s time to get a loan. Banks are back to 10% deposit for investors and whilst DSR calculator is still above 7%, if you lock in your rate they will use that number as your service calculator. This means it gives you a better borrowing capacity.
Basically we have had clients go from NO borrowing capacity to now qualify for a $480,000 loan. That’s the reason why finance is on top of our dashboard.
The White Noise
Academics love to say housing is unaffordable. Where they lose me is with their numbers. They use an old matrix of the average median wage. Why that’s wrong is that the Gross household income is $130,000 or 1.6 times the median wage. Here is what we know: our household structure has changed from 3.4 persons per household with 1 income earner to 2.6 persons with 1.6 income earners (woops, memo to self; must do census before 23 Sept)
House prices don’t and won’t crash. I read about it nearly every day in the papers with someone new always trying to predict it. I’ve said it before: it’s not new. I have an old clipping from 1971 when house prices got to $12,000 and on the front page you could read “it simply isn’t sustainable!!” There’s just no data on a house price crash.
What is a dwelling anyway?
It can get confusing because so called ‘experts’ talk about dwellings and dwelling prices. I ask the question: What is a dwelling? What data are they using?
A dwelling goes from a 36m² 1-bdrm studio to a 600m² house on 2,000m² land, or even a house in Moranbah which someone famously bought for $1.36 Million now worth $300,000 with no buyers (the Kate Moloney story).
At our Melbourne breakfast last week we had 3 clients who have been with us since 1998. Between them they have 29 properties. A great testament to what we do: Land and Compound Growth.
A new client also attending the breakfast asked me what I thought of property in Port Melbourne. It puzzled her when I said I’m not interested in property. I said I’m only interested in Real Estate. Real estate is the land. Property is what sits on the land.
The early 1998 clients shared how they bought 1,000m² lots for circa $70/m². They’re now worth $630/m². That’s multiplied 9 times. The median house price since then (or dwellings) has multiplied less than 4 times and even an investment with the Investment King himself Warren Buffett has only multiplied 5 times….. With no income tax deductions or leverage.
