The Australian Lending & Investment Centre's managing director Jason Back reflects back on lessons learned in 2016.
2016 has thrown up more than one surprise, with a reality TV host now moving into the White House. What else did we learn and how will this impact you in 2017?
Let’s take a look back………
1. Bah Hum’bank’
Rates don’t go down forever. In 2010 the cash rate was 4.75% and a standard variable rate was around 7.81%. In Dec 2016 the RBA rate was down to 1.5% and the SVR for most banks is down under 5.22%. So just in time for Christmas the banks are looking to recover their margins. So in 2017 we will see reduced discounting and increased focus on investors and business loans.
2. Not all property is the same
In the last year we have seen Perth continue to struggle in the face of a mining down turn and value in both property and decreased yields are starting to show. Brisbane, Sydney and Melbourne apartment markets are under stress, while pockets of Adelaide and Brisbane at certain prices can still be showing possible value.
3. Negative Gearing is not the devil
If the government of the day or in the future for that fact wants to get into the residential housing game then bring it on! The constant blame on mum and dad investors trying to get ahead in life is beyond a bore. 76% of those 1.7m investors only own one investment property, so let’s stop with the conspiracy theory that investors are to blame for housing prices.
4. It’s not just mining towns the banks hate
We have seen not just the mining towns hit the lending exclusion list for the banks, but we have now seen the some exclusive suburbs of Melbourne and Sydney make the naughty list just in time for Christmas. Banks are worried about their levels of exposure to both apartments and high density living areas in the event of a fire sale, which could see banks take loses in areas you would not have expected!
5. What interest rates do the banks really care about?
It does not have a 3 or 4 in front of it! In fact it’s around the 7.40% mark. This is the rate banks often use to calculate if you can service your loans today and the ones you want tomorrow. Banks in general now don’t use the actual rate you pay for affordability calculations, but a much higher rate to stress test the customers’ ability to pay in the event we move back towards the long term average rates.
6. Oversupply still kills demand
We have seen hundreds of cranes in the skylines around the country in the last 24 months and even though basic economic theory has not changed in hundreds of years, supply and demand are not mutually exclusive. We are seeing the results in Brisbane and Melbourne of rapid inner city development and the effects of pressures on demand as projects come to completion and valuations may struggle to meet the purchase price from 2 years ago. We see this potentially getting worse in the apartment market before it gets better but there will be bargain eventually as the house and apartment price gap grows there will come a day when this turns.
7. The banks hate tourists
For some banks this has been a really strong source of business for the last few years, until someone realised there was some dodgy pay slips and employment checks slipping through and they did some digging to realise that 2 of our 4 major banks had some serious coin out the door to customers that they did not know that well! Thank god for APRA and ASIC stepping in so they could blame them rather than poor compliance and not meeting basis verification standards. Watch this space if we have a fall in the apartment market and these foreign income borrowers start to default. We do feel sorry for the expats as they have been painted with the same brush.
8. Credit defaults will rise
We are starting to see some credit stress in the lower end of the market, some driven through unemployment, but a lot driven through consumerism and debt gouging. We need to start thinking clearly about what’s important in life and having a fridge that makes ice, 2 leased cars in the driveway and a holiday overseas ever year, whilst living in a house leveraged to 95% maybe not the best strategy for the average income earner.
9. APRA and ASIC there is more to come
The regulatory bodies are not done yet. They will continue to put pressure on lending institutions to rain in bad behaviour and tighten up the supply of cash to slow down the growth of a hot market. The challenge will be that a significant proportion of the GDP of this country comes from the property market and related industries.
10. ALIC is still the number 1 Brokerage in Australia
In 2016 we continue to work with our clients to achieve the best possible results through tailored and considered planning. It was only as recent as last month that one of the team told a client we could not help them as they wanted to over commit to a new home for $1.6m in their mid-twenties earning a combined $180k. They will get their debt somewhere, it just won’t be from us…
The Australian Lending & Investment Centre (ALIC) managing director Jason Back has over 24 years’ experience in the finance sector, having worked in senior sales and distribution and management roles for ANZ and having provided financial advice and services on behalf of financial planning, equity trading platforms, private banking, lending and retail distribution firms.
Jason has a passion for education and improving the ‘financial fitness’ of the Australian public. He has conducted hundreds of seminars over the past 20 years, his key intent being to encourage Australians to better look after their finances to guarantee independence into retirement.
ALIC is an award-winning finance brokerage which assists clients in achieving their investment goals and building wealth. ALIC specializes in assisting investor clients to structure their loans correctly in line with their wealth creation strategy.