Where To From Here and How To Play It?

The two questions that we get asked the most in this business are the following:

1. What are rates going to do?
2. What’s happening to the property market?

I wish that I could answer these questions with 100% certainty but considering that the “experts” get it wrong most of the time, I can’t guarantee it. Having said that, we’ve had a pretty good strike rate in recent times in picking what rates will do!

So to answer the above questions, I’m going to provide some thoughts on what I think will occur over the next 12 months.

Interest Rates

The variable rates on owner occupied properties will creep up a little. This will occur not because the RBA increases the cash rate, but because fixed rates offshore have increased and this is making bank funding more expensive.

Now those Bank Execs will do anything to keep the margins up and their bonuses flowing, so the variable rate will be increased and we’ve already seen this occurring.

Once the big 4 increase all the other lenders will take the opportunity to increase as well..that’s as guaranteed as the sun rising to-morrow!

We’ve already seen increases in Investment property interest rates. The banks are receiving pressure from APRA to increase these rates in an attempt to slow the property market and protect margins.  These rates will probably keep increasing and there will be some major differences between lenders as those with a large percentage of investment loans will increase more to keep APRA happy.

I don’t think Banks will increase owner occupier rates much more as they’re super keen to grow this portion of their loan book. The RBA won’t be increasing any time soon as the economy isn’t performing well enough to warrant an increase and probably won’t increase within the next 12 months.

How to play it from here!

Sit tight on your Owner Occupied mortgage. If  your lender increases to much, come and see us and we’ll find a lender that is more than happy to have your business.

Fixed rates are still competitive, so if you’re worried about increases down the track, then it may pay to consider partially fixing a portion of your loan. Chat to us about this before you proceed as it’s important to understand what the limitations may be on your fixed product, as they vary significantly between lenders.

If you’ve got an investment loan, monitor the situation as you may find your lender increasing both the rate and also converting the loan to Principal and Interest only. If you’re not happy with the arrangement, there are lenders that are still keen to grow their Investment loan books and have priced accordingly.

Property Market

The Sydney and Melbourne markets are now in dangerous territory. All the historical pricing indicators are indicating that these markets are at dangerously high levels.  We’re starting to see the RBA and APRA communicate their concerns and attempt to talk the market around.

They’re becoming more concerned daily as Australians have increased their debt to income levels to record levels to get involved in this party. All parties eventually end.  Best to avoid the hangover associated with this party!

Stay away from these markets for the moment!

The Brisbane and Melbourne apartment markets are also in very dangerous territory. A huge amount of stock is about to come onto the market and the developers will struggle to sell it all.  Lenders are pulling back on LVR’s and being selective on what they’ll finance.  That’s a good sign that there are troubles ahead.

Off the plan purchasers may struggle to settle, particularly if values decrease below the contract price and lenders demand larger deposits.

Let it all come onto the market and then wait for the blood to flow if you’re keen to purchase this type of product. There will be some great deals to be had in this market segment over the next few years.

The Gold Coast market is pretty hot at the moment as well. This market is still very cyclical and once the current construction boom slows, things will cool off quickly as it always does.

There are opportunities in other areas of Australia if you still want to invest. Perth and Darwin have been going backwards and they’re worth watching.  Green shoots are starting to emerge.

The best time to invest is when no one wants to know about a market!

Contact Us if you would like more information on this topic.

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Article by Shayne Fergus, Capital Funding Group