Navigating the volatility of the Australian housing market

There seems to be near-endless talk and speculation of a property bubble in Australia. Something you’ve no doubt noticed if you keep abreast of the news week in, week out.

Okay, the Melbourne and Sydney property markets are hot, let’s face it. Depending on which side of the fence you’re on, that’s fantastic news, or, if you’re not already in the market, it’s downright scary. In saying that, though, if recent figures are anything to go by, Melbourne’s and Sydney’s prices have slowed slightly – if only for now.

Those already already in the market are often cast as the perennial villains of the ‘impending property bubble’. In other words, owner-occupiers and investors are seen as easy targets, you might say. Then there’s the routine fear mongering around negative gearing amongst politicians, which always seems to coincide with the tail-end of the election cycle. Not to mention Australia’s run of historically low interest rates, which you’d argue has been one of the most significant contributors to the ‘heat’ in the market and its subsequent volatility.

What’s sobering, though, is that, whichever way you look at it, interest rates are likely to head in only one direction – and that’s up. In saying that, rates are certainly trending upwards and starting to catch owner-occupiers and investors out in the process.

The current state of play

Let’s start with some context. Families make up a whopping three-quarters of residential property owners in Australia. That’s a lot.

While I won’t get into the restrictions around foreign investment, the Federal government has made it a priority to try and take some steam out of the market to help first-home buyers get in. Thinking back to those 75 percent of mums and dads already in the market, it’s seems a case of robbing Peter to pay Paul. In other words, if the Government’s push succeeds, a significant number of Australians’ net wealth will be affected.

The biggest reverberations in the industry right now are, without doubt, the fact that interest-only rates are drastically increasing. Add to that the fact that rates for investors are on an upward trajectory and investment loans are becoming harder to get. With the latter in mind, investment loans aren’t necessarily out of reach, per se, provided you have the structure in place – more on that shortly.

Another important factor for investors is that rental increases aren’t keeping pace with rising house prices, which is a worry. In fact, rental income yields have been dropping in pretty much every state capital over the past few years. Going by the numbers, Australia’s two-million-plus property investors are receiving as little 1.5 per cent income return, on average, on their investment. The upshot? You have a situation where property investors are left thousands out of pocket each month.

Structuring your debt right

One of the biggest things I see, month in, month out, are people who overlook the implications of rates rises on their monthly loan statements and, worse, assume the banks are acting in their interests at all times. More often than not, their are better deals out there. To this end, reviewing your loan structure periodically is vitally important, particularly if you’re in the ‘interest only’ investment camp, with rates continually heading north, and rental incomes continuing to stagnate.

Let’s put things in context. Some lenders have upped their rates by as much as 1.0% over the past six months. Which is significant. If you have a portfolio that extends beyond one investment property, there’s genuine cause for concern, hence why it’s so important to ensure you’re getting the best possible rate you can.

Debt always comes down to getting the structure right. To give you an idea, last month I saved a client $8K interest per year. And that was off the back of a simple five-minute review of their financial situation. Combine the right structure with the right lender and the right rate, and it goes a long way to keeping you in the best possible shape as rates continue to go up.

With all this in mind, the time is nigh to review your loan/s and how your debt is structured. As we start to see rates creep progressively higher – as they have over the past 18 months – that’s only going to become more and more important. Once we know where you stand, we have long-standing relationships with around 40 lenders across residential, commercial, business and investment lending. If you’re concerned you’re not getting the best bang for buck from your lender, feel free to give me a call on 03 9805 2299.