Amid record low lending, property investors look for bargain loans

Amid record low lending, property investors look for bargain loans

Investor lending has dropped to record lows around the country, but about a third of property investors are watching rates closely in the hope of refinancing.

Investor lending dropped to 24 per cent in August, according to figures from the Australian Bureau of Statistics (ABS), a steep tumble from the decade average of 36 per cent.

All states are feeling the pain, but analysts believe the recovery will be a drawn out process for the nation’s largest two.

“… From an affordability and yield perspective, smaller capital city markets may see increasing popularity from investors in the coming months,” Eliza Owen said, head of research at CoreLogic.

“For the traditional investor markets, such as inner-city Sydney and Melbourne, COVID-19 has triggered a further retreat of investors that is likely to last until overseas migration and travel resumes.”

Investor lending has been trending downwards due to macroprudential measures introduced about five years ago in a bid to tame rising housing prices.

But the COVID-19 pandemic — ushering in sweeping changes to how people conduct business, socialise and go about their everyday lives — has made the fall sharper, analysts said.

Border lockdowns, instituted as a health measure to stop the spread of COVID-19, have all but stopped international students and other migrants from entering the country — eliminating a key cohort that would typically rent properties in Sydney and Melbourne.

“A year ago in August 2019, almost 55,000 students arrived in Australia to study,” Craig James said, chief economist at CommSec. “In August this year, 50 students came to Australia.”

A third of property investors want a better deal — likely from brokers

About 36 per cent of property investors — many containing multiple properties in their portfolio — are considering a bulk refinance if they find rates half a per cent lower than their existing loan, according to the Property Investment Professionals of Australia (PIPA).

The savings from lower rates would help free up cash flow for investors who have passed on discounts to renters, often leaving them out of pocket, Peter Koulizos said, chairman of PIPA.

“Investor and interest-only interest rates have reduced over recent times but are still significantly higher than owner occupier home loans,” he said.

“Many investors are also coming off fixed rates and are refinancing to obtain rates that are one or, sometimes, two percentage points lower than what they had been paying.”

The majority of investors relied on mortgage brokers to negotiate their loans. PIPA said about 71 per cent of its investors used a broker in the past, and that 80 per cent indicated they’d rely on mortgage brokers for their next purchase.

Investor rates have fractionally fallen over three months

In the last three months, 52 of the 123 lenders in the RateCity database have lowered their interest rates on investor loans by an average of 0.10 per cent.

The most competitive variable rate loan is being offered by Pacific Mortgage Group. They’re offering a principal-plus-interest loan at 2.49 per cent for both the advertised and comparison rate if borrowers can meet a loan-to-value ratio of 75 per cent.

The next variable rate loan following it is from Homestar Finance. Its principal-plus-interest loan offers a 2.49 per cent advertised rate with a comparison rate of 2.52 per cent, for loans below $850,000 where the loan-to-value ratio is 70 per cent.

Rents are recovering — except in two capital cities

Rents widely increased across the country over the September quarter, according to the experts at Domain, but two capital cities anchored the national average for unit rents.

Housing rents increased by 3.2 per cent on average over the same quarter a year earlier, according to Domain’s rental report, recovering from the losses incurred during the first COVID-19 lockdown in March.

But unit rents dropped on average across the country by 2.9 per cent, when compared to the same quarter a year earlier, despite all but two capital cities recording growth.

Drops of 4.8 per cent in Sydney and Melbourne were enough to offset any gains made across the country, largely due to the fall in international students, migrants and travellers.

“Inner-city areas … are more susceptible to changes in overseas migration and international students, tourism and job losses associated with COVID-19,” Dr Nicola Powell said, senior research analyst at Domain.

“Unit rents (in Sydney) have now fallen $55 a week from peak prices in 2017 and are now the lowest in six years.”

 

Tony Ibrahim, RateCity, 21 October 2020
https://www.ratecity.com.au/home-loans/mortgage-news/amid-record-low-lending-property-investors-look-bargain-loans

What’s driving land demand in Brisbane?

What’s driving land demand in Brisbane?

Brisbane is set to become a property investment hotspot next year, as demand for land continues to swell, according to the latest market update from Herron Todd White.

Increased demand for land is evident across markets in Brisbane. This strong interest helps support prices for land, particularly in the city’s growth corridors where properties sell out in a matter of weeks, said David Notley, director at HTW.

“As to whether this state of affairs will continue into the medium and long term is entirely dependent on an extension to the builder’s grant, interest-rate fluctuations and also availability of stock,” he said. “If these variables remain sound, then demand will remain strong.”

There are several factors that are influencing the confidence of potential buyers and investors in the city. In fact, a recent survey by the Property Investment Professionals of Australia showed that a third of investors believe Brisbane is poised to become the best capital city for investment over the next year.

Notley said a big contributor that continues to uplift sentiment in Brisbane is the strong interstate migration to Queensland prior to the COVID-19 pandemic. A report from the Australian Bureau of Statistics showed that Queensland had a net gain of 22,831 people within the country. This figure was almost double its 10-year average of 12,409.

“Of course, that number has plummeted since the boom gate came down on our hard borders, but selling agents are reporting a rise in enquiry from out-of-towners. There’s a sense of anticipation that we’ll see some serious improvement in interstate arrivals once folk can cross state lines more freely,” Notley said.

The low interest-rate environment is also a significant factor. The relatively cheap costs of borrowing money have provided an opportunity for many would-be buyers to break into the market, Notley said. The easier access to finance is supplemented by government grants, further boosting the capacity of many buyers.

“Brisbane and its surrounds offer a relatively inexpensive option for buyers — and that’s a key incentive at present. People are being very cautious with their money in the shadow of COVID. Brisbane provides buyers with the chance to own a new home within easy reach of a major CBD at substantially less than it would cost in Sydney or Melbourne,”

 

Gerv Tacadena, Your Investment Property, 21 October 2020
https://www.yourinvestmentpropertymag.com.au/news/whats-driving-land-demand-in-brisbane-273791.aspx

What can make investors switch lenders?

What can make investors switch lenders?

A small difference in interest rates is enough for property investors to consider switching or refinancing with another lender, according to a new study by the Property Investment Professionals of Australia (PIPA).

One in three investors said they would consider moving their portfolio to take advantage of even a half percentage point difference in mortgage rates. For 65% of investors, a difference of up to one percentage point can compel them to switch lenders.

Peter Koulizos, chairperson of PIPA, said the results of the survey indicate that investors are actively looking for better deals to take advantage of the low-rate environment.

“Investors have had to pay unfairly high interest rates ever since they were unnecessarily targeted by the Australian Prudential Regulation Authority a number of years ago,” he said.

In 2014, the APRA set a limit on the growth of residential investment loans. In the next four years, banks were required to restrict growth in investment loans to 10%.

The APRA also introduced a measure limiting interest-only lending for more than a year starting in 2017. Interest-only loans are typically used by property investors who are taking advantage of tax deductions.

Koulizos said cash flow is a crucial consideration for many investors who are currently under financial pressures due to the COVID-19 pandemic. He said lower rates help alleviate these financial setbacks and improve cash flow.

“Reduced, or even no, rent coming in meant that more than 13% of investors indicated in the survey that they had a cash flow deficit each month,” he said.

Furthermore, around 8% of investors had to apply for repayment deferral during the lockdown phase. Roughly the same accessed their super fund due to the reductions in personal and rental incomes.

Despite expectations that the cash rate will be reduced further this month, the RBA decided to hold it at its current historic low of 0.25%.

While the central bank believes that a global economic recovery is underway, it remains to be seen whether its targets are achievable in the near to medium term. This could point to a possible rate cut next month, said Shane Oliver, chief economist at AMP Capital.

“Our base case remains that the RBA will cut the cash rate, the term funding facility rate and the three-year bond yield target to 0.1% and will now do this at its November meeting after it has updated its forecasts, which will likely show that its employment and inflation objectives are still not going to be met over the next two years at least,” he said.

 

Gerv Tacadena, Your Investment Property, 20 October 2020
https://www.yourinvestmentpropertymag.com.au/news/what-can-make-investors-switch-lenders-273766.aspx

 

What does it take to make investors switch loans?

What does it take to make investors switch loans?

According to the Property Investment Professionals of Australia (PIPA), 36 per cent of investors would switch rates to save half a percentage point on their mortgage.

PIPA chairman Peter Koulizos said the survey result made it clear that investors  were on the hunt for better home loan deals, especially in the current record-low interest rate environment.

“Investors have had to pay unfairly high interest rates ever since they were unnecessarily targeted by APRA a number of years ago,” Mr Koulizos said.

“Investor and interest-only interest rates have reduced over recent times but are still significantly higher than owner-occupier home loans.

“Many investors are also coming off fixed rates and are refinancing to obtain rates that are one, or sometimes two, percentage points lower than what they had been paying.”

As the rate of savings increases, so does the likelihood of investors switching, with the research showing two in three investors would change to save 1 per cent on their mortgage repayments.

Mr Koulizos said lower interest rates significantly improve investor cash flow, which has been under pressure over the past six months.

Further, the survey found that more than 16 per cent of tenants had asked for a rent reduction or holiday during the pandemic.

“Reduced, or even no, rent coming in meant that more than 13 per cent of investors indicated in the survey that they had a cash flow deficit each month,” Mr Koulizos said.

“About 8 per cent of investors also applied for a mortgage repayment pause during the lockdown, but the majority (75 per cent) did not have to continue the arrangement beyond its original term.”

About 8 per cent of investors also withdrew funds from their superannuation during the pandemic, according to the survey, with the main reasons for doing so being reductions in personal or rental income.

 

Cameron Micallef, Nestegg.com.au, 20 October 2020
https://www.nestegg.com.au/borrow-money/loans/what-does-it-take-to-make-investors-switch-loans

Investors keen to refinance, use brokers

Investors keen to refinance, use brokers

More than a third of investors would consider refinancing to a new lender to secure a slightly better rate, while the majority of investors used brokers to secure finance over the past year, according to a survey.

The 2020 Property Investment Professionals of Australia (PIPA) Annual Investor Sentiment Survey revealed that 36 per cent of investors would consider moving their portfolio to take advantage of interest rates just half a percentage point lower than their existing home loans.

The survey also found that 65 per cent of investors would consider refinancing for an interest rate differential of up to one percentage point.

Commenting on the findings, Peter Koulizos, PIPA chairman, observed that the current record-low interest rate environment is encouraging investors to seek better home loan deals.

“Investors have had to pay unfairly high interest rates ever since they were unnecessarily targeted by APRA a number of years ago,” Mr Koulizos said.

“Investor and interest-only interest rates have reduced over recent times but are still significantly higher than owner-occupier home loans.

“Many investors are also coming off fixed rates and are refinancing to obtain rates that are one or, sometimes, two percentage points lower than what they had been paying.”

Furthermore, lower interest rates could improve investor cash flow considerably, which has been under pressure over the last six months, Mr Koulizos added.

From the tenants’ perspective, the survey revealed that more than 16 per cent of tenants had asked for a rent reduction or holiday during the pandemic.

As a result of reduced or no rent, 13 per cent of investors indicated that they had a cash flow deficit each month, the survey showed.

Around 8 per cent of investors also applied for a mortgage repayment pause during the lockdown, but 75 per cent did not have to continue the arrangement beyond its original term, the survey found.

Around 8 per cent of investors withdrew from their superannuation during the pandemic, with the reduction in personal or rental income being the main drivers for doing so.

In terms of broker usage by investors, Mr Koulizos said 71 per cent of respondents said they used mortgage brokers to secure finance over the past year.

This figure rose to 80 per cent for investors who indicated that they would use a broker to secure finance for their next property purchase.

“Fewer than 10 per cent of investors indicated they would secure finance directly from a bank for their next investment property loan,” Mr Koulizos said.

A recent report by major brokerage Aussie revealed that 69 per cent of mortgage-holders believe now is a good time to refinance their home loan as the COVID-19 crisis placed pressure on the hip pocket of mortgagors.

However, the report also found that 78 per cent are confused about what refinancing is, while only 22 per cent were able to identify correct examples of refinancing without also choosing wrong examples.

 

Malavika Santhebennur, Mortgage Business, 20 October 2020
https://www.mortgagebusiness.com.au/breaking-news/15048-investors-keen-to-refinance-use-brokers

 

Six months in: How are house prices faring?

Six months in: How are house prices faring?

We’re six months into the COVID-19 pandemic, and so far Australian property markets have weathered the economic storm quite well.

The data shows that median property values are starting to slowly trend down, but we’re nowhere near experiencing the 10%, 20% or even 30% drops that some industry experts predicted.

But are those price falls still to come?

The most recent data suggests that, if we continue on the current course, Australian real estate prices are set to continue down a path of resilience.

The RPM Real Estate Group’s latest quarterly Residential Market Review suggests that government stimulus packages and grants,  particularly the HomeBuilder incentive introduced in early June (which offered $25,000 to anyone buying a new home), may  have thrown the property and construction industry a lifeline – and could be responsible for putting a floor under the market going forward.

“The way that people work will likely change significantly post-pandemic, and this will have an impact on less traditional property investment locations” Peter Koulizos, chairman, Property Investment Professionals of Australia

In Melbourne, more than 50% of the quarter’s 3,786 total lot sales across Greater Melbourne and Geelong occurred in June, of which 69% were titled or near-titled lots, demonstrating the grant’s effectiveness at bringing forward buyer demand for eligible lots.

The June figures topped out at 2,043 lots, reflecting the strongest monthly sales result since November 2017 and contrasting deeply with the 654 lot sales recorded in April – the weakest result since the market hit the bottom in April 2019.

Top 10 capital city suburbs in Australia: Post-GFC capital growth

“During April we felt the crunch of social distancing restrictions, with a stark shift in spending patterns and wide-felt uncertainty across the workforce. Understandably, land sales stalled and the rental and apartment markets were heavily impacted too,” says RPM chief executive Kevin Brown.

“We saw lot sales steadily climbing to pre-pandemic levels through May, demonstrating underlying buyer confidence in Victoria’s property market, before activity really started escalating from early June with demand shifting notably to titled or near-titled lots.”

Brown says HomeBuilder made a marked difference to sentiment, and he welcomed the recent blanket extension of the grant across Victoria by three months, meaning that applicants now have six months from the time of signing an eligible contract to commence construction. However, he warned that a sudden drop-off in activity loomed large without further government intervention and suggested that a minimum six-month extension of the grant’s current contract and build timelines would help even out demand through the remainder of 2020 and into 2021.

It’s a sentiment echoed by Denita Wawn, CEO of Master Builders Australia (MBA), who says a strong building and construction industry is essential to a strong economy, and vice versa.

“Potential for price falls and reduced investor activity, together with historically low interest rates and government support, are propelling first home buyers into action” Andrew Bartolo, general manager home loans, ME

“In the Australian economy there is no industry with a bigger economic multiplier effect than building and construction. There is also no larger provider of full-time jobs and there is no other industry with as many small businesses; that is why we are seeking stimulus measures across the entirety of the residential, commercial and civil construction sectors,” she explains.

MBA is calling for a 12-month extension of HomeBuilder, among other things, to drive sustainable demand for new housing over the next 18 months.

In the short term, new housing activity remains robust, and while it’s impossible to predict where property markets might go from here, we can take a look at how markets have performed historically to get an idea of where they may be headed.

New research from Property Investment Professionals of Australia (PIPA) and CoreLogic, for instance, has identified the best-performing capital city and regional locations three years after the onset of the GFC.

The research and analysis, a joint initiative of PIPA and CoreLogic, found that capital city dwelling values increased by up to 39% over the three years from the end of December 2008.

This was just as government stimulus was ramping up, according to PIPA chairman Peter Koulizos, who says the capital city results showed a mix of inner- and outer-city suburbs, with six of the top performers being in Sydney (see boxout, p18).

 

Peter Koulizos, chairman, Property Investment Professionals of Australia  Peter Koulizos, chairman, Property Investment Professionals of Australia

“The dominance of Sydney in the results shows that nobody rings the bell to tell you when the upward swing of a property cycle has started,” he says.

“When you do hear it, it’s too late because it’s already begun. I say this because most people believed that property prices in Sydney only started firming a year or so later – in 2012 – when it was already underway but perhaps masked by the continued economic uncertainty around the globe.”

Across the country, Koulizos says the individual performance of each capital city was varied in terms of where the top-performing suburbs were located. In Melbourne, the best performers were inner-city areas, while in Adelaide it was homes located in outer suburbs that experienced stronger growth.

During the same period of time, the number of first home buyers also hit historic highs, because of the federal government’s First Home Owner Boost.

“The recovery in the property market was broad, varying from inner-city to outer-city suburbs, and certainly first home buyers helped by boosting demand for new properties, whether they were located in urban regeneration or greenfield sites,” Koulizos says.

CoreLogic head of research Tim Lawless adds that dwelling values in regional areas increased by up to 65% over the period, with mining areas in particular performing well, given that the resources sector was firing on all cylinders at the time.

 

Tim Lawless, head of research, CoreLogicTim Lawless, head of research, CoreLogic

“Areas such as mining towns, where economic conditions are dependent on a single industry, are much more likely to experience bursts of price rises or falls because of the strength or weakness of their dominant industries,” he explains.

“While many of these mining regions recorded spectacular capital gains post-GFC, a few years later many of these same regions recorded a crash in home values.”

While the research shows the resilience of property prices during turbulent times, and Koulizos says prices are expected to stand firm over the medium term this time around, he cautions that the best-performing locations “may be very different to what has occurred in the past”.

“The way that people work will likely change significantly post-pandemic, and this will have an impact on less traditional property investment locations,” he says.

“Areas such as mining towns, where economic conditions are dependent on a single industry, are much more likely to experience bursts of price rises or falls” Tim Lawless, head of research, CoreLogic

“Lifestyles will undoubtedly change, which will make living outside the inner city more appealing. If you don’t have to go to the CBD every day for work, because you can work from home, then you don’t have to live near it.”

How this will impact the spring selling season, which is traditionally the busiest season for property markets, is unpredictable.

Andrew Bartolo, ME general manager home loans, says the property market “notoriously blooms in spring” with a flurry of listings and buyers preparing to pounce.

 

Andrew Bartolo, general manager home loans, MEAndrew Bartolo, general manager home loans, ME

“But this season will be different: the property market will be quieter due to the impact of COVID-19, particularly in Melbourne. Despite some more listings this spring and record-low interest rates, economic concerns will dampen demand,” he says.

“Plenty of challenges remain, including high levels of unemployment, job insecurity and lower immigration, impacting people’s willingness to transact in property. Many Australians are also on home loan repayment pauses, and the gradual end of this type of support will be a critical juncture for the property market going forward.”

In terms of demand, buyer activity is expected to be lower overall than in previous spring buying seasons, Bartolo says, although buyers are still there  and have a strong appetite for potential bargain buys.

“ME has seen an influx of first home buyers and expects this to continue. Potential for price falls and reduced investor activity, together with historically low interest rates and government support, are propelling first home buyers into action,” he says.

“The fallout of the COVID-19 pandemic and lockdowns has caused a short supply of stock. However, this spring we may see an increase in listings come onto the market. I don’t foresee new stock overwhelming current demand, but certainly anyone listing will be met with a high degree of enquiry.”

Bartolo backs up Koulizos’s sentiments that the pandemic may prompt a more wholesale shift in priorities when it comes to homebuying trends, with proximity to your place of employment no longer as important as it once was.

“COVID-19 has led to a reassessment of life priorities. According to ME’s latest Quarterly Property Sentiment Report, 45% of respondents said they were more likely to consider buying in a regional area to save money and improve their lifestyle − rising to 60% of first home buyers,” Bartolo explains.

“New remote and flexible working arrangements have made buying in regional areas a more feasible and affordable lifestyle option, and as such we may start seeing more buyers making their move this spring.”

Top 10 regional suburbs in Australia: Post-GFC capital growth