Servicing Melbourne, the Mornington Peninsula and wider Victoria

Welcome to our first edition for 2010

Welcome to the first 2010 edition of “The Flash”.

Although much media commentary is still evident in relation to Australia’s emergence from the doom and gloom of the economic difficulties of the past 18 months, it appears many Australians have moved well beyond these concerns already.  The property market is again vibrant despite the reduction in benefits to first home buyers, as seen by auction clearance rates and median house prices, especially in the inner city region. The RBA left interest rates on hold in February, although there appears to be certain upward rate movement/s ahead, yet the time is now ripe to enter the market …. otherwise you may find it very difficult to do so soon. This month, our feature article examines this issue in greater depth.

As always, please contact us at Lightning Fast Home Loans if we can offer any advice or answer any questions you may have.  Adrian Willaims

Feb 2010
Issue 08

Investment News

The future of Australian property

As you may have read or heard about from various media reports there has been very strong performance in the property sector through 2009. This is great news for current property investors. However, these investors, and potential new property investors, are also interested in whether this performance is sustainable into the future. Key to this issue is the question as to whether the Australian housing market is overvalued.

In this edition article, courtesy of the Latrobe Financial Investment Team, we consider what the experts are saying about the Australian housing market.

Is Australian housing properly valued?

Both the International Monetary Fund (IMF) and the Reserve Bank of Australia (RBA) are consistently assessing the Australian property market. A summary of their recent findings follows. International Monetary Fund Analysis At the end of October 2009, the IMF released its "World Economic Outlook" in which it noted that:

"... in the case of Australia, if the impact of long-term migration on housing demand is taken into account, the results do not produce evidence of a significant overvaluation of house prices."

Christopher Joye summarised the detail of IMF analysis in a presentation to the Melbourne Institute as follows:

"Whether assessed since 1980, 1990 or 1997, Australia's house prices have risen in line with its peer group (broadly Western Europe, the UK, US and NZ)." See table below.

Year	Australia’s Position	No of countries surveyed
1997	6th	Eleven (11)
1990	6th	Eleven (11)
1980	5th	Eleven (11)

Further, Australia's house price-to-income ratio growth between 1997 & 2008 would rank it 7th.

Housing correction

Interestingly, the IMF also considered whether there was a global 'correction' occurring in the housing market, but concluded that:

"... the corrections in Australia and the United States are close to complete."

Reserve Bank of Australia Analysis

The IMF report followed a presentation by Tony Richards, Head of the Economic Analysis Department of the RBA, on 29 September 2009. Richards commenced by noting that, since the Australian property market hit its peak in 2003, housing prices have risen less rapidly than incomes.

However, Richards then pointed to a number of factors that increase the prospect of housing price rises in the future, including:

·   strong population growth (both natural and immigration-led);

·   a long-term trend towards decreasing average household sizes (although there is some evidence that this trend might have paused in recent years. The pause itself might only reflect pent-up demand for housing that has temporarily been delayed);

·   a long-term increase in average hours worked per week, per household;

·   the high price of vacant land on city fringes; and

·   zoning and development approval issues constricting new development.

Further, on 25 November 2009, the Deputy Governor of the RBA, Ric Battellino gave an assessment of the Australian economy's future prospects. In doing so, he reviewed the much-discussed ratio of house prices to household income.

Battellino noted that the ratio was higher than 20 years ago, but that the increase was largely explained by the fall in inflation over the period, which had kept interest rates cycling at a lower average level than had previously been the case.

Further, although the Australian home price relative to incomes was higher than that in the United States, this reflected the differences between the two countries, including:

·   the higher population concentration and urbanisation in Australia;

·   the lower level of income (including medical expenses) spent on non-housing consumption in Australia; and

·   the tendency of Australians to pay off their debt more quickly.

For these reasons, Battellino stated that:

"... the Australian household sector as a whole appears to have the financial capacity to sustain a relatively high ratio of housing prices to income."

Recent Research

More recently the Commonwealth Bank Economics Research team released its analysis of housing and housing costs. Reassuringly, the report concluded that 85% of households spend less than 30% of their gross weekly incomes on housing.

Conclusion

Despite the often-overheated commentaries in tabloid papers, the evidence does not seem to suggest that prices in the Australian housing market have been increasing at an unsustainable rate in recent years. Indeed, it seems that the correction that has been occurring dramatically in the US and the UK over the last couple of years has, in fact, been occurring at a more measured pace in Australia since the market peak in 2003.

Although predicting the future is always a risky venture, the experts suggest that the fundamental demand and supply position means that the Australian housing market is likely to remain strong and attractive to investors for the foreseeable future.

Is buying a property your New Year resolution?

Consider the who, what, when, where and why of property ownership

Mortgage Broking Industry representatives are encouraging potential investors and ‘next’ homebuyers to fine tune their financial strategy now for 2010.

With less competition expected in the lower end of the market thanks to the expiration of the First Home Owner Boost, this year could be a prosperous one for buyers keen to further their foothold in the Australian property market. Those who have done their research, know their borrowing limit and have a good idea of the mortgage options available will be well ahead of their purchasing rivals.

One observation relevant to this opportunity that should be a welcome relief for investors and next homebuyers is the almost-certain decline in first-time owner occupiers following the expiry of the First Home Owner Boost on 31 December 2009. This could now create a great new property investment window for those who put their mind and money to it.

Knowledgeable investors will already be paying attention to mortgage market commentary, factoring a number of interest rate rises into their budget, checking their loan options, looking at getting pre-approval and carefully considering if it is the right time for them to purchase. Now might be the right time to invest, avoid inflated house prices and ensure that repayments are affordable.

If you have decided ‘when’ to buy is “now”, you should consider the remaining who, what, where and why of property ownership.

Considering the who, what, where and why of property ownership

Kristy Sheppard from Mortgage Choice was quoted as saying, “Whether it is your first or third property, buying can be daunting when you are doing it solo. So it is no surprise that 70% of a recent Potential Property Investor Survey respondents plan to buy with someone else, such as a partner, friend, family member or colleague,”

Here at Lightning Fast Home Loans, we have noticed an increase in enquiries from borrowers looking to take out loans with others so they can share the financial and emotional commitment. Deciding who you will buy with should be a well thought out decision and it’s best to seek legal advice to understand each party’s role and responsibilities. There are different structures as options for both property ownership and loans. We are happy to provide advice on these issues.

Deciding on what type of property suits your long term goals is just as important.

Consider what you hope to achieve from the purchase and whether a house, townhouse, unit or other fits best with that. Weigh up each property type and research the potential capital gains within the area you hope to buy, plus the demand for rentals and potential rental yield if it is an investment purchase.

Plan to identify the type and location of a property you might like to purchase as an investment.

Having a good idea of where you want to buy may affect the type of property available to you. Remember that property closer to the city or coast often tends to be more expensive and so it may be necessary to make allowances for internal and external space. You may need to extend the search parameters while reconsidering what percentage of your income you can really afford to make repayments with.

Why is all this thinking and planning essential?

Borrowing sensibly, buying a suitable property, preparing for rate rises, knowing your long-term investment strategy helps to reduce the potential for mortgage stress, which no one wants to endure. It is important for homebuyers and property investors to have financial dreams that are manageable and attainable now, next year and in future.

PRODUCT SNAPSHOT

Lenders sometimes provide special deals such as discounts off the Standard Variable Rate for the first 12 months before reverting to a lesser discount or a discount off the standard variable rates before reverting to a basic home loan rate.

One such offer we have available now is for those who can borrow up to 65% LVR (loan to valuation ratio) an additional discount is available for a short period.

We'll be sure to let you know if any of these offers might be suitable for you when looking at your loan needs.

Have you browsed our web site lately?

We have current articles on How the financial crisis impacts Australian homeowners, Fixed rate mortgages, Self-employed trying to get a loan, and a general article on how to Save Money On Your Home Loan, along with other valuable information. www.lightningfasthomeloans.com.au