Prosper with Property – even in this changing market?
Recent news about housing affordability has been dominated by fears home prices, especially in capital cities like Sydney and Melbourne, are beyond the reach of the average household. For many, it seems home prices are rising in a never-ending property market boom. However, speak to any expert in the real estate and property finance industry, and you may discover a different perspective. And how does this affect the ability to prosper with property?
Are the Days of Surging Property Prices Over?
Some economists are calling time on rising property prices, and investment bank UBS, for example, nominated the peak of the boom in April, saying it did not expect the four-year prices growth boom to continue.
“We are now calling the top and think the market has already peaked,” UBS economists, Scott Haslem, George Tharenou and Jim Xu wrote in a special advisory note to clients.
“Housing activity rose consecutively over four years, its longest ever boom,” they wrote while suggesting the long-run is over.
Nationally, we have seen house prices rising at seven-year highs of 13 per cent per annum, though this is not expected to stay quite so strong, with many experts suggesting price increases will drop to around 3 per cent growth per annum as we enter 2018. This will be led, they say, by a tightening of lending policies and increases in interest rates.
Government Action Helping to Moderate Prices
The house-price boom has focused the attention of government agencies like the Reserve Bank of Australia (RBA), in charge of the nation’s monetary policy, and the Australian Prudential Regulation Authority (APRA), the body responsible for regulating financial sector activity. The RBA has been cautious about raising interest rates too quickly. On one hand, it doesn’t want to push the Australian dollar too high by attracting excess foreign capital through higher interest rates. Higher exchange rates also make life difficult for Australia’s exporters and local manufacturers as a higher dollar is a disincentive for overseas buyers to buy Australian. It is a balancing act the RBA will need to get used to as it manages a soft-landing for the property sector while continuing to grow the economy.
Thankfully, the RBA doesn’t act alone in managing the Australian economy. APRA can help monetary policy ease inflationary pressure on house prices by regulating the finance sector, including banks and financial institutions, more stringently. This is known as macroprudential policy; the regulatory policy settings controlling the finance industry. Used wisely they can promote growth and stability in the lending environment.
Recently, APRA announced several measures designed to take some heat out of property price increases, after concerns rapid increases in home values were making it harder for people to access the housing market. Firstly, APRA has required the banks to raise their capital reserves; the funds they set aside and do not lend out. This policy change is designed to make our financial institutions more stable and solid, though it does mean there will be fewer funds available for lending.
In addition to this, APRA has regulated how much of each type of loan can be available. Investment lending growth has been limited to 10 per cent year-on-year, while interest-only home loans, favoured by many investors, may only make-up 30 per cent of banks’ overall lending. This is the biggest change in the lending environment for several years.
How does this affect the ability to Prosper with Property?
Hamish Ferguson, from Vision Property & Finance, has watched the property market with interest since the beginning of the current growth cycle. Although APRA’s changes are beginning to have an effect, he says, with the right approach and good advice there is no reason why investors can’t prosper with property in the near future and beyond.
“We always take a cautious approach with all of our clients, ensuring they have built-in a buffer of at least a few per cent to accommodate any rate rises in this current cycle. If investors plan carefully, get the right advice from professionals, buy their investment property in the right location, and properly manage it, there is no reason why they can’t still prosper with property even in this changing market.“
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