The Open Trade Agreement
Since the open trade agreement made by China with the West in 2004, property prices have soared. The good times continued in all of the major developed countries with the influx of Chinese money up until recently.
You may be thinking the slowdown was due to COVID-19, right? Wrong! For Australia anyway, the halt and subsequent 30% decline in prices has been a result of the Australian Government’s Royal Commission on the banking sector in 2018/19 financial year and the banks subsequent reaction to this probe.
How did the banks respond?
By almost exclusively rejecting all loan applications for almost a year. This was catastrophic for the prices of properties with many buyers being the real losers.
A couple purchased a home in Templestowe Lower for $1,240,000 in June 2017 with a one year settlement term through Bill Schlink First National. The buyers had pre-approval as they owned a small business and approved on what was termed a ‘low doc’ loan.
This is where banks approve loans to small business owners who may not necessarily disclose all their income. Sounds crazy right?
This is one of the criticisms noted by the Commission. The loans were approved with a higher interest rate then normal due to the risk of not knowing whether the buyers would be able to make their monthly repayments.
Fast forward a year and the same buyers came to settle only to be told by the bank that pre-approvals were valid for 6 months only. Therefore the buyers needed to re-apply. Unfortunately for the buyers, banking standards had changed and low doc loans were no longer allowed. Therefore, the buyers had to declare their tax returns; in this case, the returns showed lower profits and so the same bank rejected their loan approval despite the buyer needing to settle on the property.
In summary, the buyer lost their deposit of $124,000 and the same property resold for $1,080,000 (a 23% reduction in 12 months).
Enter coronavirus 19, aka COVID-19, aka COVID.
Lots of buyers who initially missed out felt that they could finally enter the market with lower priced homes. Dilemma was, for Victoria anyway, we had 3 months of tight restrictions where buyers were unable to inspect homes and unable to buy any properties.
In the meantime, Federal and State Government incentives plus banks been given the green light by the same government that actioned the Royal Commission, to relax their tight borrowing requirements.
Result was a massive spike of home prices right after the COVID restrictions were lifted.
This momentum continues today with media news outlets promoting boom times as well as banks offering fixed rates for 2 years for as low as 1.67%. This has analysts predicting a 20% growth in the market by the end of 2022. This is because of a new phenomenon referred to as ‘FOMO’ (fear of missing out). Like the toilet roll, sugar and rice shortages, buyers are going to extreme measures to buy a property and in some cases with short term thinking.
The reality for all mortgage holders is that the current record low interest rates will eventually go up exposing them to higher monthly repayments. My suggestion for any buyer wanting to enter the market is the same advice my father gave me: “Do your sums on an interest rate of 10% and if you can still afford the repayments, then buy the home with confidence.”
For many, the answer may be no, without seriously compromising lifestyle. If this is the case, then consult a financial adviser for other options, including buying a similar property or better in an area you can afford even with much higher interest rates and lease it out. In return, you can lease in your preferred suburb and continue to enjoy your lifestyle while you have a property that overtime will appreciate in value and avoid FOMO.