2015 may be less than a half-decade ago but it was a very different time in the property market. That year the Reserve Bank of Australia dropped the cash rate by 25 basis points twice, resulting in a historical-low of 2 per cent. Mortgage rates had never been so affordable. Buying activity skyrocketed in Sydney. It was almost-impossible to convince anybody to invest in any other market. It was absolute mania.
As is often the case, rental yields were unable to keep up with the rapid growth of Sydney dwelling prices. This meant many investors were forking out seven-figure sums in return for annual rents which were lucky to equal 2.5 per cent of the purchase price. This increased the dependency on capital growth for these investors which they expected to achieve, since the market was in a frenzy.
Regulators grew nervous as the median house price of Australia’s largest city approached $1 million. The next year, working class suburbs in Sydney’s west were creating droves of millionaires as fibro workers cottages attracted price tags of yesteryear’s mansions. It’s fair to say the post-GFC Sydney frenzy was unsustainable. This was undoubtedly the position of the Australian Prudential Regulation Authority (APRA) when they turned off the tap.
The tap was turned off by increasing loan serviceability requirements. This meant although borrowers were paying a mortgage interest rate of between 4 and 5 per cent each year, they would be assessed at a higher rate (7 per cent) to promote responsible lending. This is good in theory, but it disproportionately affected people on the fringe of housing affordability such as first home buyers and ‘middle Australia’.
Accompanied by APRA’s tightening was the uncertainty caused by the Labor Party’s negative gearing policy during the 2016 election. I commented on this issue back then, as well as ahead of the 2019 election. Just like APRA’s tightening of lending conditions, it is my position that changes to negative gearing would most impact affordability-driven investors, not the asset-rich ‘big end of town’. Around 2016-17, fear of foreign investors taking over also led to heavy five-figure duties being applied to their purchases.
We saw the result of government intervention most notably from 2017 onward when Sydney’s median dwelling prices stalled. This impacted media coverage (instead of reporting Sydney’s stalling, it was often conflated to the entire national market) and the number of purchasers dwindled. Sydney and other parts of Australia have been experiencing price corrections since then which is very bad news for people who purchased at the peak of the Sydney boom. Not only do they have negative equity, but also terrible rental yields.
The good news for property investors is that many markets in Australia remained stable or even grew over this period. This illustrates the value in not just investing for the upside, but also to mitigate the downside with well-researched investment decisions. The not-so-invisible hand of government intervention has been more favourable in 2019, with good news for property investors such as:
· A Liberal upset in the federal election which leaves negative gearing untouched
· Two RBA rate cuts to a record-low 1 per cent
· APRA partially winding back their intervention in loan serviceability calculations
It’s not quite time to pop the champagne in anticipation of the next price boom in your market of investment, but it’s certainly comforting to see more favourable conditions.