Reading Time: 5 Minutes
Good to be back in front of y’all on this sunny Sunday!
I was getting a bit carried away with Netflix in bed there for a sec (will Mowgli ever re-join the pack? SO intense).
But as much as I’m enthralled with the latest adaption of the Jungle Book and wolves with British accents, I think it’s time to get back to the second part of the Sydney Property Outlook (read part 1 here).
My opinion was and still is that 2019 will be a tough year for real estate in Sydney, here’s further reasons why that’ll be the case:
Brexit and the Trade War
What a difference a day or two makes eh, Theresa May hung on to the prime minister-ship (just), thus avoiding short term uncertainty regarding Brexit… until 29th March 2019 when the UK’s deadline to leave is due.
The smart money is on the uncertainty of Brexit to continue until the very last moment… and then a time extension is requested.
Coupled this with the ongoing Trade War negotiations between the US and China (incidentally also with a March deadline), makes the political risks enormous in terms of the global economy.
How does this impact Sydney?
Well Sydney (and to a lesser extent, Melbourne) is a predominantly service-based economy, with jobs and wages growth heavily tied to the Banking and Financial Services, Professional Services, IT and Healthcare sectors.
This means that these white-collar jobs are very much tied into how the Australian and Global economies are performing.
The headwinds at the macro level should see subdued wages growth and job expansion in the short-term at least.
RBA Rate Cut
The prevailing negativity should mean the RBA (Reserve Bank of Australia) actually cuts the cash rate, which is a positive right?
I mean, these days the banks are doing their own thang with interest rates anyway.
As in they are operating out of cycle with rate hikes and rate cuts.
I reckon that IF the RBA does cut rates, the banks won’t be passing on the full cut, no way – maybe 10, 15 basis points max (a basis point is 0.01%).
After all, every basis point up or down equates to MILLIONS in revenue for their bottom line, in terms of loans and deposits.
Sigh, here I go all nostalgic with the good old days not so long ago – when if the RBA hiked rates, the banks hiked it the NEXT day with the full 0.25% rise.
And if the RBA cut rates, the banks cut their headlines rates also, maybe not the next day, maybe not even the day after that… but at least you had confidence the full 0.25% cut would be passed along.
We live in interesting times.
Don’t forget there is one element in all of this which make Mowgli and his pack of wolves seem like a bunch of animated cartoon drawings, I am referring of course – to the ferocious beast that is the Australia media.
Not since a talking bear and a melancholy panther has a wild creature appeared so devastating in their ability to sway public sentiment.
Just have a glance of the Google News headlines when you type in “Sydney+Property“, my word you would think the sky is about to fall on our heads.
Unfortunately as 70% of all housing is from owner-occupiers, i.e. mum and dads – we can’t help but be affected by all the doom and gloom!
If this does pan out, expect liquidity and turnover (less people buying and selling) to dry up and further increasing price pressures.
Back in the halcyon days of 2012 – 2016, many investors and owner-occupiers stumbled onto a simple trick of taking out interest-only loans to minimize their loan repayments.
The rationale is that as the underlying property value rises, we can always sell the property at a later date for a higher value, thereby preserving our cash-flow.
Interest-only periods are taken out from anywhere between 1 – 5 years (on rare occasions up to 15 years) of the loan term.
Traditionally, the banks would tick and flick your application for a loan renewal, given the likelihood of the real estate value increasing.
But in this environment, more and more lenders are asking for a FULL application during the loan renewal process.
What’s more frightening is that at the end of the interest-only term, the lender has the right to convert the loan on a principal and interest repayment basis for the remaining term.
Let’s say on a standard 30 year mortgage of $500,000 at 5%, you take out an interest-only period of 5 years.
The only payment for the first 5 years is this interest portion or $2,083 per month.
At the end of the interest-only period, unfortunately the banks won’t let you extend further and force you to paydown the debt on a 25 year term.
The remaining 25 years is on a principal + interest repayment structure or $2,923 per month.
The difference of $840 may or may not break you – but it would hurt.
Here’s the scale of the interest only loans coming off in the next few years:
There ya go folks, more pain than gain to come methinks.
But you know, not all negative Nelly – in fact if you are buying, now is an AMAZING opportunity to wait and pick your battles or build up that war chest.
And if you’re purchasing a forever home, a place where you’ll be staying 20 years or more to raise a family – remember that it’s a long term decision, a few years here and there won’t be making a drastic difference.
Housing purchased in our major capital cities can be VERY forgiving, just look at history!
The final thing I will say about this is to re-iterate the best analogy I have heard to describe the housing market; that it’s like a giant oil tanker, it takes ages to get going and takes ages to slow down.
Of course the question is… just how long?
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