I sincerely hope that everyone has had the opportunity to take a break over the holiday period with friends and family. To open up the year thought I’d share the latest update of how I see things unfolding from a lending perspective for 2019.
The Overall Property Market
But first, a little bit of quick commentary on the property market overall. 2018 was a challenging year for property and Sydney in particular, which is down some -11.1% from peak in July 2017.
It has been widely publicised that the credit environment has contributed strongly to the market decline, though my own personal view that it the decline wasn’t really amplified until the mainstream media took a negative position and this has turned people off buying.
On the ground, I think the reality is the figures are far worse and personally I think we’ll see numbers at a decline more around -15%. The reason we are not seeing this reflected in the numbers yet for three reasons.:
- Firstly, people who don’t need to sell are not selling so transaction volumes are lower than previous years.
- Secondly, not all sale prices are being reported by agents which distorts the data reporting.
- Lastly, the data is a lag and is reported after the fact (it comes out around a month late).
There is also significant political uncertainty at the moment; firstly a potential change of government in 2019 with labor looking poised to successfully take government at the election. One of their policies they have tabled is the removal of negative gearing for investors, which could further reduce the attractiveness of the market. I suspect in reality this may not materialize given the market conditions, but time will tell. There has also been the royal commission into banking with which we’ll hear by February the implications. My view here is that there won’t be any further systemic reform given the changes lending has been through over the past 18 months, and that most lenders have evolved practices simultaneously.
For borrowers in 2019 – I think it is going to be a real buyer’s market and I’m expecting to see great value for those entering the market or upgrading.
In recent times we’ve seen almost all lenders put up their interest rates for new and existing lending (notable exception being NAB). The narrative has been the driver of this being the US Federal Reserve putting up rates in order to curb inflation, which has impacted the cost of wholesale funding across the globe. This impacts each lender differently depending on their exposure, but it does mean some smaller lenders have now passed on more than one increase over the past 6 months and the is risk this will continue to send rates up in our market over the year. With the state of market impacting things we are starting to see some new commentary from the Reserve Bank of Australia signalling that there could even possibly be a decline in our local cash rate, so this could play out in 2019. For borrowers going into 2019 –we see lenders continuing to battle for new customers with strong rates for new lending (particularly 2-3 year Fixed Rates) and continuing to blend their margin through existing lending.
Interest Only Lending
Adding to the “positive” talk from the RBA around decreasing rates there has also been positive news from APRA in December, who have announced they are scrapping the Interest Only lending cap of 30% that has been implemented for some time. The reality is that lending was significantly below this cap as it were, so unfortunately the change alone won’t make a difference to the market or lending. Until the assessment criteria is relaxed (particularly for investors) this won’t be a material change. What it could mean however, is that if a lender wanted to carve a niche and go after lending in the interest only space they are unrestricted. For example, a lender could potentially do an interest only investment loan at the same rate as a principal & interest owner occupier loan in order to take market share. If this occurs, I’d expect to see more competitive rates for new business across Interest Only lending in 2019.
The final thing to note in lending at the moment is that Credit Cards have also been the target of recent reform. I’m sure many can attest to anomaly of being able to apply for a credit card (with significantly high limits) with little to no income or identification verification, all while there have been significant controls put into residential mortgage lending.
This is now being addressed. They’ll also be assessed differently for the purposes of residential lending which will make it slightly more difficult to borrow as much for many. At the moment a $10K credit card would be assessed at a $300 per month repayment but this will now move to $382 per month based on paying the principal of the card off as well.
For borrowers in 2019 – this means ensuring that you either cancel the credit cards you don’t use or need, and reducing your limits on the card you keep to only what you need (e.g. $2K per month, not a $25K limit!)
So in summary, 2019 will be another interesting year with some big political milestones to clear. I don’t see the property market changing fundamentally, nor lending becoming any more difficult than the current environment. If anything, I think there will be opportunities that present themselves so I’ll commit to a monthly update to keep my clients informed.
Happy New Year – Hope everyone was able to celebrate with family and friends (and champagne of course!)