Australia Property

[edragon]

Likely RBA's Stevens will again jawbone the Aussie to drop so that foreign investor who want to dispose of their properties will face losses when converting back to their home currency. Meantime, building approvals is gathering pace.

[specuvestor]

Firstly I think Stevens has stated many times that AUD has to drop. Investors should be aware.

Good thing is that this will dampen investor demand... for a while. Demand will comes back when they think AUD has bottomed, and unlikely Australia will cut rates further as they need a positive spread against other currencies to maintain capital inflow. So this is not a structural solution.

As I posted before, increasing unemployment and reversal of current account surplus is a sign that the property market is not sustainable, if not for foreign inflows.

My GUESS is that they will engineer a soft landing in Aussie properties coupled with weakening AUD while keeping interest rate flat. Structural solution has to be found on the regulatory side to tilt the risk/reward propositions.

[edragon]

On the other hand, little brother Kiwi's interest rate is 3.5%, a full 100 basis point to the Aussie's 2.5%.
How long can Aussie hold onto this low interest rate?
As Steven's hands are tied, He can only use his mouth to do the job like a talking mynah, talk talk talk and more talk. Nothing but talk, no venom.

[greengiraffe]

Investors typically borrow in A$ and hence they are hedged. Only novice investors and migrants converts into A$...

RBA is probably the best Central Bankers in the world though their tools are running out with interest rates falling in line with the global liquidity trap...

RBA urges increased housing supply to deflate price bubble
AAP OCTOBER 02, 2014 3:50PM

AN increase in home building activity is most likely the best way to rein in the rapid rise in house prices, the Reserve Bank of Australia says.

In 2013-14 house prices grew more than 10 per cent nationally and 15 per cent in Sydney, driven by a big rise in investor activity, mostly in existing homes.

RBA assistant governor for financial systems, Malcolm Edey today told a parliamentary committee inquiry into affordable housing that an emphasis on increasing the supply of housing was needed to slow price increases.

“We can’t improve housing affordability simply by adding to demand,” Dr Edey said in Canberra.

“Targeted assistance can certainly help particular groups such as first-home buyers, but without a supply-side response, any generalised increase in demand will just be capitalised into prices.”

Dr Edey said that investor loan approvals had increased by about 90 per cent over the past two years.

“It is against this background that the bank said in its financial stability review last week that the composition of housing and mortgage market activity is becoming unbalanced,” he said.

Dr Edey said housing affordability had fluctuated between around 20 and 30 per cent of disposable incomes in the past three decades.

“It has been rising recently and is now at the upper end of its recent range,” he said.

Last week, RBA governor Glenn Stevens raised the possibility of changing regulations to curb risky lending to property investors. The central bank is concerned that soaring house prices and rapidly growing investor activity could pose a risk to banking stability and to the economy.

“I want to emphasise that the banks in Australia are resilient, and mortgage lending in this country has historically been relatively safe,” Dr Edey said.

“APRA (Australian Prudential Regulation Authority) has, however, noted a trend to riskier lending practices, and over the past couple of years has been seeking to temper these through its supervisory activities.

“Since this activity can amplify the property price cycle and increase risks to households.”

When asked what tools specifically were being considered, Mr Edey said the tools were APRA’s, not the RBA’s and that discussions with APRA and other agencies are ongoing.

He said he wasn’t “ruling anything in or out” during the session, but said loan-to-value ratios are “unlikely”.

“The tools we are talking about need to be carefully targeted,” Dr Edey said.

“We have said we think there is an imbalance in the form of excessive activity by investors in the market. It is out of proportion with their normal share of the market.”

Dr Edey said the RBA was not trying to kill the investor market.

“We are not against investors; we are just against imbalance. It has got to be proportionate,” he said.

The RBA’s head of financial stability Luci Ellis told the hearing that this imbalance was primarily in the Sydney and Melbourne markets and where the increase in house prices were most concentrated.

She said prices were rising in other places, but not by amounts that would cause concern.

“(But) we are worried about what the downside of that house price cycle would look like,” she said.

Mr Edey said an announcement on any macroprudential tools would likely be made before the end of the year.

While they would be targeted, it would not be narrowly targeted to regions.

“We are not social engineers and getting into the postcode level,” he said.

[greengiraffe]

http://www.afr.com/p/personal_finance/sm...jzlubeDhIP

Scramble for housing gets riskier
PUBLISHED: 5 HOURS 28 MINUTES AGO | UPDATE: 4 HOURS 58 MINUTES AGO

Scramble for housing gets riskier
If prices fall investors could be left with a bigger loan than the value of their property, leaving them in a dreaded “negative equity” position. Photo: Louise Kennerley
RBA faces the daunting challenge of housing
Young buck aims for 10 properties by 30
Investors are taking advantage of super low mortgage rates to get a foothold in the current property boom.

Greater numbers, though, are moving up the risk curve to get into the market, borrowing at higher loan-to-value ratios and taking out riskier interest-only loans on the premise that house prices will continue to rise.

One in two home loans in NSW over September were for investment purposes, according to Australia’s biggest mortgage broker, Australian Finance Group. It was a record month, with investors also accounting for more than a third of home loans in Victoria, South Australia and Queensland.

In Sydney, the dominance of investors (50 per cent) and the withdrawal of ­first-home buyers (less than 4 per cent of all AFG home loans in September) is most pronounced.

Westpac economist Matthew Hassan says rising property prices, falling fixed ­mortgage rates and gross rental yields comfortably above both term deposit rates and dividend yields have created a mix “conducive for strong investor activity”, particularly in Sydney.

Mark Hewitt, chief operating officer at AFG, says in Sydney and Melbourne there is a flight among investors towards property over shares. “In the last two years, competition for home loans is the strongest it has ever been.”

But, he argues, credit standards have not slipped. “Lenders remain quite choosy,” he says. “Most investors take out a standard principal-and-interest loan on their primary residence, but want to keep payments on their investment loan at a minimum.”

Hence the rise of interest-only loans, where only the interest is paid off each month, leaving the principal untouched as investors punt on price gains to build equity.

However, if prices fall investors could be left with a bigger loan than the value of their property, leaving them in a dreaded “negative equity” position.

“Investor lending is not a major problem at this stage,” Hewitt says. “But it’s very prudent the RBA is watching the market closely and bringing its concerns to people’s attention.”

Loan-to-value ratios under 80 per cent (the point at which a borrower does not require lender’s mortgage insurance) declined from 46 per cent to 40 per cent over September.

At the same time appetite for conservative fixed-rate loans rose to 28 per cent of all new investor lending. “There are some very good fixed-rate offers in the market and not a lot of downside risk given how low they already are,” Hewitt says.


MOST POPULAR HOME LOANS
Comparison website Finder.com.au’s most popular home loans are a 4.39 per cent three-year fixed-rate home loan with building society Newcastle Permanent and a 4.54 per cent variable rate loan from online lenderloans.com.au, an offshoot of non-bank lender FirstMac.

“Competition is strong for investment home loans,” says finder.com.au’s Michelle Hutchison. “Investors can improve their returns with a good value home loan deal; the difference between a $300,000 investment home loan at the average variable rate of 5.31 per cent compared to the lowest rate of 4.54 per cent, could save them $141 a month” – $50,000 over 30 years.

However, finder.com.au also recorded a 73 per cent rise in borrowers taking out interest-only home loans in September 2014 compared with the same month last year.

“For investors, it may be easier to manage cash flow if it’s a short-term investment. However, this may be a risky move for some borrowers – if they overstretch themselves – as rates are expected to rise next year”, Hutchison says.

Among the banks, Westpac is the nation’s biggest lender to investors, according to APRA figures, ahead of the Commonwealth Bank and its big four rivals. Macquarie Bank is a rising force, targeting investors borrowing against their self-managed super funds.

In Westpac’s case more than 90 per cent of its investor clients borrow below 80 per cent, are generally older, with higher incomes and higher credit scores. Owner-occupiers carry more risk.

But economists, including AMP Capital’s Shane Oliver, say investors should keep in mind that residential property provides a similar long-term return to shares – about 11 to 11.5 per cent a year since the 1920s.

“They are also complimentary to each other in terms of risk and liquidity and are lowly correlated. All of which means there is a case for investors to have exposure to both,” he says. “At present, though, housing looks somewhat less attractive as a medium-term investment. The average gross rental yield is just 3.8 per cent. After costs this is just below 2 per cent. Shares and commercial property both offer much higher yields.”

Some investors have already seen the writing on the wall in markets like Sydney, where the median unit price rose to $575,000 in September, according to RP Data.

NSW police officer Charmian Whitehurst made good money on her first three properties, in Western Sydney. “I bought before the current boom,” she says. She has since shifted her attention to Brisbane, where she says houses are more affordable: you get more for your money and better returns.

Her seventh investment purchase was a one-bedroom apartment in Fortitude Valley, which she bought off the plan for $392.000.

Her bank, AMP, offered her a 4.8 per cent variable rate if she refinanced all her home loans with them.

The Australian Financial Review

[greengiraffe]

http://www.afr.com/p/personal_finance/sm...cfriIQtaTP

RBA faces the daunting challenge of housing
PUBLISHED: 5 HOURS 28 MINUTES AGO | UPDATE: 4 HOURS 55 MINUTES AGO

RBA faces the daunting challenge of housing
Private investors are using their savings and getting into debt to fund their real estate purchases. Illustration: Sam Bennett
ROBERT HARLEY
Scramble for housing gets riskier
Young buck aims for 10 properties by 30
In the year to June, eager housing investors borrowed an extra $40 billion to fund their new found enthusiasm for real estate.

The surge is modest by the standards of past booms but it has been enough to spook the nation’s financial regulators.

The Reserve Bank, the Australia ­Prudential Regulation Authority and the Council of Financial Regulators are working to slow the growth in investment lending.

What they do will have implications for new housing investors seeking a loan, and for all those existing investors keen to see the value in their assets grow.

On Friday, ANZ Banking Group chief executive Mike Smith warned investors saying “If anybody believes that housing prices should continue the way they have the last few years, (the RBA) have been saying very clearly this is not going to happen,” he said. But if the regulators know what will ­happen,they are not “ruling anything in or out.” Before a Senate Committee on Thursday two key Reserve Bank executives, assistant governor Malcolm Edey and the head of financial stability, Luci Ellis, looked like the parents of an 18-year-old birthday girl.

They just want to slow the alcohol, not stop the fun. And only to protect one or two friends who, you know, get a bit silly.

But just as an 18th birthday party can be hard to control, so too can a housing boom. Too light a touch and nothing happens; too heavy a hand and the much needed increase in housing supply will grind to a halt.

The regulators, says Edey, will likely make an announcement by year end.

In the meantime, the experts are assessing the options from a subtle tightening of lending requirements to the heavy hand interest rates or taxation changes.

Mark Hewitt, the general manager of sales and operations at the largest mortgage broker, AFG, says the RBA is, in the first instance, trying to talk the market down.

“At the moment it is more jawboning,” he says. “The regulators are keeping an eye on things and if it gets out of hand they will have to take action.”

In this view, the RBA is taking a well trodden central bank line, talking tough in the hope that nothing more needs to be done.

On AFG’s numbers, the tactic is not working, at least not yet. In September, AFG, with 10 per cent of the market, wrote a record $1.7 billion in investment loans.

At the same time, the proportion of investment ­mortgages with loan to ­valuation ratios above 80 per cent rose to 60 per cent.

STANDARDS HAVE NOT LOWERED
Nevertheless, Hewitt says the banks are holding their lending standards. “They have not tightened them, but they have not ­loosened them,” he says.

The RBA has a similar view. In its September Financial Stability Review, the bank noted the signs of competition like larger ­discounts on advertised variable rates, fee waivers, up-front cash payments to ­borrowers, and higher bonuses for ­mortgage brokers.

The key safeguards are in place. “In ­aggregate, banks’ non-price lending standards, such as loan serviceability and deposit criteria, have remained,” wrote the RBA.

The next step in regulation would be to tighten some of those non-prime lending standards. Edey says the aim is to “target the high risk and problematic areas of ­housing activity”.

The obvious place to start is on the ­“buffers” which the banks use to ensure that the loan can still be serviced with a rise in interest rates.

Today the banks are buffering for a rise of around 200 basis points. Another 100 basis points would have a marginal impact.

The next step would be to restrict loan to valuation ratios, as has been attempted in New Zealand. Across the Tasman, the policy had the unintended consequence of cutting out first home buyers instead of investors and the RBA appears to have ruled it out.

Another step would be to toughen the loan to income ratio controls, as the Bank of England has done in the past. Once again the consequence might be to hit first home ­owners rather than investors.

The last way to target non-price lending criteria might be to set geographic rules. Again the RBA appears to have ruled this out. In the past, the banks have controlled lending by avoiding oversupplied postcodes or worrisome property characteristics.

In the 1990s, lending to inner city postcodes, like Melbourne’s 3000, was restricted as was lending on apartments of less than 50 square metres in size.

Today, despite the plethora of warnings about an oversupply in inner Melbourne, the banks still seem to be lending, At the same time, mortgage brokers note that lending to areas linked to resources, like the Pilbarra, is being restricted.

STRUGGLE FOR CONTROL
In essence the RBA and APRA face a daunting challenge to find the right mix of such controls.

Beyond the nation’s housing market other changes are taking place, both nationally with David Murray’s Financial Systems Inquiry, and internationally, in response to the financial crisis, and these might give the regulators more clout. Adjustments to the capital adequacy rules are under discussion, which could make investment loans less attractive compared with owner-occupied and business lending.

But those rules do not apply to the ­non-bank sector. Investors, keen to take advantage of mortgage rates at long-term lows and rents at long-term highs, could look elsewhere for their finance.

One key watcher of the mortgage sector, Martin North of Digital Finance Analytics, says the regulators have chosen a “hard nut to crack”.

“Its been created by many years of bad policy,” he says. “The real key to long-term adjustment is supply side initiatives which are more state than federal.”

Sledgehammer tools do exist.

The big one is a rise in interest rates. A new survey of economists by comparison website finder.com.au points to a first rise in rates in June 2015.

The Abbott government will also come under pressure to change the rules on negative gearing through the white paper on Reform of Australia’s Tax System.

For potential investors looking for a loan, this might be the best time to move.

The Australian Financial Review

BY ROBERT HARLEY

[greengiraffe]

http://www.afr.com/p/personal_finance/sm...Txcl7sJQ3O

Young buck aims for 10 properties by 30
PUBLISHED: 5 HOURS 33 MINUTES AGO | UPDATE: 4 HOURS 55 MINUTES AGO

Young buck aims for 10 properties by 30
Mitchell Shand paid $250,000 for his second investment property, in Townsville. Photo: James Alcock
LARRY SCHLESINGER
Scramble for housing gets riskier
RBA faces the daunting challenge of housing
Mitchell Shand is 22 and has just bought his second investment property. His goal: to own 10 properties by the time he turns 30. “I’m young so I’ve got a long-term plan. It’s all about wealth creation.”

The Sydney mortgage broker bought his first investment property – a $650,000 townhouse in Riverwood – with his sister in May last year and hasn’t looked back

“I work in the mortgage industry, so property is pretty hard to ignore. It’s something tangible. It won’t burst and it won’t lose its value overnight. Shares tend to go up and down,” he tells AFR Weekend.

He believes the Reserve Bank’s fears about property investors overheating the market are largely unfounded because the right lending measures are already in place.

“The RBA is being a bit too cautious. Investing is only a problem if you do it the wrong way; if you’re geared up to the hilt, don’t know the value of your property and prices fall. Then you could end up owing 100 per cent or more of the value of your investment”

His advice: be conservative, think outside the box and buy at the cheaper end of the market. “You need to look at what you can afford, not how much the bank says you can borrow. Don’t overextend yourself.”

TOWNSVILLE TARGETED
With Sydney property prices rising about 16 per cent over the past year, Shand did better than expected out of his Riverwood townhouse and was able to use the equity accrued to buy a $250,000 property in Townsville in June. He plans to buy again next year and is looking at Brisbane.

He picked Townsville because of its good capital growth potential. “It has a university, army base, good schools and plenty of infrastructure development.

“I’ve done well out of my Sydney property, but I think the market has peaked. When it eventually flattens out, I’ll look at it again.”

Both his properties are negatively geared.

He earns about $300 a week in rent from the Riverwood property and $295 a week from his Townsville tenants. This gives him gross yields of 4.8 per cent and 6.1 per cent respectively: “I get a lot back in tax, so in a way it’s forced savings. The rent I receive goes into a separate lender account so I don’t miss any interest payments.”

Before joining Neutral Bay mortgage brokers Smartmove, Shand worked at the Commonwealth Bank, where he has both his loans. His first loan was a split fixed-variable mortgage. The fixed portion acts as a hedge against future rate rises, while the variable component allows for extra repayments.

“If I get paid a bonus, I can put that into my home loan. I also have an offset account, which reduces my home loan balance and my monthly interest payments,” he says.

90PC BORROWED
He bought his second property with a variable investment loan. In both cases he borrowed 90 per cent of the value, but only had to pay lenders’ mortgage insurance (LMI) on the second investment property.

“When I bought my first investment property, the bank offered a staff deal, which waived LMI,” he says.

Shand continues to rent, flat-sharing with a mate in Cammeray. He budgets carefully each month to meet his commitments with something left over to eat out with his friends. But these are small sacrifices and Shand appears well on his way to becoming a property mogul.

“My friends are all very surprised I am able to do this at my age. The hardest thing was to accumulate my first deposit – my father helped me out – but it just rolled on from there,” he says.

The Australian Financial Review

[BlueKelah]

That's why RBA is concerned.

Even youngsters are jumping in the bandwagon with >90% variable LVR. Setting up offset accounts and leveraging up with their "equity", hoping to get to the magic target of 10 properties touted by property investment gurus. They won't be so confident when interest rates rebound back to 10% or property prices go down >25%. However they stand to become really rich if the market goes up for next 10 years whilst they are accumulating. It is a big gamble which only pays off when times are good.

[greengiraffe]

Be positive lah... no use being negative. I have not made $ from property investments as I never believe in leverage.

The negative gearing and investment property is part of culture if able Aussies.

I think that is a fair report as the young bloke sounds sensible.

I m pretty sure that there plenty of such unreported cases in Singapore, HK, China and UK - anywhere where there is a property bubble.

That's why RBA is concerned.

Even youngsters are jumping in the bandwagon with >90% variable LVR. Setting up offset accounts and leveraging up with their "equity", hoping to get to the magic target of 10 properties touted by property investment gurus. They won't be so confident when interest rates rebound back to 10% or property prices go down >25%. However they stand to become really rich if the market goes up for next 10 years whilst they are accumulating. It is a big gamble which only pays off when times are good.

[greengiraffe]

More Chinese cash on the way


Nick Lenaghan and Michael Bleby
462 words
7 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

China further eased restrictions of ­outbound investment this week, with a fresh wave of capital expected to make its way into the Australian ­property market.

Under the changes, which take effect from October 6, China's commerce ministry will relax the requirements for outbound investments that need its approval.

The latest edict is among a number of reforms since 2012 that China has made in order to reduce the red tape holding back its own investors ­moving offshore.

"A new raft of easing of policies is going to come in October this year," said Hong Kong-based Simon Smith, Savills research senior director on Monday.

"That might help encourage ­overseas investment. That's something to watch."

The reforms have accompanied a broader shift in the Chinese economy away from its reliance on foreign investment, toward domestic drivers.Outbound investment rising

At the same time outbound ­investment from China has been gathering pace in the last five years, in ­comparison with foreign investment.

The global energy sector has been the main targets for outbound Chinese investment although real estate is ­proving attractive.

Chinese sovereign wealth funds have joined the charge, led by China Investment Corp and the State ­Administration of Foreign Exchange, which each control $US550 billion ($633 billion) in funds.

Along with them are the conglomerates, such as Fosun International and Dalian Wanda, which are investing in Australia, and developers including China Vanke, Greenland Group and Guangzhou's R & F Properties.

Owned by the Shanghai municipality, Greenland is planning Sydney's ­tallest residential tower and a 1500-unit project at Flemington in Melbourne.

The next wave of investment could involve Chinese insurance giants such as China Life Insurance, Ping An Insurance and China Taiping Insurance, says Mr Smith and his Shanghai-based research colleague James McDonald.Insurance company ownership

China Life has an exposure in the Australian residential ­development market through its investment in Sino-Ocean Land, which is backing the 63-level Eq apartment tower in the Melbourne CBD. Restrictions on the amount of direct property held by China's insurance companies have been eased even further this year.

In June last year, Ping An snapped up the Lloyd's building in London for £260 million ($478 million) following that initial easing of restrictions. As well, Chinese insurers can allocate more ­of their capital offshore. There are almost 140 Chinese insurers, controlling $US1.4 trillion in assets under ­management.

"They are getting fairly low returns on investment at home and should be keen to look ­overseas," Mr Smith said.

A lack of capability and experience offshore could temper some of that expected activity as well as the limited opportunity for the kind of assets­ ­insurers need, he said.


Fairfax Media Management Pty Limited

Document AFNR000020141006eaa70004e