Australian Expat Finance 2019 update. It’s been an eventful few months since the Australian Federal Election. We are sure you’ll enjoy reading our observations on the current marketplace for Australian Expat property investors and for the remainder of 2019.
What’s next for the Australian debt market in 2019?
Over three months have now passed since the Australian Federal election and what a surprise that was! The result was what many wanted but didn’t hold out much hope that it would happen. Many articles have been written about how Labour failed to win, all we are concerned about is what has changed since then.
- The Government being re-elected has provided a platform for stability, a Labour government would have driven a few very unpopular changes that would ultimately have destabilised the property market and then the broader economy, so by re-electing the Government, the uncertainly was removed and the broader market breathed a sign of relief. The weekends that followed the election, we saw clearing rates dramatically increase.
- The second positive change came fairly out of the blue during the week after the election. The banks had been lobbying APRA for over a year to make changes to the way lenders had to assess debt, e.g. what “buffer” they had to apply to the interest rate of a loan to satisfy the Responsible Lending guide-lines.
The “buffer” had been set at a fixed rate of at least 7.25%, for owner occupied debt, up to 8.05% for investment debt (The buffer was effectively in place to ensure an applicant’s mortgage was stress tested, e.g. could they afford an increase in interest rates?). These limits had been set a few years earlier when rates were higher, however were now seen as far too conservative. APRA announced they were repealing the ruling and were in consultation with the industry to identify a better model to move forward.
- The third positive change came on the 5th June and the 3rd July when the Reserve Bank dropped the cash rate by 0.25% respectively. The RBA cash rate now sits at a record breaking 1% and is widely expected to drop further! Fortunately, most lenders have dropped their rates, usually not the full 0.5% but close to it, we are now seeing rates as low as 2.99% on owner occupied P&I loans.
In July we saw many banks make changes to their formulas of how they assess new and existing debt, this related to the changes being made by APRA. APRA didn’t provide a ruling but directed lenders to implement a responsible approach and comply with Responsible Lending guidelines. As a result, the most common model we have observed is a formula of the actual rate plus 2.5%, with a minimum rate of 5.75% being applied. This, in my view, has been the most significant aspect to the three changes, because it allows people who couldn’t obtain debt, to now potentially access debt. In addition, it allowed people who could get debt, to get more debt
So, when you put all three points together, what’s the outcome?
Ultimately, we are seeing clearance rates in Sydney, Melbourne and Brisbane increasing, the length of time properties that are on the market reducing and prices increasing, so we are seeing definite signs of a stagnant property market moving.
All good, so what’s the problem?
The property market is only one aspect of the broader Australian economy, cash rates weren’t dropped to increase property prices, they were dropped to provide stimulus for an economy in need of help.
We have seen the early effect of the reduction of the cash rate on one part of the economy but how are the other parts performing and how long will it take for us to see a positive change there?
Another indicator has historically been the ASX, the stock market, during the same period we have seen the ASX hit record highs, fantastic.
Or, is it?
If you were a retiree looking to gain a reasonable return on your hard-earned super, where do you invest? As cash rates are at historical lows, so are Term Deposit rates, so if you are a retiree looking for a conservative return on your savings where do you invest?
What we are observing is that in the search for yield, many are looking at the ASX. In the recent reporting season, we have seen many companies reporting lower than expected profits, ultimately showing that many are overvalued (too high price/earnings ratios).
The big question, what can we expect for the remainder of the year, and who has a very hard decision to make?
We have seen the effect of the combination of three outcomes;
- Easing of credit rules
- Lower interest rates
The property market is increasing. But is that positive for the broader economy?
If the broader economy doesn’t grow, for example, we don’t see the inflation figures that the Reserve Bank are looking for, then what does the Reserve Bank Governor do with interest rates moving forward?
Does the Governor drop the cash rate by a further 0.25%? This could further stimulate an already fuelled property market, property prices increase further, but if the Australian economy is still teetering on the edge of a technical recession, he may not have a choice.
On a final note, we are now in September, with Christmas only a few months away. If we manage to avoid a recession, the accolades will go to the Reserve Bank and the Government for their fiscal policy, however, we will all know it was Santa who saves the economy again.
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