Eight ways to profit from a falling property market

Cashed-up property buyers with good credit histories are enjoying the best of all worlds as prices and interest rates fall, discounts increase and reduced competition means there is more time to shop around for the best deal.

“It’s never been so good for buyers,” says Emma Bloom, a director of buyers’ agency Morrell and Koren. “They should be waiting like a tiger in the long grass for the right moment to strike.”

The outlook for those renting while saving for a house is also brighter because falling prices make it easier to save a deposit and increased competition for tenants as housing supply rises means landlords are anxious to find or retain tenants by lowering – or capping – rents.

Buyers are in the driver’s seat thanks to the slide in property prices. Simon Letch

Here are eight ways to profit from a slowing property market.

Falling prices

A two-storey, four-bedroom house in Lilyfield, six kilometres west of Sydney’s central business, that was on sale in November 2017 for $2.7 million is currently valued at 25 per cent less.

In Melbourne, a four-bedroom, two-storey house in a prestigious, leafy inner suburb that was last year sold for more than $7 million has dropped in value by more than $2 million, or 28 per cent.

House prices fell another 0.9 per cent in November, the largest monthly fall in 10 years, and are down 5.3 per cent for the year, according to analysis by investment bank Morgan Stanley.

But there’s no need to rush into the market because low auction clearance rates and weak sentiment are evidence of even bigger bargains as prices continue to fall, says the bank, despite being 9.5 per cent down from peaks.

Trading up

Mark Wridgway, a director of real estate agent RT Edgar, is willing to sell his family home at a discount for what he considers a great deal on a house closer to his work and schools his children attend.

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“There are great opportunities to trade up in these markets,” says Wridgway, despite recent falls in property values.

Wridgway has paid about $6.2 million for the four-bedroom, two-bathroom house on a 1210-square-metre block that was last year sold for more than $7.8 million and passed in at auction earlier this year at $5.6 million. The father of three will be selling his home in a nearby suburb to fund the deal for around $5 million.

His company handled last year’s sale and the recent auction was conducted by Marshall White.

“I will be taking a hit on selling my home but it’s worth it for the much better location and being closer to schools,” he adds.

Wridgway says prospective buyers are being put off by falling markets and tightening credit.

“Ninety-nine times out of 100 when lots of people go one way, the market goes the other,” he says about changing market sentiment.

Developer deals

Thousands of new apartments continue flooding on to the market, putting pressure on developers to cut prices and offer incentives to buyers, ranging from cars and cash bonuses to white goods.

Some property groups are offering mortgage brokers, financial advisers and accountants a $10,000 bonus for every sale plus generous rebates on stamp duty and other incentives.

Buyers should check with their adviser and seek rebates on any incentives.

“While they are attractive, they are not the main game,” says Christopher Foster-Ramsay, principal of mortgage broker Foster Ramsay Finance. “Buyers need to focus on whether the property is right for them in terms of design, location, finance and price.”

For example, the sale of $1.5 million apartments in Ashwood, about 14 kilometres south-east of Melbourne, includes free blinds and the waiving of stamp duty.

Developers are throwing in luxury fixtures such as marble kitchens, Miele appliances, timber flooring and high ceilings.

Mark Wridgway is making the most of falling prices to trade up to this new home. Duncan Hughes

Buyers of a three-bedroom apartment in beachside Mordialloc, about 24 kilometres south-east of Melbourne, selling for $990,000 are being offering 12 month rent guarantee – which is paid even if a tenant cannot be found – and free blinds.

Lender cuts

Lenders are keen to do deals with the right borrowers. They want the business because net interest margins are their biggest source of profits, pumping up dividends and executive bonuses.

First-time buyers with deposits of at least 20 per cent are hot property and attracting great rates, terms and conditions.

CBA, the nation’s biggest lender, recently increased discounts by up to 50 basis points on variable mortgage rates to attract more first-time buyers and existing buyers seeking to refinance.

Other lenders, including ANZ, Westpac, Macquarie Bank and HSBC Australia, are following up recent rate rises with cuts for selected existing borrowers.

Mortgage brokers, which act as an intermediary between lenders and borrowers, reckon they can improve deals for owner-occupier borrowers.

Foster-Ramsay says brokers should be able to knock up to 15 basis points off the advertised rate for the “right borrower”, which is typically someone with a good repayment history wanting to borrow 80 per cent or less via a principal-and-interest loan.

“If there has ever been a great opportunity for a terrific deal, it’s now,” says Foster-Ramsay.

 

Other incentives on offer from lenders include waived administration fees and cash incentives to help pay legal and moving costs.

For example, Pepper Home Loans, a non-bank lender, is waiving $1800 in upfront fees on some loans.

Vendor discounts

With auction clearance rates having dropped to about 40 per cent during the past two months, many sellers have been forced into private negotiations, according to CoreLogic, which monitors auctions.

Vendor discounts are relatively low but increasing, nationally averaging about 4.6 per cent for houses and 4.9 per cent for apartments, according to investment bank Morgan Stanley.

They range from about 4.3 per cent in Melbourne to 6.4 per cent in Perth and are rising as sales continue to decline.

Another factor putting pressure on sellers is the number of days properties are on the market. It is spiking to highs not seen for about six years, typically between 30 and 56 days depending on the capital city.

Bargain hunting

Local and overseas investors are selling discounted apartments in prestigious high-rise developments like Australia 108, Aurora and Premier Tower because they cannot secure bank funding.

Online websites, such as Gumtree, are advertising heavily discounted apartments, or advertising that the seller is open to negotiations.

No everyone is unhappy about falling property prices.  Greg Newington

For example, a Queensland investor is selling a 49-square-metre one-bedroom apartment in Australia 108, the tallest residential building in the southern hemisphere, for $459,000, having bought it off the plan for almost $500,000.

Increasing numbers of properties are selling at “reduced prices” and mortgagee-in-possession sales are rising. A mortgagee in possession happens when a borrower defaults on their repayments and the lender takes possession and sells the property.

Falling rents

For those renting while they save for a deposit, lower rent increases disposable income and contributes to savings.

National rental yields are rising as prices have declined to about 3.4 per cent for houses and 4.2 per cent for apartments, according to analysis by CoreLogic. (Rental yield is a measure of how much cash an income-generating asset produces as a percentage of that asset’s value.)

But median rents are falling in Sydney (the nation’s most populated city), Perth, Darwin and parts of Brisbane as supply increases or demand falls. Melbourne remains robust as surplus stock is being absorbed by rising rental demand.

Rental returns nationally on houses are about 1.6 per cent, which is below the benchmark inflation ration of just over 2 per cent, according to SQM Research, which monitors rents and property prices. For apartments the return is 3 per cent. In Sydney rents for housing and apartments during the past 12 months have fallen by 3 per cent and 2 per cent respectively.

More time to negotiate

Anxious buyers and curious neighbours no longer crowd suburban streets for weekend auctions, say real estate agents and buyers’ agents.

“These days it’s none, or one,” says buyers’ agent Bloom about auction turnout and bidding.

 

“That means buyers are in the driver’s seat,” Bloom says. “The vendor no longer sets the pace. The fact that a property sold for x,y, or z two years ago no longer matters. Prices are driven by competition and there is no longer the same competition.”

Buyers can also negotiate more flexible settlement conditions and discuss the price with less likelihood of being gazumped by a rival bidder.

https://www.afr.com/personal-finance/banking/how-to-profit-from-a-falling-property-market-20181205-h18rol

The graph that puts falling home prices in perspective

In one of his last public appearances before he retired from a decade-long stint as governor of the Reserve Bank in September 2016 – what we now know to be approaching the peak of Australia’s property price boom – Glenn Stevens gave a prescient warning.

“Prices can fall; they have fallen,” he warned. “I think, since I’ve been in this job, we’ve seen them fall two or three times.”

Banking Royal Commission report looms over the industry

Back in 2010 the RBA governor Glenn Stevens warned that property prices wouldn’t always keep rising, six years on he shares his thoughts again.

That such a statement of the bleeding obvious made big headlines at the time was a symptom of the frenzied state of Australia’s property market.

We can now pinpoint the peak in the Sydney property market to July 2017; and Melbourne to November 2017, according to CoreLogic data.

Since then, prices have fallen 9.5 per cent in Sydney – within a whisker of the falls seen during the 1990s recession, when double-digit mortgage rates tipped borrowers over the edge. Melbourne is also off 5.8 per cent from its highs.

And there’s more property pain to come, with economists tipping total falls of between 15 to 20 per cent all up.

But it’s important to keep things in perspective.

CoreLogic data showing the median dwelling sales price going back to 1980 confirms home prices have undergone several periods of adjustment during that time.

After the halving in real interest rates that followed the 1990s recession, Sydney home values more than doubled from less than $200,000 to more than $400,000 – where they stayed for almost a decade.

The global financial crisis in 2008 initially ate a chunk out of home valuations, before the Reserve Bank stepped in to drop interest rates to record lows, sparking the biggest property boom in Australia’s history.

That boom forced regulators to step in to curb some of the worst elements of excessive lending, like interest-only loans.

They’ve been successful. The Australian economy is at less risk of a messy fallout from excessive leverage as a direct result.

But Sydney dwelling prices – including houses and units – are now closer to $800,000 than their frenzied peak at close to $900,000. Still, prices are again roughly double where they were a decade ago.

Stevens concluded his remarks by noting: “The assumption that there’s an easy road to riches through leveraged holdings of real estate … is not a great strategy.”

It may not be. But even factoring in the latest falls, it hasn’t proved such a bad one either – for those fortunate enough to afford the entry price, of course.

 https://www.smh.com.au/business/banking-and-finance/the-graph-that-puts-falling-home-prices-in-perspective-20181204-p50k33.html

NSW to make the biggest changes to stamp duty in 30 years

The Berejiklian government will make the biggest overhaul to stamp duty in 30 years delivering a tax break to future home buyers that will grow over time.

Under the changes the seven price bands, or brackets, which determine how much stamp duty is paid by home purchasers will start to rise with inflation from the middle of next year.

NSW Treasurer, Dominic Perrottet says his stamp duty changes will improve fairness and efficiency
NSW Treasurer, Dominic Perrottet says his stamp duty changes will improve fairness and efficiencyCREDIT:AAP

The brackets have remained largely unchanged since 1986 despite the increase in property prices since then.

The government says the changes will cut the average amount of stamp duty per property transaction by around $500 by 2021 but the savings will rise over time.

NSW Treasurer Dominic Perrottet labelled it the most significant reform to the stamp duty system “in a generation” and said it would deliver a fairer, more efficient system.

“The savings in the short term are modest but over the long term they will be substantial,” he said.

The tax reform will cost the state budget about $185 million in the three years after the changes take effect on July 1 next year.

NSW will be the first state to index stamp duty brackets to the consumer price index.

Stamp duty is levied on residential property purchases using  price brackets and rates that rise from 1.25 per cent under $30,000 to 5.02 per cent over $3 million.

During the past 15 years the median house price in Sydney has climbed from around $400,000 to just over $1 million. As a result, stamp duty “bracket creep” caused by property price inflation has pushed up the average rate of duty payable from 3.37 per cent to 4.05 per cent.

The changes to be announced on Monday will reduce, although not eliminate, the effects of stamp duty bracket creep.

To illustrate, Mr Perrottet said that if the state’s stamp duty brackets had been indexed when they were introduced in 1986 someone purchasing a $1 million property today would pay around $8,000 less in stamp duty.

“Anything we can do to reduce the impediment for people to move home or downsize is good reform and this will do that,” he said.

The indexation of stamp duty brackets will only apply to residential property transactions.

The stamp duty reforms come amid a downturn in the Sydney property market. Dwelling values in the city have fallen  around 8 per cent since their peak in July 2017, Corelogic figures show.

But there is still widespread voter concern about housing affordability, especially in Sydney, and the cost of housing remains a key political challenge for the Berejiklian government.

Mr Perrottet said the stamp duty changes would help make it “easier for people to realise the dream of owning a home”.

The stamp duty reform is modest compared with recommendations made by the commission of audit conducted when the Coalition won government in 2011.

The audit, by former NSW treasury secretary Michael Lambert, said stamp duty is the “most inefficient of NSW state taxes”. It recommended a ‘Stamp Duty Replacement Tax’ be phased in to replace all property transfer duties. The proposed replacement tax would be based on land values rather than market values of properties and would be payable annually instead of when properties change hands. The report said that change would deliver an annual welfare gain to the state of $2.3 billion.

Separate private sector modelling in 2016 found the NSW economy would get a $5 billion-a-year boost and add thousands of jobs if stamp duty was replaced by a broad-based land tax.

Mr Perrottet said he was open to further reform of property-related taxes but that substantial changes would require the co-operation of the Commonwealth government and other states and territories.

https://www.smh.com.au/national/nsw/nsw-to-make-the-biggest-changes-to-stamp-duty-in-30-years-20181104-p50dy1.html