Many clients value my direct and undiluted views, even if they are not optimistic or what they want to hear. I value honesty and like sharing what I am seeing, so here are a few thoughts about the property market.
News Headlines - at the end of last year I wrote in one of these newsletters that we would see the terms 'mortgage prisoners' and 'negative equity' coming to a news paper near you. It is likely that you have seen this, and I hope that you are not in that situation. The issue with being stuck in a property either from changing rates that impacts servicing or changing rates impacting values is that it reduces options to refinance or sell at a profit. If people are in this situation they may be forced to sell which would be a negative force on property prices as they will have to sell to meet the market, which will inevitably be lower than what is has been over the past few years. People who bought in the last few years are particularly vulnerable.
Interest Rates - my forecast is that the RBA Governor Phil Lowe will do more heavy lifting before he is exited in September, and that in July, August and September we will see a 0.25% increase in each month, taking the cash rate to 4.85%. I already believe the RBA has overshot on the increases but the fact of the matter is that they have no choice but to keep raising. Why? There are two reasons. The first is that the RBA is behind other central bank interest rates globally, notably UK, US and NZ. We can't sustain a wide margin of difference in cash rates as that would lower the AUD value, import more inflation and be detrimental economically. Secondly, they are focused on getting inflation back in the target 2%-3% band and they will do what ever it takes to see that happen. This could mean even more rate hikes from the new governor.
Property Prices - we have not seen the bottom. The lagging impact of rates washing through the system will cause more downward price movement in the property market. Immigration will not be enough to solve this, but it will add more pressure to rents. One point to highlight why prices are going lower is that a property is only as valuable as what someone will pay for it, and borrowing power has been slashed by about 25% in most cases if not more, meaning that people can't borrow to buy at higher prices. This is why interest rates matter for property prices, the more someone can borrow the more they will spend on the property which bids prices upwards. As people try to sell into a market where people can't generally pay as much prices will be a lot less than they were over the past few years. It is likely that over the traditionally busy Spring and Summer selling periods we will see a large number of properties coming to the market, and they will sell at less than comparable ones that sold before mid 2021 when the cash rate starting rising. This will lead to a large repricing of property to lower prices..
Anyway, there’s been an enormous amount of finance, property and tax news since my last newsletter. Here are four of the biggest stories right now.
Fixed-rate cliff explained
ATO warns property investors
Regulation coming to BNPL
Tax scam warning
Read more below.
Australia's mortgage market is experiencing a significant shift, with many homeowners coming off two-year and three-year fixed-rate loans onto much higher variable rates today. Starting during the 2020 pandemic, there was a boom in fixed-rate borrowing, as lenders slashed their fixed rates to record-low levels and many borrowers took advantage. At the peak, almost 40% of outstanding home loans in early 2022 were fixed, which was “roughly twice their usual share from prior to 2020,” according to a research paper published by the Reserve Bank of Australia (RBA).
As of March 2023, about 25% of fixed-rate loans outstanding in early 2022 had expired. By the end of 2023, another 40% will expire; and by the end of 2024, another 20%. This is what the media has been referring to as the 'fixed-rate cliff'.
Here are three tips if you're about to revert from a fixed to a variable loan:
Start budgeting right now for higher interest rates
Contact me to discuss whether you could refinance to a new lender with a more suitable fixed or variable rate
Limit your spending to increase your chances of qualifying for a new loan
The Australian Taxation Office (ATO) has revealed it will have three key focus areas this tax time – one of which will be deductions claimed by property investors.
The reason property investors are being targeted is because an ATO review found nine in ten property investors were filing faulty tax returns. Common errors included:
Leaving out rental income
Making mistakes with property-related deductions – like overclaiming expenses or claiming for improvements to private properties
As a result, the ATO said it would match investor tax returns with data from home loan providers and insurance providers, to ensure investors don’t omit income or inflate deductions. “Around 80% of taxpayers with rental income claimed a deduction for interest on their loan, and this is where we’re seeing mistakes,” ATO assistant commissioner Tim Loh said. “For example, you can’t refinance an investment property to buy personal items, like a holiday to Europe or a Tesla, then continue to claim the interest expenses as a tax deduction.” The ATO's other two focus areas will be work-related expenses and capital gains tax.
The federal government will change the law so buy-now-pay-later (BNPL) products are regulated as credit products, like home loans. The reason BNPL services are regulated differently is because, technically, they’re not a form of credit, as consumers are not charged interest. However, as Minister for Financial Services Stephen Jones told the Responsible Lending & Borrowing Summit: “BNPL looks like credit, it acts like credit, it carries the risks of credit.” “We have heard that some people are opening multiple BNPL accounts, to access far more debt than they’d be able to get on a credit card or a payday loan,” he said. However, Minister Jones also said BNPL had done a lot of good for the economy, and provided a lot of benefit to both consumers and businesses. As a result, he said the government’s legislation would be “a proportionate solution” that would allow consumers to continue enjoying BNPL while establishing “appropriate safeguards”. The government plans to release exposure draft legislation later this year and introduce the final bill to parliament by the end of the year.
Consumers have been warned to expect heightened scam activity and new tax scams now that tax season is almost upon us. The Australian Taxation Office (ATO) received about 20,000 scam reports in the first 11 months of the 2022-23 financial year, according to Minister for Financial Services Stephen Jones. Minister Jones said impersonation scams – in which criminals pretend to be from the ATO – were common at this time of year. Under these scams, fraudsters will contact people by unsolicited phone calls, emails, text messages and social media messages. They may offer to answer tax questions, promise fake tax refunds or direct users to fake myGov login pages. Often, their aim is to collect as much personal information as possible. The ATO will never send you a link to login to their online services or ask you to send personal information via text, email or social media. Do not respond if you receive any suspicious contact. Instead, call 1800 008 540 to check if it was the ATO speaking with you.