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John McGrath
Property Expert
+ About John McGrath
About John McGrath - Founder and Executive Director, McGrath Limited

John McGrath is considered one of the most influential figures in the Australian property industry. As Founder and Executive Director of McGrath Limited, , he took McGrath Estate Agents from a lounge room start-up in 1988 to one of Australia's most successful residential real estate groups, listing McGrath Limited on the Australian Stock Exchange in November 2015.

An integrated real estate services business, McGrath today is one of the fastest growing real estate companies in Australia with a strong market presence in NSW, the ACT & Queensland, and a growing presence in Victoria.

In October 2008, John was honoured by the Real Estate Institute of NSW with the Woodrow Weight OBE Award, a lifetime achievement award for his outstanding contribution to the real estate industry.

John himself has become a spokesperson for the industry both in Australia and internationally. John has five books that have reached bestseller status including “You Don’t Have To Be Born Brilliant” and “You Inc.”. In “The Ultimate Guide to Real Estate”, John shares with the reader his invaluable knowledge on the Australian property market.

John is a Director of REA Group and also the South Sydney “Rabbitohs,” which is one of his great passions.

Are Sydney and Melbourne at their peak?

Tuesday, May 23, 2017

By John McGrath 

A lack of stock for sale in both Sydney and Melbourne has substantially contributed to a prolonging of the current boom. Over the past 12 months, there’s been plenty of buyers in the market but not nearly enough homes for sale to meet that demand. When this happens, prices inevitably increase.

The current boom is in its fifth year and that is an unusually long period for high-price growth. What needs to change is a reduction in demand or an increase in supply – or both – to bring these markets back to normal selling conditions and normal patterns of annual capital gains.

So, it’s interesting to see some new figures from CoreLogic, which show that supply of established housing stock available for sale in Sydney and Melbourne is at its highest level for this time of year since 2012. We’re not seeing a flood of new listings coming onto the market, but rather the increase in supply is due to a slower rate of sales. Or in other words, a slight softening in demand.

This is often the first sign that a booming market has turned. Demand softens because prices get to such a high point after a long period of growth that buyers start giving up and exiting the market.

It’s not uncommon now to hear about would-be upgrader buyers choosing to stay put and renovate or extend their current homes because they feel that trading up is just too difficult. First home buyer activity remains very low and we might see some evidence of a reduction in investor activity soon due to further lending restrictions imposed by APRA recently. All of this adds up to lower demand.

Whether this new data from CoreLogic indicates a turn of the cycle or a blip, we don’t yet know. My feeling is that both Sydney and Melbourne are at, or around, their peak for this cycle and we’re certainly overdue for a period of price consolidation, which I continue to believe is a healthy sign for the market.

Vendors are still in the driver’s seat but this won’t last forever, especially if demand is on the way down. If you’ve held your property for a long time and would like to fully capitalise on this boom, I’d say now is the time to sell. A change in conditions is just around the corner. Don’t fall for the myth that Winter is a bad time to sell. Talk to your local agent and consider your options now.   

As we all know, properties typically sell faster and for higher prices when demand outweighs supply. CoreLogic released another report recently that lists the fastest selling suburbs in every state for the 12 months to January. Of course, NSW and VIC have the most impressive results, but it is interesting to note how quickly properties are selling in some areas that are not in booming capital cities.

Fastest selling suburbs in each state

NSW – Houses

1. Lapstone: 9 days

2. Mayfield East: 10 days

3. North Gosford: 10 days

4. Valley Heights: 11 days

5. Glossodia: 12 days

NSW – Apartments

1. South Penrith: 7 days

2. Wyoming: 7 days

3. Lisarow: 10 days

4. Camden: 12 days

5. West Gosford: 13 days

VIC – Houses

1. Tooradin: 8 days

2. Wandin North: 9 days

3. Diggers Rest: 10 days

4. Carrum Downs: 10 days

5. Frankston North: 10 days

VIC – Apartments

1. Endeavour Hills: 9 days

2. Mooroolbark: 13 days

3. Bayswater: 14 days

4. Lilydale: 15 days

5. Bayswater: North 16 days 

QLD – Houses

1. Keperra: 10 days

2. Algester: 13 days

3. Willowbank: 13 days

4. Middle Park: 14 days

5. Ferny Grove: 15 days

QLD – Apartments

1. Oxley: 15 days

2. Elanora: 20 days

3. Reedy Creek: 21 days

4. Hendra: 22 days

5. Carina Heights: 22 days

SA – Houses

1. Melrose Park: 25 days

2. Rosewater: 25 days

3. Edwardstown: 28 days

4. Tranmere: 28 days

5. Surrey Downs: 29 days

SA – Apartments

1. Firle: 14 days

2. Rose Park: 20 days

3. Greenwich: 23 days

4. Frewville: 25 days

5. Collinswood: 28 days

WA – Houses

1. Daglish: 14 days

2. Menora: 18 days

3. Subiaco: 19 days

4. Floreat: 22 days

5. Shenton Park: 23 days

WA – Apartments

1. North Beach: 29 days

2. Mount Pleasant: 32 days

3. Palmyra: 33 days

4. Shenton Park: 33 days

5. Queens Park: 36 days

TAS – Houses

1. Montagu Bay: 5 days

2. Mount Stuart: 6 days

3. Moonah: 8 days

4. Warrane: 8 days

5. South Hobart: 9 days

TAS – Apartments

1. South Hobart: 10 days

2. West Hobart: 11 days

3. Battery Point: 12 days

4. Youngtown: 12 days

5. Dynnyrne: 13 days

NT – Houses

1. The Gap: 41 days

2. Tiwi: 49 days

3. Desert Springs: 49 days

4. Girraween: 56 days

5. Braitling: 58 days

NT – Apartments

1. Leanyer: 58 days

2. The Gap: 64 days

3. Woolner: 66 days

4. Fannie Bay: 80 days

5. Rapid Creek: 83 days

ACT – Houses

1. Ainslie: 16 days

2. Dickson: 21 days

3. Higgins: 23 days

4. Downer: 25 days

5. Hackett: 25 days

ACT – Apartments

1. Theodore: 29 days

2. Calwell: 30 days

3. Isabella Plains: 37 days

4. Page: 37 days

5. Garran: 37 days

Source: CoreLogic, ‘Top 10 Fastest Selling Suburbs in Each State’, published 1/5/17. Above figures show the shortest median selling time for houses and apartments over the 12 months to January 2017

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How the Federal Budget will impact property

Thursday, May 11, 2017

By John McGrath

In this week’s Federal Budget, a range of measures were announced that should have a positive impact on the market in terms of increasing supply and helping young buyers purchase their first home. 

There has been a lot of pressure on both state and federal governments to ‘fix’ the affordability issue, so long as they don’t do anything to decrease property values as this would be to the detriment of the 67% of Australians who currently own their own homes. Not an easy task. 

But the Federal Government has had some good ideas and the measures in the Budget should be useful. Among the most impressive measures is incentives for downsizers to sell. 

From July 1, 2018, individual downsizers aged 65 and over who have lived in their home for at least a decade will be able to make a non-concessional contribution of up to $300,000 into their super from the proceeds of their sale. Couples will be able to contribute $600,000. 

This is a win for retirees as it removes a significant disincentive for older Australians to downsize and will result in greater supply of family homes to young family buyers. This is especially important in markets like Sydney, where lack of supply has been a significant factor in pushing up prices and making it very hard for young families to secure appropriate accommodation. 

Additional money in super will also help older Australians fund their retirement long term as their superannuation investments are taxed at a lower rate of 15%. The contributions that can be made from the sale of their homes will be exempt from the usual voluntary contribution rules. 

First home buyers are also getting some help through the First Home Super Saver Scheme. 

From July 1 this year, first home buyers will be able to make voluntary contributions of up to $15,000 per year into their super ($30,000 total) for the purposes of saving for their first home. 

These contributions will be taxed at the usual super rate of just 15%. These funds, along with earnings, can then be withdrawn for a first home purchase from July 1, 2018, minus a small withdrawal tax (the buyer’s marginal rate less a 30% offset).

We see this measure as beneficial to all buyers, however, the reality is that buyers in Sydney and Melbourne will benefit less given median home values are so much higher. Currently, a 20% deposit on a median priced Sydney apartment is close to $150,000, so the $30,000 cap on savings through super means this particular measure is a long way off meaningful assistance.

However, we can’t hand first home buyers a blank cheque either, so this measure appears to be a sensible way for the Federal Government to contribute to affordability. For today’s younger buyers, saving the deposit is a far bigger hurdle than managing repayments given mortgage rates are so low. 

Don’t forget that federal assistance to first home buyers will be in combination with state government measures as well. The Victorian Government plans to abolish stamp duty on properties worth $600,000 or less and double the First Home Owner Grant for regional buyers. We’re yet to find out what the New South Wales Government intends to do but a taskforce has been set up.

All in all, first home buyers in Victoria and New South Wales are about to receive a lot of new assistance and young people should start planning how to take full advantage of it now. 

There is also a focus on developing urban areas of cities which will take pressure off the inner ring suburbs. Western Sydney was a key focus of the Budget, with reform of planning and zoning laws and a reduction in development approval timeframes to enable more new housing and better infrastructure connecting the west to the rest of Sydney. This is really important for the future, with population growth in eight key council areas expected to be close to 500,000 over the next 20 years. 

There has been much debate about negative gearing and capital gains in the lead-up to the Budget but no major changes have been made, just a few tweaks around the edges. 

From July 1 this year, landlords will no longer be able to claim travel expenses when visiting their properties; nor depreciation on items purchased by previous owners on future investments.  

A vacancy tax will be levied on foreigners who leave their investment properties vacant. This should add to the supply of rental homes for Australians by encouraging foreigners to lease their properties. 

From now on, the proportion of new developments that can be sold to foreign investors will be capped at 50%. Currently there is no limit.

The Government also plans to stop foreign and temporary tax residents from claiming the main residence capital gains tax exemption when they sell their Australian homes. This feels like a disincentive especially for skilled professionals to come to Australia with their families. 

I think we should be welcoming foreign investment into our country, as there is a lot of new wealth in Asia that could be headed for our shores if we put out the welcome sign. Right now, I think both federal and state governments are sending unhelpful messages to foreign investors with a range of new fees and rules that limit or discourage their participation in our real estate market.  

Overall, this Budget is aimed at building confidence in our economy and the measures above will no doubt assist in this process. A strong economy benefits every buyer, seller, investor and renter. 

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Australia's most affordable suburbs

Tuesday, May 09, 2017

By John McGrath

This week the Federal Government delivers its much-anticipated Budget, which is expected to include an affordability package aimed at helping young people into the housing market. 

Affordability has been a hot topic, particularly in Sydney and Melbourne over recent years and both state and Federal governments are moving on the issue due to significant public concern.

Parents are worried their kids will never be able to afford their own homes, so much so that many of them are in the market today buying property for their children – some of whom are still in primary school – to ensure they will have a first home close by in the future. 

Given affordability will no doubt be a talking point this week, let’s take a look at the most affordable suburbs within 10km of the CBD in every capital city across Australia. These figures come from CoreLogic’s Best of the Best Report, which was released in December last year and is based on September 2016 quarter data. 

Top 10 Most Affordable Suburbs Within 10km of CBD 

Sydney Houses 

1. Tempe $1,128,920 (median price) 

2. Turrella $1,132,949 

3. Waterloo $1,166,732

4. Canterbury $1,172,435

5. Beaconsfield $1,175,493 

6. Arncliffe $1,194,713 

7. St Peters $1,200,056 

8. Erskineville $1,231,695 

9. Pyrmont $1,248,579 

10. Lewisham $1,275,278 

Melbourne Houses  

1. Maidstone $692,131 

2. Melbourne $704,962

3. Bellfield $706,398

4. Coburg North $740,195

5. West Footscray $755,147 

6. Footscray $760,058 

7. Pascoe Vale $764,581

8. Pascoe Vale South $829,280 

9. Preston $832,583

10. South Kingsville $840,161 

Hobart Houses  

1. Clarendon Vale $155,655

2. Risdon Vale $179,115 

3. Rokeby $193,291 

4. Goodwood $223,651

5. Warrane $242,673

6. Glenorchy $255,600

7. Derwent Park $255,781

8. Mornington $283,721

9. Montrose $286,673

10. Lutana $287,769 

Adelaide Houses  

1. Wingfield $276,624

2. Pennington $360,942 

3. Royal Park $375,794

4. Woodville Gardens $376,661 

5. Athol Park $380,693

6. Saint Marys $385,990 

7. Mansfield Park $386,437 

8. Woodville North $388,455

9. Enfield $390,009 

10. Clearview $393,519 

Perth Houses  

1. Westminster $404,236 

2. Nollamara $420,959 

3. Redcliffe $437,733

4. Cloverdale $458,694

5. Queens Park $467,793

6. Kewdale $477,558

7. Bentley $481,866

8. Osborne Park $489,075

9. Belmont $490,137

10. Ashfield $496,441 

Darwin Houses  

1. Anula $497,824

2. Darwin City $504,150

3. Wagaman $533,175

4. Jingili $546,736 

5. Moil $554,600

6. Alawa $555,149 

7. Millner $563,439 

8. Ludmilla $634,463 

9. Coconut Grove $647,960

10. Rapid Creek $673,361 

Brisbane Houses 

1. Rocklea $390,241 

2. Keperra $484,314 

3. Nathan $526,393 

4. Stafford Heights $550,274 

5. Salisbury $550,365 

6. Stafford $556,039 

7. Everton Park $556,534 

8. Chermside West $563,317 

9. Mount Gravatt East $564,864 

10. Chermside $565,140 

Source: Best of the Best 2016, article by Tim Lawless, published by CoreLogic 19/12/16

Lists like these can be very helpful, however you need to tread carefully when looking for affordable options.

Suburbs can be affordable for a number of reasons. The best scenario for young buyers is purchasing in an affordable suburb that is on the cusp of urban renewal. One of those suburbs that has gone under the radar for a long time but due to new infrastructure or some sort of change in local demographics, it is about to become a hot spot. Those areas are always a great buy. 

Other suburbs are affordable simply because, at least for now, they’re undesirable. Perhaps they have little infrastructure such as few transport options or shops. Maybe they’re a long way from jobs. Perhaps there’s a crime issue. It’s therefore especially important to do your research when buying in an ‘affordable’ suburb.

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Sydney and Melbourne decouple

Tuesday, May 02, 2017

By John McGrath

Sydney and Melbourne continue to lead the way for residential price growth and have certainly decoupled from the rest of the country in recent years. 

This is a phenomenon seen all over the world, where the largest city or cities within many countries become separated from the rest of the market by the weight of demand. And within these cities we continue to see an increasing “Manhattan Effect” where people want to live as close to the CBD as possible, making desirable inner-ring suburbs very expensive places to live. 

This decoupling effect isn’t just happening because of the latest boom. Sydney and Melbourne are now major international cities and an ideal alternate address for those living or doing business in Asia. 

There are several billion people on Australia’s doorstep with a huge appetite to enjoy the lifestyle that we have. Compared to property values in other great cities of the world, many overseas buyers and expats still see Sydney and Melbourne as good value globally and a very safe place to invest. 

To demonstrate this decoupling, let’s look at the history of price growth in Sydney and Melbourne compared to other capitals since 2010, which was recently documented in a report from independent property data analysts, CoreLogic. 

Firstly, looking across all capital cities, property prices increased by a collective 44.9% from January 2010 to February 2017. During this time, Sydney and Melbourne were the only two cities with growth of more than 25%. Here are the stats for each city. 

Comparing growth across capital cities 2010-2017 

  • Sydney dwelling values have increased by 78.3% 
  • Melbourne property values have increased by 55.1% 
  • Canberra property prices have increased by 23.8% 
  • Adelaide dwelling values have increased by 11% 
  • Brisbane home values have risen by 6.6% 
  • Hobart dwelling values have increased by 3.4% 
  • Perth dwelling values have declined by -3.3% 
  • Darwin property values have fallen by -5% 

The data clearly shows that Sydney and Melbourne are currently growing at a rate that is well apart from the rest of the country. This hasn’t always been the case but it’s certainly the trend this decade. 

Now, let’s look at median house prices across our capital city markets. Once again, Sydney is the stand-out with Melbourne (and Canberra) a distant second but still well ahead of all other capitals. Strong population growth and migration in Sydney and Melbourne, coupled with an ongoing undersupply of housing, will continue to power high buyer demand over the long term in both of these cities.  

Median house prices across capital cities

  • Sydney $860,000
  • Canberra $605,000 
  • Melbourne $650,000 
  • Brisbane $481,000 
  • Darwin $467,000 
  • Perth $472,000 
  • Adelaide $430,000 
  • Hobart $363,000 

Source: CoreLogic Hedonic Home Value Index April 2017, median prices based on settled sales over past three months  

So, after five years of phenomenal growth, what’s next for Sydney and Melbourne? Right now, it feels to me that these markets are at, or around, their peak for this cycle. We've seen strong double digit growth for five years and I can't see any material uplift from here. 

Historically, if and when there is a correction, the market gives back about half of the prior year’s growth which would suggest that when prices stop rising, we are likely to see either a stabilisation at that point or perhaps a 5% correction. Either way, you can never pick the top or bottom of the market until it has passed.  

Buyers taking a medium-term view will be well rewarded for buying into high quality Australian property now. If you’re considering buying a home or investment in Sydney and Melbourne, do so with confidence but a little caution as well. If you have the long term in mind, then there’s every reason to feel confident. But be aware that we’ll shortly be coming to the end of the boom, so it’s vitally important that you don’t get carried away and buy above your budget. 

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Capital city hot spots of the past 5 years

Wednesday, April 26, 2017

By John McGrath

The past five years have been an amazing time in Australian residential property, particularly in Sydney and Melbourne. We’ve seen a number of important trends emerge and/or get stronger, including rising demand from foreign buyers, increased apartment living, ‘rentvesting’ and the bank of mum and dad.

Within every capital city market, there are hundreds of micro markets where growth is not only affected by big macro trends, but also local factors that have caused higher price growth for those particular suburbs. These are the hot spots of our capital city markets.

So this week, we’re taking a look at the top 10 performing suburbs in every capital city for both houses and apartments. These figures come from CoreLogic’s Best of the Best Report, which was released in December last year and is based on September quarter data.

Top 10 Suburbs for Capital Growth 2011-2016

Sydney Houses

1. Homebush 147.3%

2. Strathfield South 112.7%

3. North Strathfield 103.9%

4. South Hurstville 102.7%

5. East Ryde 100.6%

6. Connells Point 98.8%

7. Chester Hill 97%

8. Villawood 96.8%

9. Epping 95.7%

10. Rydalmere 94.7%

Sydney Apartments  

1. Lilyfield 134.3%

2. Waverley 122.8%

3. Hunters Hill 120.7%

4. Forest Lodge 100.6%

5. Macquarie Fields 87.9%

6. Edgecliff 87%

7. Glenfield 86.9%

8. Minto 84.9%

9. Rushcutters Bay 84.1%

10. Punchbowl 82.9%

Melbourne Houses 

1. Malvern 102.8%

2. Mont Albert North 90.4%

3. McKinnon 81.9%

4. South Yarra 80%

5. Clyde North 77.8%

6. Box Hill 76.7%

7. Burwood 75.5%

8. Glen Iris 74.5%

9. Ashburton 73.1%

10. Wollert 72.2%

Melbourne Apartments  

1. East Melbourne 64.5%

2. Hampton East 61.5%

3. Mount Waverley 49.8%

4. Vermont 48.6%

5. Blackburn South 45.7%

6. Keysborough 43%

7. Burwood 41.5%

8. Forest Hill 39.3%

9. Safety Beach 39%

10. Carlton 38.6%

Perth Houses 

1. Dayton 68.4%

2. Bedfordale 65.3%

3. Wattle Grove 45.7%

4. Brabham 42.7%

5. Beaconsfield 40%

6. Hammond Park 38.2%

7. North Coogee 35.8%

8. Coolbellup 35.8%

9. Woodlands 35.3%

10. Riverton 34.6%

Perth Apartments 

1. Applecross 28.4%

2. Morley 27.2%

3. Bayswater 24.6%

4. Victoria Park 24.2%

5. Scarborough 21.8%

6. Burswood 21.3%

7. Mount Hawthorn 18.9%

8. Yokine 18.4%

9. Tuart Hill 18%

10. Carlisle 17.6%

Brisbane Houses

1. West End 42.6%

2. Seventeen Mile Rocks 37.2%

3. Seven Hills 36.6%

4. Macgregor 36.2%

5. Murarrie 35.7%

6. Highgate Hill 35.1%

7. Kalinga 34.8%

8. Robertson 34.2%

9. Graceville 34%

10. Sunnybank Hills 33.6%

Brisbane Apartments

1. Camp Hill 26%

2. Kedron 25.9%

3. Stafford 24%

4. Paddington 23.9%

5. Capalaba 22.8%

6. Wynnum West 22.5%

7. Mount Gravatt East 21.7%

8. Carina Heights 21.5%

9. South Brisbane 20.7%

10. Wishart 18.9%

Adelaide Houses 

1. Hazelwood Park 37%

2. Torrens Park 33.7%

3. Walkerville 32.2%

4. Hyde Park 30.5%

5. Mile End 30.5%

6. Unley 28.9%

7. Hawthorn 28.2%

8. Daw Park 27.4%

9. Hectorville 27.3%

10. Burnside 26.7%

Adelaide Apartments

1. Unley 20.3%

2. Henley Beach 20.3%

3. Magill 18.8%

4. North Adelaide 15.2%

5. Norwood 13.9%

6. Brooklyn Park 13.9%

7. Parkside 12.9%

8. Glenelg East 12.5%

9. Plympton 11.9%

10. Klemzig 9% 

Hobart Houses 

1. North Hobart 25%

2. Bellerive 17.5%

3. Geilston Bay 12.9%

4. Mornington 11.7%

5. Sandy Bay 11.5%

6. Lenah Valley 11.3%

7. Howrah 10.5%

8. Kingston Beach 10.2%

9. Kingston 9.4%

10. Acton Park 9.2%

Hobart Apartments  

1. Blackmans Bay 9.5%

2. Bellerive 7.6%

3. Howrah 6.3%

4. New Town 4.5%

5. Glenorchy 0.4%

6. Kingston -1.7%

7. Sandy Bay -2.1%

8. Hobart -3.4%

9. Claremont -8.5%

10. Battery Point -9.4%  

Darwin Houses 

1. Bakewell 22.9%

2. Humpty Doo 19.1%

3. Gunn 18.6%

4. Bellamack 17.1%

5. Rapid Creek 15.8%

6. Rosebery 15%

7. Nightcliff 10.4%

8. Howard Springs 9.5%

9. Driver 8.9%

10. Durack 7.7%  

Darwin Apartments  

1. Nightcliff 16.5%

2. Rapid Creek 8.7%

3. Larrakeyah 8.6%

4. Coconut Grove 4%

5. Parap 3.3%

6. Fannie Bay -4.3%

7. Darwin City -4.3%

8. Bakewell -8.3%

9. Stuart Park -8.7%

(Only 9 published)

Source: Best of the Best 2016, article by Tim Lawless, published by CoreLogic 19/12/16


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Goal posts move on interest-only loans

Tuesday, April 18, 2017

By John McGrath

The goal posts for residential lending have moved again, with the Australian Prudential Regulation Authority (APRA) now asking the banks to limit the number of new loans issued to both investors and owner occupiers on interest only terms to 30% of all new loans. 

According to APRA, nearly 40% of existing loans held by authorised deposit-taking institutions (ADIs) are on interest-only terms and this is quite high by international and historical standards. 

Coupled with this, APRA states that current “heightened risks” such as high housing prices in our two biggest capital city markets, rising household debt, low wage growth and low interest rates means we need to apply a stronger brake on mortgage lending practices to reduce risk.  

Fair call. While it might be inconvenient to have another hoop to jump through, tighter criteria on loans will protect our banking system as a whole. It’s also creating a natural economic firebreak that will help slow the Sydney and Melbourne markets and put us in good shape in the event that there is a correction in the future. 

The lending landscape has changed a lot in recent years. Higher risk borrowers, both individual purchasers as well as developers have found it much harder, if not impossible, to secure funding. Deposit requirements have often been higher, loan-to-value ratios more conservative and borrowers have had to satisfy stricter criteria to qualify for a loan. 

On top of this, APRA’s limit on new investment lending remains, with banks expected to keep investor lending to less than 10% of credit growth. This measure has been in place since December 2014. 

I had a chat with Alan Hemmings, General Manager of McGrath’s mortgage broking division, Oxygen Home Loans, about how borrowers can best navigate the new rules on interest only loans. Here’s Alan’s point of view. 

“The 30% cap on interest only lending has been brought in to try and slow property price growth and protect customers. The regulators feel with hot property markets in Sydney and Melbourne, which are both still showing strong price growth, customers who are highly leveraged and paying interest only might be hurt should there be a property price correction.

“For example, if a client has borrowed at 90% LVR on interest only, should there be a price correction as we are seeing in WA, they might end up owing more than the property is worth.

“The interest only rule doesn’t only apply to investors, the larger concern for APRA is the level of interest-only loans on owner-occupied properties. Why does a customer need an interest-only loan on their own home? Is it an affordability issue? What happens when the interest-only period expires and the customer has to start repaying the principal component over a shorter timeframe, particularly if interest rates go up?”

I also asked Alan what policy changes the banks might adopt to achieve the new 30% cap. These measures are going to differ from lender to lender and will, therefore, affect buyers differently. Here are Alan’s predictions. 

“In the past, interest only could simply be requested, now a legitimate reason will need to be supplied and this is where a broker can assist in formulating the proposal to the lender.

“I suspect it will be harder to get interest-only terms on higher LVR loans (80% or more) and owner-occupied loans. Some lenders might stop interest only for owner-occupied loans altogether. It’s like the 10% cap on investment lending growth, different lenders are pulling different triggers.

“Once lenders start announcing their policies regarding interest-only lending, the Oxygen team will be able to have a conversation with our clients about their needs and provide feedback on the best structure for them and which lender can assist.”

So, where to from here?  

“I think the 10% cap on investment lending and the 30% cap on interest-only loans is just the start. 

“If we continue to see a strong investment market, the 10% cap might be reduced to 6% or 7%. APRA is also yet to announce new capital requirements for the banks mid-year, which might have a further impact on interest rates. 

“Now, more than ever, clients need a good broker who can work through the minefield of different policies, rates and so on to get their desired outcome.”

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First quarter results: Which city took top spot?

Tuesday, April 11, 2017

By John McGrath

So, the first quarter results are in and guess what? Sydney is not – that’s right, not at the top of the leader board for price growth among our capital cities. It’s exciting to see some other cities moving forward after such an extended period of Sydney and Melbourne dominance. 

Over the March quarter, CoreLogic reports dwelling values (houses and apartments combined) grew by 5.6% in Hobart, 5.1% in Canberra and 5% in Sydney. Melbourne wasn’t far behind at 4.2%. Adelaide grew by 1.6%, Brisbane had no movement, and median prices fell in Darwin by -3.1% and Perth by -1.3%.

Sydney and Melbourne continue to grow strongly

Clearly, Sydney and Melbourne are both still growing strongly. Growth of 4-5% per quarter is very fast, and at that rate we’re on track for 15-20% growth over the year if things don’t slow down.

Right now, after a five-year boom, I would love to see some heat taken out of these two markets. It’s important for the long term that prices have a chance to slow down and consolidate at their new levels. However, with interest rates so low and a severe lack of stock intensifying buyer competition, it’s hard to see this happening any time soon.

The hand of APRA

APRA’s announcement that banks will have to limit interest only loans to 30% of all new residential lending might help reduce investor demand, as it is investors who typically want interest-only terms. This measure, combined with government intervention on affordability, might help Sydney and Melbourne get back to normal market conditions.

We’re yet to find out what the NSW and Federal Governments have in mind to deal with affordability, but VIC has already announced a range of measures – among them the removal of incentives for investors to try and dampen demand from that particular group.

Other cities

Looking at the other cities, Canberra’s market turned in 2016 and continues to do well. Prices were up 9.3% in CY2016 and now they’re up a further 5.1% in the first quarter of 2017 alone. Hobart is also on the rebound. Prices went up by 11.2% in FY2016 and now they’re up a further 5.6%.

Conversely, Perth and Darwin have been doing it tough since the mining boom ended. Median prices fell by -4.3% in Perth in FY2016 and Darwin prices rose by just 0.9%. So far this year, prices have fallen slightly in both capitals.

Now, for Sydneysiders who have been keeping track of sales stories in the media, you would have seen many articles with screaming headlines about homes selling for up to a million dollars over reserve.

Every week, there are properties selling for astounding amounts – I’m talking $400,000, $500,000, $700,000 above reserve. Obviously, this is fantastic for sellers but quite disheartening for buyers.

I would advise buyers in Sydney to be very wary right now. If you’re going to compete in this market, you need to understand that you’ll probably have to pay a premium.

If you’re buying for the long term, this might be less of a concern, but I do advise you to be very careful. Figure out your budget and stick to it. Better to be disappointed and walk away on auction day than endure the sleepless nights that come with a mortgage you can’t afford. 

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New first home buyer assistance in Victoria

Tuesday, April 04, 2017

By John McGrath 

Last week I talked about the rising issue of affordability, which is particularly acute in Sydney but also a concern for Melbourne as both cities are leading the way in residential price growth.

This boom is now almost five years old, which is a very long run for strong price growth and we are yet to see signs of a slowdown, mainly due to low interest rates, demand from investors and a lack of stock driving prices further north. 

There has been much discussion around what Federal and state governments in NSW and Victoria should do to address the issue. Plenty of ideas have been put forward but the first government to actually do something is the Victorian government, with a series of measures recently announced to make home ownership easier for young people. Most of these measures are still subject to approval by parliament, but here’s a rundown of what they’ve proposed.

  • Abolishing stamp duty for first home buyers on properties worth $600,000 or less, with a sliding scale of concessions on properties worth between $600,001 and $750,000. All properties are eligible – both new and existing. These stamp duty changes will take effect from July 1 this year 
  • The existing First Home Owner Grant (FHOG), which is available to all first home buyers who are either building or buying a brand new home valued up to $750,000, will be doubled from $10,000 to $20,000 for regional buyers. It will apply to contracts signed from July 1 this year through to June 30, 2020.  Regional areas include the cities of Geelong and Ballarat. Eligible first home buyers of new properties in Melbourne will continue to receive the $10,000 FHOG
  • Introducing a co-ownership pilot scheme, whereby eligible first home buyers will be able to co-purchase a new or existing property with the Victorian Government. Called HomesVic, the scheme allows the government to purchase up to 400 homes with an equity share of no greater than 25% in each. The idea is to help young buyers who are capable of meeting loan repayments but simply can’t save the full deposit they need to buy on their own due to the cost of renting. With HomesVic, buyers will need a 5% deposit and income thresholds will also apply – couples $95,000 and singles $75,000. When the properties are sold, HomesVic will receive its equity share back. The scheme will commence in January 2018
  • At least 10% of all properties in government-led urban renewal developments will be allocated to first-time buyers. This measure will be implemented for the first time at the Arden development in Melbourne’s north, which will mean about 1,500 homes will be reserved for first home buyers 
  • Increasing land supply by re-zoning 100,000 lots across Melbourne to create 17 new suburbs
  • Introducing a Vacant Residential Property Tax to encourage owners in Melbourne’s inner and middle rings to make properties available for purchase or rent. The Tax will be 1%, so on a $700,000 home the tax would be $7,000. There will be exemptions, for example, it won’t apply to holiday homes, deceased estates, city ‘bolt holes’ used for work purposes and homes owned by Victorians temporarily living overseas. The tax will be implemented from January 1, 2018 for homes vacant for more than six months in a calendar year

In addition to the above measures, the Victorian government will also remove incentives for investors in a bid to slow demand in that particular sector. First home buyers typically end up bidding against investors for lower priced stock, so this should reduce competition at auction for young buyers.

Melbourne is a fantastic prospect for property investors with plenty of upside over the long term. Despite large-scale price growth over the past five years, Melbourne continues to offer much better value to investors than Sydney. For example, the median apartment price in Melbourne is $480,000 with an average 4% rental yield while in Sydney it is $685,000 and 3.7%, according to CoreLogic. 

Investors need to move quickly if they want to beat the deadline for changes such as the end of the off-the-plan stamp duty concession (this will remain for owner occupiers), which will see duty on a $800,000 investment apartment go from a few thousand now to more than $40,000 after July 1.

For first home buyers in Victoria, it’s time to start your research. Pick a location and the type of property you want and attend some inspections to gain market knowledge. Get yourself ready to buy after July 1.

Most importantly, don’t overextend yourself just because your stamp duty will be less. You need to be able to afford your repayments over the long term when interest rates are back at their long-term averages of 7-7.5%, so do your calculations based on this, not on today’s record low rates!

Affordability measures are expected to be announced in NSW soon, with the NSW government recently setting up a cross-government working group to brainstorm ideas for review by former Reserve Bank Governor, Glenn Stevens, before a formal plan is announced to the public.

On May 9, the Federal Government is expected to include an ‘affordability package’ in the Budget to address the affordability problem on a national scale. Let’s hope they get it right.

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The affordability challenge

Wednesday, March 29, 2017

By John McGrath

Affordability has become a very serious issue in Sydney following a five-year boom during which time Sydney home prices have risen by 74.9%, according to the latest CoreLogic statistics.

We are hearing more stories about the affordability struggle, not just for first home buyers, but also for more established family buyers trying to upsize their homes as their families grow or downsize to smaller lower maintenance homes after their kids have left.

Affordability also presents a very real social issue, as it is becoming increasingly difficult for essential service workers like teachers, nurses and police to afford to live in the areas where they work.

The biggest hurdle for young buyers is saving the deposit. Typically, a 20% deposit is required for a new home loan. In Sydney, the median price for an apartment is currently $685,000, which means a young person needs $137,000 for a 20% deposit.

CoreLogic’s Housing Affordability Report, released last December, found Sydney home prices are now 8.3 times higher than gross household incomes. The percentage of household income required to fund a 20% deposit in Sydney is 167.7%, up from 116.8% in 2001.

These circumstances make it very hard for young people earning a career entry level income to save what they need to get a foot in the door. They might be able to afford the mortgage repayments, especially today with interest rates so low, but saving the deposit is very tough.

This dilemma has spawned a few rising trends:

  • Rentvesting, where young people are buying cheaper properties for investment because they can’t afford a more expensive first home close to the city where they want to live
  • The bank of mum and dad, where parents are increasingly chipping in for the deposit or going guarantor on the loan
  • Large numbers of young people remaining in the family home well into their 20s because they can’t save a deposit and rent their own place at the same time

In regards to Sydney upsizers and downsizers, the biggest impediments to affordability are not just rising property prices. Stamp duty plays a significant role and has a direct impact on affordability.

NSW stamp duty thresholds have not changed in 30 years, but property prices have soared. Stamp duty on the average Sydney house used to be about 1.3% of the purchase price, now it’s over 4%.

Today’s significant lack of stock is another impediment to affordability. While it’s a great time to sell, home owners understand that buying back in could be very difficult, especially in sought-after markets. Some would-be sellers are choosing to stay put and renovate instead.

The Federal and NSW Governments are both actively considering various strategies right now to tackle the affordability challenge.  

Federal Treasurer Scott Morrison has promised an affordability package in the May budget. Among the measures they are reportedly considering are incentives for pensioners to sell to free up more family homes for younger generations.

Meantime in NSW, Premier Gladys Berejiklian has set up a cross-government working group to come up with ideas which will then be reviewed by former Reserve Bank Governor, Glenn Stevens.

Everyone has an opinion on housing affordability and how to fix it. It’s a topic dominating dinner table discussions across Australia but particularly in Sydney.

However, it’s worth noting that any attempt to make property more affordable must be balanced against preserving the value of current home owners’ properties. Seven out of 10 Australians own their own home and it’s usually their largest asset and the cornerstone to their financial security. 

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Sydney and Melbourne investors should consider rental yields

Tuesday, March 21, 2017

By John McGrath 

Demand from investors in Sydney and Melbourne is particularly high today following significant property price rises over the past five years in both cities.

Investor appetite for bricks and mortar is reflected in the latest finance figures which show that NSW and VIC together accounted for 76.3% of all new investor borrowings nationwide in December 2016, the largest share of the market on record, according to CoreLogic and the Australian Bureau of Statistics. 

Separately, NSW represented 49.6% of national investor finance and VIC 26.7%. By comparison, at the start of the boom in mid-2012, investor lending in NSW was 37.3% and 25.1% in VIC.

Clearly, investor interest is highest in Sydney and that’s because of its outstanding recent capital growth. But it’s crucial that investors do not forget the importance of rental yields. Right now, the two cities with the greatest investment activity are also the cities with the lowest rental yields.

Drilling down and using Sydney as an example, weekly rents have actually been rising while yields have been falling. The latest Rent and Sales Report from the NSW Government shows the median Sydney rent has risen from $450 per week in the September 2012 quarter to $520 in September 2016. That’s good news for investors who already own property. But, for new investors, the yields they are receiving are lower overall because the pace of capital growth has been much faster than rents.

In Sydney, average yields are 2.8% for houses and 3.7% for apartments, according to CoreLogic. In Melbourne, they’re 2.7% for houses and 4% for apartments. In Brisbane/Gold Coast, it’s 4.1% for houses and 5.3% for apartments. The cities with the highest rental yields are Darwin at 5.1% for houses and Hobart at 6% for apartments.

I suspect the low yields in Sydney and Melbourne aren’t concerning today’s investor buyers because interest rates are so low. Mortgage repayments of 4-4.5% are relatively easy to manage on properties yielding 2.5-4%. But what happens when interest rates return to their long-term average of 7-7.5% and the rate of capital growth inevitably slows as the market returns to normal conditions?

While capital growth should always be an investor’s number one priority, rental returns are crucial for servicing your debt. The only way for most people to make money in real estate is by holding for the long term. So, Sydney and Melbourne investors out there buying today – at what is likely to be the tail end of this boom – need to make sure their chosen investment will provide enough rental income to help them cover their rising mortgage repayments over the next 10 years and beyond.

Today’s investors also need to be wary that supply of rental properties is rising because so many investors are buying, which means tenants have more choice and this might affect vacancy rates.

I’m not saying that investors shouldn’t buy right now. But it’s important to do your sums and make informed decisions based on a long-term view.

Be careful in your property selection too, particularly with apartments given supply will be increasing in the short term due to the construction boom. Make sure there are some unique features that will differentiate your apartment from the rest. This will help protect your rental return, reduce your vacancy periods and maintain your capital value.

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