Property markets in both Sydney and Melbourne are showing the early stages of prices stabilising with the first signs of growth since the market peaked in 2017.

Australia’s property market has been reinvigorated to some degree by a host of regulatory and monetary policy moves in recent times that have led to a huge lift in confidence. 

The obvious change in the last few months has been the RBA slashing the cash rate to 1.0% from 1.5% over its past two meetings. RBA Governor Lowe also spoke on the most recent cut and stated that there would be ‘more to come if needed.’

Economists are also predicting that there could very well be more rate cuts ahead, with many expecting the cash rate to fall to 0.75% by years end. The two consecutive rate cuts have taken home loan rates to their lowest level since the 1950s when you could buy a home in Melbourne and Sydney for around $7000.

So far the major banks have been quick to pass on the rate cuts to borrowers, led by ANZ who had previously come under scrutiny for not cutting their rates by the full amount. They passed on the full 25 basis points. Westpac passed on 20 basis points while CBA and NAB passed on 19 basis points.

We’ve also seen recently that APRA has started to wind back some of their macroprudential measures that were imposed on lenders. Specifically easing the 7% buffer rate that they were forced to apply to potential borrowers, which had thrown a handbrake on credit across the country.

While investors have been encouraged by the re-election of the Coalition government at the federal election on May 18, who campaigned on a platform of no changes to negative gearing or capital gains tax.

Price Growth is Coming

The good news for homeowners and investors is that it appears the moves by the RBA and APRA are starting to finally impact property prices. Particularly along the east coast that has seen some weakness in the past 18 months.

House prices grew by 0.2% in Melbourne and 0.1% in Sydney over the month of June according to CoreLogic, adding to some of the other key data points that are starting to turn the corner.

Auction clearance rates are also slowly turning around and have seen strong results over the last few weeks. In the final week of June, 66.5% of capital city homes sold at auction. This was the third consecutive week where the preliminary auction rate was over 60%.

It is generally considered that buyers and sellers are balanced, when auction clearance rates above 60% on a prolonged basis, which would suggest that we could very well have reached the floor with property price falls.

Again it was Melbourne and Sydney that have been showing the strongest results, with preliminary clearance rates above 70%. While the amount of turnover is light the fact that clearance rates are back up and stabalising is the first stage in the recovery.

Can the RBA boost employment?

Interestingly, the RBA mandate for the recent interest rate cuts has not really been around house prices at all. Fortunately, housing growth is a byproduct of lower interest rates.

However, at the moment, the RBA has its sights set on boosting employment across the country, in hopes of stimulating inflation back into their target 2-3% band.

As it stands the unemployment rate is 5.2%, well above what the RBA and Governor Lowe would be comfortable with. They would prefer to see something under 5.0% for a start and preferably something below 4.5% longer-term.

The problem is that the RBA are very quickly running out of levers to pull. For the time being the major banks have been under a fair bit of pressure to reduce rates in-line with the RBA’s OCR. The problem is that they will slowly be running into problems with their ever-tightening net interest margins.

So if the RBA does cut one more time in 2019, it is debatable as to whether the banks will pass it on to any large degree. It could very well end up being as low as 5-10 basis points, which wouldn’t tip the scale all that far for many homeowners and investors. Which would also mean the RBA would effectively be out of bullets.

There is also the concern that the US Federal Reserve will look to cut rates at their next policy meeting which will likely cause upward pressure on the Aussie dollar. Something that would clearly not please the RBA.

However, the good news is that the seeds of a property turnaround appear to be starting to slowly sprout. While the recent falls in areas such as Sydney and Melbourne are not ideal, we have to remember just how far property prices have come in the last five years.

For now though, the green shoots are starting to appear which should give investors and homeowners some confidence headed into the second half of 2019.

The reality for APRA was that interest rates were not headed anywhere near 7% anytime soon. As a result, there was much to celebrate for both lenders and borrowers as APRA officially removed the 7% serviceability buffer that it had previously been requiring banks to assess borrowers against.

Interest rates have been falling sharply as the RBA has moved to aggressively cut rates at its last two policy meetings and as a result, there was growing pressure on the regulator start wining back some of the restrictions they were imposing on lenders.

In the past months, the official cash rate has fallen to 1.0% from 1.5%, with many economists pricing in a further 25 basis point cut in 2019. The huge differential between the OCR and the serviceability buffer rate was putting a handbrake on credit and adding to the property slowdown that we’ve seen in recent times.

APRA’s old policy will be replaced with a new process whereby banks will add 250 bps to the rate paid when assessing an applicant’s borrowing capacity. This is a very important step forward as it will enhance the stimulus provided by the RBA’s monetary policy easing and actually make cheaper loans available to more people seeking to purchase property in Australia.

The move means that people will actually be able to borrow the money they need to buy a house and that puts the onus back on the lender, which is realistically where it needs to be. This demonstrates a move back to responsible lending practices that are in line with where the market sits at the moment.

APRA originally introduced the serviceability guidance in December 2014 at a time when east coast property markets were just starting to heat up and Australia was seeing a huge influx of foreign capital. Particularly out of China. At that point in time, the official cash rate was at 2.5%, significantly higher than it is today. The move to drop the buffer rate had been flagged more than two months ago, however, lenders were forced to sit and wait while APRA finalised the details of how the minimum interest rate floor would be assessed in the current climate.

Since APRA introduced the servility buffer, housing conditions have naturally eased as we might expect during the course of any property cycle. However, it was clear to most lenders and property investors, that APRA wasn’t keeping pace with those developments.

For borrowers, the changes mean a significant increase in borrowing power. Analysis from UBS shows the impact the changes will have for an average Australian family earning a combined $200,000 per year. The new policy would increase their borrowing capacity from $1,097,000 to nearly $1,249,000, which is an increase of around 14% according to UBS.

Begrudgingly, APRA boss Wayne Byres did come out and say what we had all been thinking for some time.

“In the prevailing environment, a serviceability floor of more than 7% is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” said Byres.

Mr Byres stopped short of giving too much control back to the lenders and highlighted the fact there was still some risk present.

“With many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

A Tax Boost to Boot

It has been a big week for property not just on the lending front, but also in terms of taxes as well.

On the back of a double RBA interest rate cut and the regulator removing the key serviceability handbrake as mentioned, we also saw the Government pass their tax-cut package that was outlined in the lead up to the Federal Election earlier this year.

The Government’s tax package will give middle income earners a tax saving of $1080-$1215 per year, which will grow to roughly $2,340 by 2024/5.

The move will potentially help first home buyers find their way back into the market and is clearly a positive for the economy. If you combine responsible lending standards with falling interest rates and add in the tax boost, it will likely see middle-income earners with average mortgages (approximately $500,000) around $3000-4000 per year better off than what they were only months ago – which is clearly a good thing.

Overall, this has been another good week for Australian property and one that will likely help improve sentiment in the short term. Now that we are moving back to responsible lending standards, we will hopefully see that positivity start to flow back into property markets across the country.

 In this era of record-low interest rates, many homeowners and investors fall into the trap of thinking they will automatically be getting a great rate on their mortgage.

Unfortunately, that’s not the case and by putting in a little bit of time and effort it has the potential to shave tens of thousands of dollar’s off the interest you’re paying on your mortgage.

Most borrowers, stay with one lender for the lifetime of their loan and quite often it is with the lender they have traditionally banked with. While this might be the easiest and most comfortable option, it pays to shop around.

Getting the best deal on your interest rates all start’s with doing your research. If you know what the best rates in the marketplace are, then you’re able to make an informed decision and you can then look to negotiate.

Senior Finance Executive and Mortgage Specialist at SMATS Group, Bridget Bowman, suggests that all borrowers must do their research and then ask the question of either their current lender or a specialist mortgage broker.

“Research is key when negotiating a lower interest rate – firstly you need to check the rate on your existing loan and compare it to what other rates are available in the current lending environment,” said Bridget Bowman.

“If you feel your current rate is too high, you can approach your mortgage broker who can negotiate on your behalf with the lender or you can go to the lender directly to ask them to match the lower rate. It never hurts to ask the question. If they are unable to lower their rate to an acceptable level, it may be worthwhile considering refinancing to a new lender.”

Another important thing to note about interest rates is that new borrowers often receive the best and lowest rates. While long term customers are often forgotten about and stuck with higher rates.

Director of Multipart Finance, Tim Russell says that lenders are oftentimes happy to match interest rates, rather than lose a valuable customer.

“Typically, existing customers of a lender will have a higher interest rate than what is offered to new customers. They do this as they are aware that even though existing customers knew they were on a higher rate, they are still likely to stay with the same lender,” said Tim Russell.

“When we do annual reviews for our clients, we will give them a report detailing the existing package they are currently on and the three best offers that are available in the market. We then use this tool as a bargaining chip to renegotiate with their existing lender.”

“Quite often the existing lender is happy to match what is available elsewhere but if they’re not, then it’s simply a matter of calculating what the interest saving would be refinancing to the new lender versus the total cost of exiting the current lender. If the savings are significant enough then it’s always worth doing in my opinion.”

Understanding what sort of interest rate is achievable from the banks perspective is also a very important part of the equation.

Generally speaking, different interest rates will apply depending on the type of borrower you are. If you have a clean credit history, a stable income and require a lower LVR, then you should expect that most lenders would not only be happy to lend to you but would offer you a lower interest rate.

On the flip side, if you are looking at a high LVR interest only, investment loan, without full documentation of your income, then most likely lenders would assign you a higher risk and therefore a higher interest rate.

Founder of The Investors Way, Andrew Woodward says that once you know where your bank is coming from as well as your own credit situation then you can start to negotiate with lenders more directly.

“Try not to be too aggressive in your negotiation tactics – understand that the bank needs to be comfortable with the deal too. A simple rule of thumb is that the bank wants to earn approximately 1.5% above what they are paying. So if the official rate in Oz is 0.75%, add 1.5% and you get 2.25%,” said Andrew Woodward.

“In recent times banks have been asking for a lot more than 1.5% above the official rate, but that doesn’t mean you can’t negotiate to get a better deal. Most of the major banks have rates above 3% but we are starting to see some of the smaller lenders offer rates that start with a 2.”

Once you know what interest rate you are able to obtain, Andrew says that then becomes a matter of weighing that up against the costs of refinancing.

“Understand the costs of changing banks to ensure the reduced rate you are moving to is worth it. You don’t want your costs of moving to offset any gain from the reduced rate, especially when the costs are paid upfront and the interest rate benefits are over time.”