Category: Articles

Investors are continuing their momentum-gathering return to the property market, outpacing the growth of owner-occupiers and first home buyers.

Over the last year, property investors have ignored higher interest rates, with the annual growth in the value of investor home loans rising 30 per cent in June from a year earlier.

Australian Bureau of Statistics (ABS) data released Friday (2 August) revealed that the value of new owner-occupier loans grew by 0.5 per cent to $18.2 billion in June, while the value of new investor loans jumped a hefty 2.7 to $11.0 billion during the month.

Over the year, the value of new investor loans surged 30.2 per cent, more than double that of owner-occupier loan values, which rose 13.2 per cent, The value of loans to first home buyers rose just 3.4 per cent from a year earlier.

Simon Arraj, founder and director of private credit investment manager Vado Private, said first home buyers were being priced out of the market but investors chasing capital growth were largely undeterred.

“Notwithstanding this, house prices could consolidate from their record levels, as the Australian economy slows and higher rates feed through the economy.”

Interest Rates No Barrier

Over the last 12 months, the national average has risen by $56,357, an increase of $154 a day, despite the fact the cash rate is at its highest level since November 2011.

The average new owner-occupier mortgage in Australia is now $636,597 – a new record high that is set to keep on rising alongside property prices in key states.

New South Wales is leading the nation in terms of loan sizes. Over the past 12 months, NSW continued to have the highest average loan sizes for both owner-occupiers and investors. In June, it rose to $780,000 for owner-occupiers and $818,000 for investors, compared to $636,600 across Australia, $604,300 in Victoria, Queensland’s $599,300, $545,800 in SA, $566,700 in WA and $467,500 in Tasmania.

RateCity.com.au’s Research Director, Sally Tindall, said the average new owner-occupier loan size has just hit another record high, as property prices in key capital cities continue to soar.

“Across the country, the average new owner-occupier mortgage has risen by $154 a day over the last 12 months, and on a 30-year mortgage you can basically double that figure when adding in interest costs,” she said.

“In Western Australia, the average new mortgage for an owner-occupier is now almost $100,000 more than it was just 12 months ago – rising by a gobsmacking $257 a day.

“It’s incredible to think this has unfolded under the weight of a rising cash rate.

“While there is seemingly no shortage of buyers prepared to up their bids at heated auctions in key capital cities, many would-be first home buyers have their hands tied by the double whammy of rising rates and property prices.”

The number of owner-occupier first home buyer mortgages, meanwhile, is stuck in neutral, clocking in at just 9,947 in the month of June.

“This figure has managed to lift above the 10,000 mark just once since the start of the rate hikes – a far cry from the most recent peak in first home buyer numbers recorded back in January 2021 when over 17,000 first home buyer mortgages were written for owner-occupiers,” Ms Tindall said.

The proportion of new and refinanced loans opting for a fixed rate clocked in at 2.6 per cent in the month of June. While this is just a fraction of what it was at the peak in July 2021, when 46 per cent of new and refinanced loans chose to go with a fixed rate, it is the highest level of fixing since September of last year.

Reflecting Australians’ love affair with property, recent data from the ABS reveals that household net wealth was a record $16.2 trillion in the March 2024 quarter, boosted by a record level of property assets of $11.0 trillion. As a proportion of household wealth, residential property comprises 67.9 per cent, up from 61.7 per cent in December 2020.

The key driver of household wealth gains in recent years has been rising property prices.

Housing Industry Association Economist, Maurice Tapang, the number of loans issued for the purchase and construction of a new home has been steadily increasing since the start of 2024, from a very low base.

“Market confidence appears to be stabilising following nine months without a change in interest rates.”

The number of loans issued for the purchase or construction of a new home increased by 9.2 per cent in the June quarter 2024 compared to the previous quarter.

“This quarterly increase was broad-based, with all states recording more loans issued for new homes in the June quarter 2024 than in the March quarter.

“This increase in lending is partially driven by a return of first home buyers to the market.

“The number of loans issued to first-home buyers in the June quarter 2024 was 5.8 per cent higher compared to the March quarter, which suggests building activity is at, or near, the trough in this cycle.”

East Coast investors are drawn to the perfect storm that is pushing up Western Australia’s house prices faster than in any other state.

With the property market continuing to heat up in Western Australia, investors from interstate have shown an increasing interest in buying Perth property.

At a recent presentation to UDIA WA members in Perth, REA Group Economist Anne Flaherty said investor activity in WA had ‘surged’, with the portion of investors in WA property increasing by 53 per cent over the year to May 2024.

Admittedly, this surge is coming off a low base, given investors have been scarce in the WA market in recent years, likely due to a range of factors including the five-year downturn the WA property market experienced in the lead up to 2020, rising interest rates, restrictions during the pandemic and rental reforms causing uncertainty.

It is also important to note that, according to the Australian Bureau of Statistics, the portion of investors in WA in January to May this year was still only 36 per cent, which, while up from 29.5 per cent last year, still remains far less than owner occupiers (42 per cent), combined with first home buyers (21 per cent).

According to UDIA WA’s Urban Development Index, 32 per cent of new land sales in the Perth metropolitan area were to investors in Q1 2024, with 34 per cent to first home buyers and the remaining 34 per cent to owner occupiers. This breakdown is compared with 2021, when the portion of investors in the new land market was just 17 per cent.

East coasters targeting WA property

East Coast investors are no doubt recognising the perfect storm that is pushing up WA’s house prices faster than any other state.

While Perth remains one of the most affordable capital cities in Australia, that mantle is slipping as, according to the PropTrack Home Price Index for June 2024, the annual growth rate for median house values in Perth was the highest for any other capital city, at 22.5 per cent over the last financial year.

Some of the most significant price growth has occurred in Perth’s northern and southern growth corridors, as well as regional centres such as Bunbury and Mandurah.

That growth is likely to continue as, according to Ms Flaherty, WA continues to grapple with our housing supply shortage over the next three years at least.

Ms Flaherty highlighted what many of us in the industry here in WA are already acutely aware of, and that is our booming population growth, strong economic growth and dire housing shortage that has been compounded by the longer time it takes to build a new house in WA compared to anywhere else in Australia.

This is heating up demand while we struggle to deliver enough supply. In fact, UDIA WA has forecast a shortfall in excess of 30,000 dwellings over the next five years.

The rental market is also experiencing escalating prices, with Perth rents growing 18 per cent over the last year to $640 per week according to PropTrack. This is in the context of a 0.5 per cent rental vacancy rate.

All these factors are contributing to investor interest in our market as they recognise the potential return.

Why investors should be welcomed in WA

While we have seen some negative press recently around the increased appetite from investors wanting to enter the WA market, it is important to understand that investors are a critical ingredient in boosting housing supply, particularly in the rental market.

We have seen the impact that an exodus of investors has had on the Perth apartment market in particular in recent years, with the challenge in securing sufficient presales stalling many potential projects.

According to Urbis, only 441 new apartments were available for sale in Q1 2024. That is compared to more than 1,500 in Q3 2021. New apartment approvals are also at their lowest level since 2009.

There are several factors influencing the lack of new apartment projects getting off the ground in WA, but a big factor is securing presales to appropriately finance a project.

Investors are an important source of presales and are desperately needed to assist with getting more apartments onto the local market.

While there is some fear mongering from some quarters about the impact of investors on our already tight housing supply, the fact is that investors are important in getting stock on the market.

This is especially the case if they are buying new house and land or apartments, as these contribute to getting more new stock on the ground and available to renters.

Tax reforms needed

UDIA WA continues to advocate for a range of recommendations to get more homes on the ground in WA, faster.

In terms of attracting further investment in the housing market, we believe there are property tax incentives that can be implemented in the short term, including making the transfer duty concession for pre-construction and under construction apartments permanent, extending it to grouped dwellings, and removing the purchase price thresholds.

We are also asking for the land tax exemption for build-to-rent projects to be increased, and for the Foreign Buyer Surcharge to be removed or at least frozen for two years.

We believe these particular changes could boost investment in the WA market and hopefully get more supply on the ground, meaning more homes for the people that so desperately need them.

Recently the Bank of Mum and Dad was ranked the biggest player in the Australian property market.

According to Housing Monitor Research, 40 per cent of parents in 2024 aided their first home buyer kids with housing contributions.

The reality is that parental support has been around for a long time, but it’s changed recently.

From pre-nuptial agreements to gifted deposits, the landscape is changing. Legal considerations are also a point of contention for some beneficiaries. Navigating the property ladder with parental support isn’t what it used to be.

I interact with the fortunate offspring and doting parents on a regular basis. I’m often asked, “How can I help my kids get into the property market?” I have witnessed all types of assistance, and some work better than others.

Let’s start with the parents who wish to gift their children a home.

It starts from an early age; in fact, some parents dream about what they’ll gift their children before they’re even born, and plenty of parents start mapping out their property investment journey when the children are pre-schoolers.

But for most parents who consider what their post-school children’s housing needs could be, their generosity usually kicks in during the high school years.

Things get exciting when the children actually want to pursue home ownership. Kids can ask their parents in all kinds of ways to assist, and parents aren’t always in a financial position to help.

Various Ways Parents Help Children Into Home Ownership

Assistance can range from outright gifting of a home to gifting of a deposit. Some assist with a contribution towards a deposit, while others may come up with a tailored loan arrangement.

And then there is the guarantor option.

Lenders cater well to the parental third party guarantor arrangement, whereby parents with available equity in their property lend a helping hand by releasing that equity to their child(ren).

The way that this technically operates has a lot of nervous parents flummoxed, and for good reason. Parents who have scrimped and saved to secure their home will be particularly nervous about risking that asset.

It’s more than just a financial product; it’s their security and the very roof over their head.

The thought of a loan arrangement going bad sends a shiver up their spine and has them fearing a mortgagee sale and homelessness.

The interesting thing about parental equity guarantees and associated risk is all about the percentage of the loan that is at risk to the parent, and the fear that such an arrangement can embed within a nervous parent’s psyche.

Guarantor Is No Gift

The guarantor arrangement is not well understood by parents and children.

Marketers pitch this to recipients as a no deposit option.

Parents get the request over a BBQ lunch, or an awkward coffee and they are often torn between aiding their kids on this all-important voyage and protecting their most valuable asset.

They fear several things; from reckless property decisions to bad partner selection, (and everything in between).

After all, these are the parents who have witnessed bad teenage behaviours and terrible financial mistakes in the previous decade. It’s little wonder many of them feel their blood run cold when their children ask them to consider going into a binding legal and financial arrangement for a property purchase.

But what does it really mean? These days, ‘Family Pledge Loans’ or ‘Parental Loan Guarantees’ are highly detailed, legally regulated and particularly effective for those parents and children who can take up the opportunity.

For parents, the deal can be sweet because they aren’t ‘gifting’ funds to their child(ren), but they are enabling them to take use of the equity they have built up in their home. Equity is best described as “the value of mortgaged property after deduction of charges against it”, or in other words, the amount that remains when the debt is subtracted.

Banks will generally allow an eligible borrower to access up to eighty per cent of the value of their home, and in many cases, parents have this amount available due to the combination of debt repayments and capital growth.

The part many assume wrongly is that their entire equity position is at risk when supporting a child.

In fact, lenders broadly rely on up to 25 per cent of a parent’s home for this equity. It represents the deposit and the stamp duty for the purchase of a home. In many cases, children have already amassed savings to cover a portion of the deposit obligation, so sometimes the parent’s equity obligation is even lower. The equity loan is just that, a loan. Children can access it, but they must pay for it.

Furthermore, most lenders require a lawyer to oversee and explain the documentation to the parent before they embark on the loan arrangement.

Mortgage Arrears And Risk

Importantly, the lender is clear about the risks that the guarantor takes on in the event of mortgage default (i.e. mortgagee not making their loan repayments).

The parental loan component is restricted to the percentage that they offer up in equity, being a limited amount, and not the full debt obligation. The security property (i.e. their children’s property) would be sold first in the event of mortgage default, not their property. As alarming as this sounds, Australian mortgage arrears are currently sitting below 1 per cent.

The young recipients are usually determined to pay down the debt and release their parent’s property at their earliest convenience. It is usually evident that they truly treat the parents’ contribution as a privilege rather than an expectation, and most are vitally aware of their parent’s sense of concern.

Thanks to rising house prices, many are able to release their parent’s security in a matter of two or three years as rising asset prices carry the loan to value ratio (LVR) above the required 80 per cent very quickly.

The parents who assist in non-direct financial ways are often those who spot the government incentive opportunities; and there are plenty of these in our various states/territories and national offerings.

Parental Guidance Recommended

Then there are the parents who help with the strategy, the inspections and the self-education. Sometimes these are the greatest gifts that parents can impart, because they teach their children how to ‘fish’.

From pocket money incentives for their young ones to moral support as their twenty-somethings embark on their home ownership adventure, they are the parents who are by their side, offering as much advice as they can muster.

But who gets it right? And can we adversely impact our best intentions with kindness?

Every child is different. Some need to run their own race and valiantly claim home ownership as their own. Others benefit greatly from a financial helping hand, particularly when we consider the negative impact of wasting time waiting for the right time to buy.

There are chose children who cherish the opportunity to have a deposit secured from parental equity, and I can relate to the prospective buyers who have mum and/or dad by their side, helping with the inspection checklist or backing them on auction day.

What we can’t underestimate is the power of self-achievement. Sometimes just cheering from the sidelines is the best gift we can give.

Recognising what our kids can achieve themselves, versus what is incomprehensible or unachievable for them is important. We can’t rob them of their own achievement, and nor should we. But if we can make that incredible difference at a time that is critical in life, why wouldn’t we?

You’ve probably heard this before: if you want to beat the market’s growth rate, stick to A-grade properties as they always perform best.

Is this true? And what is A-grade anyway and how can you tell if the property you’re looking at is A-grade, B-grade or C-grade?

What Is A-Grade Real Estate?

Thirty years ago, the terms A, B or C grade were just catching on and it’s taken up to now for buyers to start asking agents about them.

A-grade property and investment-grade are different but related concepts – but we’ll come back to this.

Generally speaking, agents refer to A-grade properties as those having high emotional appeal because they are in a great location and don’t have any compromises.

B-grade properties are seen as an otherwise A-grade, with one significant compromise or a few small compromises.

But a C-grade property has multiple significant compromises affecting its appeal.

What Do We Mean By Compromises?

Compromises can be an ambiguous term but the way I think of it is something that will put off relevant buyer types for this property.

Some of the more obvious compromises are location, build quality, position and floor plan.

Location seems pretty obvious but it’s also a term with different meanings.

Let’s think about some often-mentioned great areas for property over the last decade, like Kedron in Brisbane, Brunswick East in Melbourne or Annandale in Sydney.

These are great inner suburban locations, but a property on a busy road or has neighbouring light industry fails the A-grade test. Similarly, investors need to consider how the property is positioned: is it far enough away from traffic noise and other uses which would interfere with quiet, amenable living?

But positioning goes beyond this and includes how a property is positioned on the street and how the building is located on its block.

If a house sits on top of a rise in the street that improves its view, that is certainly a positive. But if its position on the block leaves it too close to a neighbouring property, that can affect its outlook and privacy.

As an investor, you’re aiming to buy a property that doesn’t have anything to detract from the quality of life offered or saps buyer appeal on auction day.

The Property Itself

Moving past location and position, there are other compromises to look out for.

Inferior build quality is a serious factor that should count investors out of the bidding and give home buyers serious pause due to the expense of rectifying such issues.

A floor plan that doesn’t deliver open plan living is another but assessing layouts requires a little more thought. For example, small bedrooms in suburban or regional houses are a definite no-no but may be okay in inner suburban apartments.

The same applies to aspect. You always want a property to deliver a pleasant outlook and plenty of natural light inside but the necessity of this for a family home in a prestige suburb than a townhouse within walking distance of the CBD when it comes to assessing value.

Working Out If A Property Is A-Grade

Given the way the pricing for Australian real estate works, strong demand for not enough properties sees most of the value uplift accumulate in the land price.

That means A-grade properties are characterised by a property with a high land value as a proportion of the overall price.

For A-grade houses in major metro markets, that typically equates to land value of around 65 to 75 per cent of its overall price. That can be difficult to assess as land values and building costs shift and swing, so investors should seek expert advice.

Similarly, for A-grade units in the suburbs of major cities, the notional land value should make up around 45 to 60 per cent of the property’s price.

With B-grade properties, the test is whether you can economically fix a glaring compromise and turn your purchase into an A-grade property.

For C-grade properties, its compromises can’t be fixed. No matter what an owner does, they can’t change the volume of traffic going past the door or the train line over the road.

A similar impact is true for newly built units and house and land packages.

Because these developments need to provide a sufficient return for the builder and have been designed to maximise tax breaks, it can take up to a decade for the land value equation to add up; and that will only be in the best opportunities.

How Different Properties Move Through The Cycle

In classic theory, real estate prices move through what’s called the property cycle.

In this model, values fall, then dawdle for a period before accelerating, moving into a boom before being checked as too many buyers find themselves priced out.

The classic property cycle looks like this model below, although Australians should note, we haven’t seen a genuine property recession since the early 1990s, resulting in our S-shaped graph mostly moving upwards.

A-grade properties tend to do the best across the rest of the cycle, followed by B-grade.

Tend to do best, but not always. Even outstanding A-grade properties can get caught out in a downward or stagnant part of the cycle.

This is where the difference between A-grade and investment-grade comes to the fore. Because investment-grade assets are being sought by several types of homebuyers and investors, their prices are more immune to downturns and are the first to rise during a recovery.

Some A-grade properties – think expensive family homes, properties in coastal resorts and prestige apartments – need a buoyant market to return before their performance starts beating the market, due to their limited pool of buyers.

So, if you’re out hunting for an investment, limit your search to A or B-grade properties – then be ruthless in eliminating those that don’t make the investment-grade mark.

The New South Wales Government’s recent decision to remove exemptions for foreign buyers who were compelled elsewhere to pay hefty land tax and surcharges has potentially added ten of thousands of dollars to the cost of buying in that state.

Effective from 8 April, citizens of New Zealand, Finland, Germany, India, Japan, Norway, South Africa, and Switzerland became subject to surcharge purchaser duty and surcharge land tax due to changes in federal law.

In early 2023, Revenue NSW had exempted these foreign citizens from surcharge taxes, citing inconsistencies with international tax treaties entered by the Federal Government. However, the Treasury Laws Amendment (Foreign Investment) Act 2024, effective from 8 April 2024, has now clarified these inconsistencies.

The amendment ensures that foreign investment fees and similar state and territory property taxes prevail over tax treaty provisions.

This change means that surcharge taxes can still be imposed on foreign nationals purchasing Australian property, despite any tax treaties in place.

Surcharge Purchaser Duty

This surcharge is in addition to the transfer duty and is set at 8 per cent of the dutiable value. From the 1 January 2025 this is going up to 9 per cent.

Surcharge Land Tax

The surcharge land tax is set at 4 per cent however rising to 5 per cent from 1 January 2025.

Case Study

A couple purchased their Sydney family home jointly (50/50) in October 2023 and then later moved overseas for work opportunities.

One of the couples is an Australian citizen and the other a New Zealand citizen.

While living in the home in Australia they were not subject to NSW land tax, however, when they relocated overseas land tax became payable because the property became a rental.

At the time of purchase the NSW Foreign Buyer Surcharge and Foreign Owner Land Tax Surcharge did not apply as detailed above, however, from 8 April 2024 this exemption no longer applied to the New Zealand citizen’s ownership interest in the property.

The impact of this change was significant for this couple and possibly many more in the same situation, either based overseas or planning on becoming expats.

Below is an example of the two different land tax charges based on an NSW example with an unimproved land value of $1.5 million at the current NSW land tax surcharge rate of 4 per cent, taken directly from the NSW land tax calculator.

When the rate rises on 1 January 2025 to 5 per cent, the land tax surcharge for 2025 will be a whopping $37,500, assuming the land value remains the same.

Dealing With These Tax Complexities

Anyone planning a move overseas is encouraged to monitor the NSW State Revenue Office – Tax Treaties webpage for further updates:

SMATS specialises in Australian tax planning for expats, tax residents and intended migrants.

Despite the earlier predictions of many, and to the dismay of borrowers, the end of the rate rise cycle has not yet arrived.

In early August, the Reserve Bank will once again weigh up persistent inflationary pressure and in doing so, it must also assess the high cost of housing.

This means giving due consideration as to why that cost is so high and what further rate rises will do to this cost in the future.

The latest CoreLogic Home Value Index shows the median dwelling price in Sydney reached another new record of over $1,156,020 in June, growing a further 0.5 per cent during the month, to be up 6.3 per cent for the just-completed financial year.

Obviously, high house prices and rents contribute significantly to inflation but these are not discretionary costs and therefore should not be viewed in the same way as other items in the RBA’s inflation basket.

The potential for a rate rise typically dampens activity in the real estate market. Yet, the main indicators remain fairly positive. Auction clearance rates remain strong and volumes are solid, with transactions continuing to occur at a steady rate, as evidenced in stamp duty revenue.

When the final numbers are in, the NSW Government will have pocketed more than $1 billion extra from property buyers in stamp duty in FY2024 than it did in FY2023. It’s another reminder of the huge contribution property consumers make to the economy and just how much Government relies on the industry to keep the state afloat.

This overdependence on property is about to intensify following the Government’s Budget announcement that singles out property owners for more pain through land tax reforms.

It’s unreasonable and short-sighted.

Removing land tax indexation means more and more properties will be captured as values inevitably rise. Government’s plan amounts to letting the increase in property values do the work of increasing taxes and will exacerbate the housing crisis. It increases costs for owners, mortgage holders and renters.

As investors know, the cost of holding a residential property is high. More tax will place more pressure on returns, leaving landlords two bad options: pass the extra cost onto tenants or sell their investment property, taking more homes out of the undersupplied rental market.

Strata Management Crackdown

Together with the coming strata reforms aimed at cracking down on rogue strata managers, signalled by the Minister for Better Regulation and Fair Trading last month, the landscape is changing for investors.

It’s important for people to feel confident investing in strata schemes and it’s worth noting the vast majority of strata managers add significant value to Owners Corporations in what can be a dynamic and challenging regulatory environment.

It’s also important for people to feel confident investing in residential property as an asset class, and this is where bad regulations like tax disincentives are having a counterproductive impact.

A residential property can be a sound investment from a capital growth perspective but the cost burdens faced by property investors are incomparable to those who choose other investment assets.

The opportunity for proper reform still exists and is becoming ever more urgent.