Well, global share markets have got he wibbly-wobblies. Too early to know what to make of it yet. Still happy to be a property investor.
The news in the property market last week was nowhere near as sexy, but still interesting if you’re a property nerd like me.
First up, the government introduced the new foreign property purchases legislation last week. According to Hockey, on 3AW Morning radio:
“In the last few weeks I’ve announced the forced sale of seven properties,”
“We are investigating 462 and I can tell you 207 investigations are underway in Victoria which is the highest in any state.
“What’s happened is some foreigners have either bought existing real estate and they are not allowed to do that, or they have got permission to buy existing real estate and when they have left the country they haven’t sold them and they have to do that.
“What we did was set up an amnesty and they’ve got until the 30th of November to notify us.
“After November 30 we will claim any capital gain they have made or 25 per cent of the value of the property.”
This is all good stuff. There’s no point having rules if the rules aren’t being followed. And the fines, to me, look like they’ve got enough teeth. If you break the rules, then you lose any capital gain you’ve made when you’re forced to sell, and you’re potentially looking at $135,000 in fines or three years jail. And that includes any third parties found to be accomplices.
That should give a few people in the industry pause for thought.
The host Neil Mitchell said there could be “tens of thousands of houses sitting around illegally owned” and asked Hockey what would happen when they went on the market.
“It might bring down the price of real estate for people.”
Sure Joe. This is going to be the magic bullet for housing affordability. Nice try.
And could there be “thousands” of houses illegally owned. Seems like a lot to me, but maybe… Compliance has been pretty lax recently.
And theoretically, take out a source of demand, no matter how small, and it’s got to ease pressure on prices. So price growth might slow a little. I don’t expect it to be a market mover, but if it turns out there’s 10s of 1000s of illegal homes, then it could be something to watch.
I guess we’ll see. The amnesty kicks in November 30, so watch for some sales action in November.
The other interesting thing that flew under the radar was ASICs review of interest-only loans.
In December last year, ASIC announced it was conducting a review of IO loans and the role banks play in dishing them out.
To the property chicken-littles, IO loans were Australia’s sub-prime mortgage crisis.
That is, poor, unsuspecting home-owners were stretching themselves to the limit with IO loans, with the banks forcing them down people’s throats, like cocaine dealers cruising the suburbs in dark cars.
We were hearing reports of income data being fabricated, servicing power over-stated, and high-school sporting achievements being grossly exaggerated.
This was one I had a lot of interest in. Because I don’t trust the banks. Time and again they’ve shown that you can only trust them as far as you can throw them. And banks are heavy.
But the ASIC review was a bit of a fizzer. No great scandals looming there.
In short, they found that interest-only loans are more popular with investors and those on higher incomes, and that delinquency rates are currently lower for interest-only home loans.
So it seems the systemic risk is pretty minimal.
But ASIC did find that lenders have been falling short of their responsible lending obligations.
Their key findings were:
- The majority of interest-only home loans were extended to investors; however, a substantial proportion of interest-only home loan approvals (41% in the December 2014 quarter) were for owner-occupiers.
- A greater proportion of the total number of interest-only home loans was sold through third-party or broker channels, compared to direct channels
- The average value of interest-only home loans was substantially higher than principal-and-interest home loans for both owner-occupiers and investors, and this was especially so for loans provided through direct channels in comparison with third-party channels.
- Overall, there was a smaller proportion of interest-only home loans in higher LVR categories when compared to principal-and-interest home loans
- A diverse group of consumers tended to take out interest-only home loans. In general, interest-only home loans were more popular with consumers who earned more money, but a substantial proportion (29%) of owner-occupiers with interest-only home loans earned less than $100,000
- Consumers with interest-only home loans were, on average, further ahead in reducing the balance of their loan when including funds held in offset accounts related to the home loan, than those with principal-and-interest home loans.
- 40% of files reviewed assumed the borrower had longer to repay than they actually did.
- In 20% of files reviews, lenders hadn’t considered actual living expenses, but relied on benchmarks.
So the banks fudged it a little. They’ve said they’re sorry and they’ll try to do better.
But IO loans tend to be held by higher-income earners, many of who hold considerable amounts in off-set accounts.
It’s not a recipe for systemic collapse. Sorry chicken littles.
And in a last little bit of good news, for all of Greece’s troubles, the country just had a record breaking tourist season:
That’s me there on the right.
Have a great week everyone.
How many people out there have IO loans? Have you got it covered by an off-set account?
Mummabear says
Yep it’s covered by an offset….no worries over here!
Vancho says
That’s me Jon.
Been doing it for nearly 15 years.
Always use a broker, IO loan accompanied by an offset account. Redraw the asset’s equity through regular revaluations (especially in a rising market), and have the funds ready for investing as opportunities present themselves.
It’s called taking responsibility for your money, and taking the power away from the bank regarding what you can and can’t do.
Jon Giaan says
exactly.
Rusty says
Just received notification from NAB that my IO loans (all 5 of them) are going up by .29%. Forget that that 3 of them are completely 100% offset. I am required to switch the 2 that are not to P&I if I want to retain the same interest rate. They are not looking at me as an individual and evaluating me based on my excellent history and LVR just getting tared with the same brush they are using against everyone else who uses IO loans as a means of paying less monthly and never reducing their prin
Rudolf says
Hi Jon
Yep, I’m one of them,……over 1m IO loan on residential, and using all available spare funds to firstly accelerate repayment of expensive loans on couple of high value commercial properties, (which will finally be paid off this Xmas), after which the IO loan will be recapitalized for a while, and redrawn on to help finance any further property investments we wish to make later next year.
Bazza says
Hi Jon,
Firstly my condolences to you on the passing of your father. Having lost a parent I can tell you never forget them and you always remember the good times and all the life lessons they taught you. Second IO loans are the way to go. I tried to pay of loans for 12 months a few years ago and have never felt so cash poor. And truthfully it felt like I was going backwards. With an offset account and frequent revaluations it is definitely the way to go