Market snapshot

Home loan affordability, the rental ‘crisis’ and interest rate movements are three aspects of the housing market that have received their fair share of media coverage lately.

Add these issues to the two-speed, or some say three-speed economy and you can see why many consumers are a little confused as to where the property market is headed and how they should handle their mortgage situation, if they have one.

In terms of the hard facts and figures, on a national basis, housing finance is looking healthy, though somewhat subdued compared to the ‘boom’ experienced in many Australian states five or so years ago.

The mortgage market has experienced strong growth in loan approvals, averaging annual compound growth of around 14 per cent. For the 12 months ending December 31, 2006, $232 billion in loans were written.

The February 2007 ABS housing report showed demand, especially from investors, was on the increase. The value of new loans to owner-occupiers rose 1.1 percent in December 2006 after a 0.5 per cent decrease in November, while investor loans jumped 4 per cent. That followed a 1.8 per cent rise the month before.

History shows the housing cycle usually lasts seven to 10 years, with average prices doubling over that time. Given that most states are experiencing a levelling out of housing prices, it could be said that savvy investors are thinking long-term and buying now to take advantage of the current ‘quiet period’.

Consumer sentiment is strong for 2007

The 2007 Mortgage Choice Consumer Sentiment Survey provides a telling insight into the general public’s expectations and plans for the future, especially in terms of property investment.

In the independent online survey by Mortgage Choice in November 2006 of 1,021 Australians, of whom many were property owners, 68.8 per cent of believed the Australian economy would be strong in 2007. This was only slightly down on the 70.8 per cent from the previous year’s survey.

Interestingly, the gender breakdown showed females were less confident than males, with 64.8 per cent of females confident of the economy during 2007 compared with 72.6 per cent of males. The most confident state was Queensland, at 76.6 per cent, and the least confident was NSW, at 61.9 per cent, which is probably not surprising given current economic conditions in the two states’ economies.

Consumers continue to have a positive outlook on their property intentions also, with 35.1 per cent of respondents planning to invest in property in the next 12 months.

Comparing respondents planning to invest in property in the next 12 months to last year, a similar amount will buy property (35.1 per cent compared to 31.5 per cent) - with that percentage breaking down into 17.5 per cent buying an investment property and 17.6 per cent buying to owner occupy. State-wise, WA respondents were the most likely to purchase, at 40 per cent, while NSW would see the fewest, at 31.7 per cent.

Concern over the stability of interest rates and petrol prices remained at the forefront of consumers’ minds, with 47.4 per cent citing rate increases and 17.2 per cent citing petrol prices as the biggest concerns for their financial future. Job security came in third, while a fall in housing prices garnered the least amount of concern. The state most concerned with rate increases was SA, at 55.8 per cent, while the least concerned was WA at 43.6 per cent.

The vast majority of respondents believed a rate rise is imminent - 86.3 per cent said interest rates would rise in the first quarter of 2007. That is a lot of people expecting higher repayments on their mortgage, even after the three rate rises of 2006. The Reserve Bank of Australia’s March cash rate decision saw the rate remain steady for the fourth month, so these Australians must be breathing a sigh of relief.

The perceived affordability of further rate increases is mixed, with 16.5 per cent of respondents stating that they would not be able to afford any increase. Last year’s survey, obviously completed before the three 2006 rate rises, saw 19.3 per cent saying they could not afford any increase.

So, however impossible they thought it might be, Australians have managed to find more in their mortgage budget for interest rate rises.

In response to the question, ‘What is the highest rate rise you could afford to meet repayments on?’, 21 per cent could afford a 0.25 per cent increase, 21.8 per cent could afford a 0.5 per cent increase, 7 per cent could afford a 0.75 per cent increase and a significant 33.7 per cent could afford a 1.0 per cent increase.

State-wise, NSW had the most borrowers who could not afford an increase (19.2 per cent), and WA had the fewest (9.2 per cent).

Considering the current general consensus amongst economists is that if rates rise within the next 12 months it won’t be by more than 0.25 per cent, it seems most Australian borrowers can afford to continue paying their mortgage without needing to seriously reassess their budget or loan.

In the current climate, borrowers should consider property investment as a long-term strategy, especially now price growth is slower. For the long-term, there are many Australian regions where good gains can be made if buyers fully research the strengths and weaknesses involved.

Many of the 64.9 per cent of responding property owners not planning to buy in the next 12 months will instead renovate existing property, with 31.3 per cent saying this was the case.

Another popular financial portfolio growth strategy is buying shares, with 37.3 per cent planning to invest in these during 2007 (slightly down on 39.8 per cent last year, though up on 31.2 per cent the year before). The survey found 18.8 per cent will invest in addition to buying property, only 12.5 per cent will invest as an alternative to property and 6 per cent will invest as both an additional and an alternative investment.

Product loan preferences

Mortgage Choice’s national housing loan approval data for January 2007 revealed Australian borrowers maintained their strong preference for fixed rate loans, with 32 per cent of all loan approvals in this category up on the 12-month average of 30 per cent. Having certainty around repayments at a time when there has been strong consumer sentiment about further rate rises during 2007 made sense to a lot of people.

With the franchiser’s annual loan approvals exceeding 40,000 nationally, its data provides a clear insight into the product preferences of housing loan borrowers generally.

There is no doubt the three rate rises in 2006 have unsettled borrowers, and in particular first homebuyers. It must be said that any savvy variable rate borrower should consider repaying their mortgage as if interest rates were at least 0.25 per cent higher. This prepares them for a rise if it occurs, and if it doesn’t, then they are paying off their loan at a faster rate, therefore saving on interest costs.

State-wise, Queensland had the highest fixed rate uptake, at 38.8 per cent, while WA had half that intake at 19 per cent. This indicates WA borrowers are less concerned with the possibility of interest rate hikes, which correlates with the Consumer Sentiment Survey results showing WA had the least respondents who could not afford a rate rise.

Standard variable home loans represented 30 per cent of all loans approvals nationally, which is below the 12-month and six-month averages of 32 per cent.

There was an increase in demand for basic variable home loans during January, with 24 per cent of approvals for this category. This was more than two percentage points below the 12-month average.

Interesting mortgage trends

With the current housing and mortgage affordability issue, people who are considering entering the property market should be aware there are a number of not so traditional ways to make the saving and home loan application process easier so they can be accepted for a property loan.

Following are some ways into the property market that may interest potential home and investment property purchasers, including those who are struggling to save the traditional 5 per cent deposit:

Multi-applicant loans

Joint home loans between three, four or even more family/friends/work colleagues is becoming more commonplace, and are especially prevalent in areas of dense housing, such as cities or popular coastal areas. These areas bring in the majority of joint loans due to their high property prices and living costs.

It is just as easy to create a joint home loan application for such borrowers as it is to complete an application with an individual or couple. The most important consideration is whether or not both, or all, parties can afford to pay off the loan. It is of no consequence if one party earns more, or has greater liabilities, than the other party/parties — the home loan can still be paid off by all involved. The only difference is at the end of the loan term the property may not be owned in equal parts.

Monetary gift from family

One method increasing in popularity is for parents (or other family members) to support their children when it comes to a home loan. It is sometimes the difference between an application being approved or declined and is a great way to enter today’s housing market. If family members can afford it, they can put forward at least 5 per cent of the property purchase price as a gift towards the home loan. Applicants must prove the gift is not repayable; in most cases signing a statutory declaration is all that their chosen lender will require.

Family equity

Another way family members can help is to allow their home to be used as security for the home loan. This is typically set up as a limited guarantee for 20 per cent of the purchase price, which means there is no need for the loan applicant to pay lenders mortgage insurance - a potential saving of thousands of dollars. All parties should consult a financial adviser before making the decision and consider the financial ramifications should the borrower default on the loan for some reason.

No deposit loan

Some lenders offer 100 per cent or no-deposit home loans, where borrowers with good ‘serviceability’ (the ability to make loan repayments) only have to put forward a small part of the loan amount, mainly covering costs such as stamp duty and legal fees. There is even what’s called a ‘105 per cent’ loan, which covers the property’s purchase price plus all other costs. However, the applicant must be aware that these low and no deposit loans sometimes have higher interest rates, so it is worth thoroughly researching which type of loan will work for their particular situation.

The main concern for the applicant and their chosen lender is whether or not they can afford to repay the loan over the long term.

<[<[stk -6.8]>And the future?<[etk]>

Property is a major asset in Australia and a high percentage of people still aspire to the national dream of owning their own home, while many build a property portfolio around investment properties.

Although May, August and November 2006 saw interest rates rise, borrower demand for mortgages remains strong.

The growth prospect of the mortgage broking industry is also looking positive. A recent report by JP Morgan Fujitsu confirmed its strong position, saying the proportion of broker originated home loans has risen to above 37 per cent of all mortgages and an estimated 45 per cent of new housing lending volumes. This is a great achievement for an industry barely 16 years old.

Currently, the indication of steady rates for at least the short-term future has provided Australians with an opportunity to continue having a good, long think about their current mortgage and/or budget and where it is heading.

And for many, one of those considerations is whether to buy an investment property or a home. With housing affordability low for a significant number of homebuyers, it is a good time for these Australians to think about initially becoming property investors instead — perhaps in an area with cheaper housing.

Many property markets around Australia are showing signs of growth, some quite strong signs. Certainly, most states are looking to be on their way up when it comes to their place in the property cycle. For example, areas with a large mining industry and areas that are highly active infrastructure-wise, such as Mackay in Queensland and Mandurah in WA, continue to experience strong growth.

It is regions of Australia such as these that serious property investors should keep their eye on. Even better would be to find similar areas before a boom begins there.

As always, there are good long-term opportunities to be had in the property market for those willing to research and perhaps move out of their comfort zone, outside the areas within which they ideally want to purchase or are familiar with.

Warren O'Rourke is national manager of corporate affairs at Mortgage Choice.