Property News

Real estate opportunities for the prudent and well-advised

2 January 2007

This year will see many challenges faced by the mortgage industry, property buyers and owners. The climate for home buyers and owners should improve, as I believe interest rates may have peaked and the next rate change could well be down, most likely in the middle of the year.

My forecast is conditional on there being no dramatic jump in the inflation rate, which is unlikely as growth in the economy is slowing, with the main culprit being the drought.

Stable interest rates offer good news for home buyers, who continue to enjoy rates not far off their 30-year lows. I also believe real estate prices have stabilised, thereby ensuring a soft landing and avoiding a property bust. The property market is still healthy, underpinned by nearly full employment and low interest rates. There are, particularly along the east coast, good buying opportunities for owner-occupiers as well as investors; however, caution and independent advice are required as conditions remain patchy.

The spiralling prices at the top end of the market should continue, as the sharemarket enjoys a continued boom in this era of low interest rates; however, the clock is ticking on how long this equity rush can continue. The intense competition among the banks and other lenders will continue throughout 2007, offering great opportunities for borrowers, but there are risks for those who do not do their homework. Buyers can now borrow as much as 100 per cent of the property's value, and doing so in the soft market conditions carries many risks, particularly for first home buyers.

Unfortunately, the vast majority of buyers who have borrowed during the past couple of years with little or no deposit now find themselves with negative equity, meaning their mortgage is higher than the present property value. In the event they need to sell, there might be a shortfall, which brings with it serious implications. Although the property market has stabilised, I do not believe prices will start to rise again any time soon.

The rapid growth in the number of mortgage brokers over the past five years, through there being virtually no barriers to entry, has given consumers wider choice and better service; however, it has also opened the doors to a small minority of unscrupulous rogue players. State and federal governments need to accelerate the introduction of legislation to make life more difficult for dishonest mortgage operators, who have gone to any lengths to stitch up a deal, often committing fraud along the way. Most mortgage players act in the interests of their customers; however, as in any industry, there are those who don't play fair.

Part of the problem has been that many intermediaries, including some accountants, lawyers, real estate agents and even the butcher on the corner, have been on a commission gravy train and have not disclosed these payments to their customers.

I hope governments will move to tighten regulations and licensing on the mortgage industry next year.

The big danger in 2007 is management of the record levels of debt Australians have built up. Over the past 15 years, consumer debt has increased nationally by 400 per cent, with NSW leading the way at nearly 500 per cent growth. Consumers have been complacent about their debt positions, treating money as just another commodity. The new generation of borrowers are unlikely to recall the ugly events of the late 1980s, when interest rates soared to 20per cent and thousands of families lost their homes.

Average mortgage repayments have grown over the past 10 years from 34 per cent of a person's average weekly earnings to about 50 per cent in many states, with the average home loan size nationally growing from $91,000 in 1994 to more than $250,000 today.

Consumers, home and apartment owners are playing an expensive game, with the majority not knowing what interest rates they are paying on their mortgages or cards.

A good new year's resolution for consumers is to undertake a full health check of their financial situation and confront any financial problems they face, or may face if personal circumstances change for the worse, such as marriage break-up or redundancy. I believe most borrowers are either paying too much for loans or are locked into a loan unsuited to their needs, income level or aspirations. However, before switching loans, borrowers should make sure they get sound, well-researched advice from a credible broker or lender before taking the next step, because a mistake may cost thousands of dollars.

We will see the growth of two new loan categories in 2007, which have arisen from market conditions and the country's ageing population. The first is a loan facility that enables parents to assist their children or other family members to refinance or avoid the 100per cent mortgage. The second category covers reverse mortgages to assist retirees to convert some of the equity built up in their homes while they were employed. There continues to be controversy about these mortgages, but I am confident the problems will be ironed out over the next year.

In this climate I strongly suggest home buyers and owners shop around for the best loan deal available with reputable, well-established lenders and brokers and forget about the smaller rogue traders and spruikers.

The sea change and tree change trends will accelerate during 2007 as an increasing number of borrowers act on their financial predicament and opt for a cheaper lifestyle, or choose to escape the city.

The debate regarding climate change will also build, with the state and federal governments working on a variety of projects to reduce the nation's water usage and build up storage facilities. However, there is a need for more drastic action. With 2007 an election year, I expect large projects will be announced. I believe there also need to be strong tax incentives and subsidies for home owners, businesses and farmers to adopt stricter water-saving measures, as towns and cities without water are uninhabitable.

The federal Government continues to enjoy a huge budget surplus and a healthy proportion of it needs to be diverted to ensuring the water crisis does not confront future generations.

In 2007 there's an opportunity for government to invest in the long-term health of the country, while home buyers can improve their financial and personal positions with a little research and commitment to change.

John Symond is the founder and managing director of Aussie Home Loans.