Listener questions – Is the market at the top of the cycle, should you invest today, where are interest rates headed and should you fix, what should a first timers strategy be? (Ep.105)

In this week’s episode, Dave, Cate and Pete take you through:

1. The market seems to be at the top of its cycle. Is it a good time to invest in property or should we be waiting for the demand to subside or the chance that govt regulators will step in to curb prices? Whilst prices are undeniably on the rise, the trio firmly believe that we are certainly not yet at the top of the market. Any regulation introduced will be carefully planned so as not to de-stablise the market or cause a downturn, but simply to slow the acceleration of property price growth. The focus for regulators is optimising GDP and bringing unemployment down. The government will be loathe to introduce any measures that could hamper our economic recovery, particularly before the election.
2. What are the implications of waiting it out? If you would like to purchase property and are waiting for demand to subside or property prices to stop rising, it’s likely that the market will move further away from you. There is great fear in purchasing at the top of a market cycle, however this only poses an issue if you crystalise losses by selling or if you have purchased a poor-quality asset in the first place. If your strategy is to purchase and hold for the long term, you will most likely be able to ride through any downturns.
3. Is now a good time to refinance? If so, why? The trio discuss the current conditions for refinance, which are fantastic. Property prices have gone up, so it’s likely that property owners have more equity that can be tapped into and interest rates are the lowest they’ve ever been. This environment provides great opportunity to get on to a sharper rate and release some equity to protect and/or build your wealth.
4. What’s your opinion on where interest rates will go over the next 12-18 months? Should I be fixing some of my debt now while fixed rates are low? The trio discuss the outlook for variable rates, which are linked to the RBA cash rate, while fixed rates which are connected to bond yields. Fixed rates are expected to rise, and even since recording, one major bank has increased their fixed rates by 0.25% and 0.45% for two of their fixed rate terms. This is likely to be the trend in the coming months as the $200B term funding facility that the Government has provided to banks is coming to an end in June. For reasons relating to our economic recovery, the variable rate is expected to remain nailed to the floor for some time to come, as consistently communicated by the RBA.
5. Considerations for fixing some of your debt. The Property Planner explains why it’s almost always a good idea to have some portion of your debt variable, due to the ability to use offset accounts and make additional repayments. Remember to speak to your strategic mortgage broker to ensure you have the best strategy possible and to avoid making decisions you may later regret!
6. I’m a first-time buyer, and I’m not sure whether I should buy a stepping stone home, investment or long-term home how do I decide? The trio provide their insights and tips for this nebulous question. Being able to long-term and stretch your thinking to 10 years in the future can be a difficult task, but will help immeasurably to make successful property decisions.

Market insights

• Regulation on the horizon as the property market continues to surge. New data shows that property buyers are stretching towards their maximum borrowing capacity to compete in this hot market. Investors have been quiet in this market so far, but they are making a come-back, as first home buyer numbers start to taper. As we expect annualised growth to hit 15% for some of our capitals and regions in the coming months, the jungle drums will beat louder for regulator intervention to slow down the velocity of the growth.
• Australia’s AAA credit rating. Australia is now one of only 9 economies to have a pristine AAA balance sheet recognised by all three of the world’s largest credit rating agencies. This is great news for us, as it keeps our interest rates slightly lower, which we do enjoy as a capital importing nation. The AAA rating means that our interest rates are 0.15% lower than they otherwise would have been.

Resources:

• 12 reasons why now is the best time to refinance
• Property Cycle Management – why now is always the best time to buy if it suits your personal economy and you have a long-term property plan
• TIME IN the market v TIMING the market (Ep.19)
• Special video – Navigating a successful purchase in a hyper competitive environment
• How to determine market values by using comparable sales (Ep.81)
• Preparing for auction #2 – Cooling off period, finance approval, negotiating terms and auction quote ranges (Ep.78)
• How our mortgage strategy helps us to hold properties
• How to succeed with Property and Create your Ideal Lifestyle
• Mortgage Strategy 101 – YouTube video series.

Show notes:

• The market seems to be at the top of its cycle, is it a good time to invest in property or should we be waiting for the demand to subside or the chance that govt regulators will step in to curb prices? 
• If our regulator jumps in and tries to curb, their intention is not to de-stabilise the market or cause any significant downturns. It is to slow down the crazy rate of growth.  
• We’re not getting any indication that that’s on the cards. The focus is all about GDP and employment.  
• At this stage, I don’t think the regulators are focusing on the property market at all.  
• If and when they do, the market might be at the top. But it will be at the top of one of many cycles.  
• Our capital cities don’t have many downturns, and they don’t go for that long.  
• Anyone trying to time the market is probably having the wrong approach.  
• Buying at the top of the market is only an issue if you crystalise loss or if you’ve bought a dud and the journey of buying and holding becomes difficult.  
• No, the market is not at the top of the cycle.  
• They’ll be higher in 6 months-time and then next year and the year after as well.  
• Property prices will not drop, but the rate of acceleration will drop.  
• If demand drops, you have a better chance to be successful at auction. Or even before auction.  
• If you do wait, what’s the implication?  
• We are entering in the golden era – we’ve done all this without overseas migration. When this does start coming in, wait till you see the numbers. Similar to 1950’s boom led by migration.  
• It’s very likely they will step in at some point in time, it will be a softly, softly approach – unlike last prudential regulation adjustments.  
• We’re coming out of a once in a lifetime recession, pandemic – no government wants to put the recovery at risk. They are going to be super conscious of any measures taken.  
• Why the government want property values to keep rising: 
• The government want property values to rise at a sustainable level leading into the next election because the ‘wealth effect’ means that we spend more if our assets grow in value. 
• This all points to the likelihood of property values increasing into 2022 up until the election as the government will only encourage policies intervention such as lending restrictions as a last resort so not to hamper our economic recovery, and cost votes. 
• Ironically, in complete contrast to after the previous election where property values rapidly bounced back, the property market take a negative turn ‘following’ this election. 
• Is now a good time to refinance? If so, why? 
• Not necessarily to get a sharper rate or to do something with the money, but to manage your buffers and your war chest while you can. You’ll be in the position to grab an opportunity. 
• Whether you want to borrow the money to do something with, the conditions for refi are fantastic – property prices have gone up so you have more equity and interest rates are the lowest they’ve ever been. Competition amongst banks as well.  
• You can start getting your ducks in a row now, get your properties re-valued.  
• What’s your opinion on where interest rates will go over the next 12-18 months? Should I be fixing some of my debt now while fixed rates are low? 
• Fixed rate up take is at a level it has never been historically. Generally speaking, variable rates were lower than fixed rates. But now we’re at a time where fixed rates are just as low or even lower than variable. But they are starting to creep up, and likely to occur further.  
• They ‘ve been artificially reduced because the government has been targeting 3 years bonds to keep the yield at 0.1% to keep in line with RBA cash rate and they have been provided with a $200B term funding facility to keep rates low, which is coming to an end in June. This will slowly be tapered away, most likely, the fixed rates will get higher.  
• They will move before variable rates. If you want to fix in borrowings to lock in certainty for the next 3 to 5 years, it’s better to look at it today. 
• Be clear when you fix, what your motivation is and whether you’re potentially causing yourself future stress. If you decide that you don’t want it, you need to pay out a portion of it. Break costs if you try to get out of that product by selling a property. 
• RBA cash rate impacts variable rates and bond yields on fixed rates.  
• The cash rate won’t go up, but that doesn’t mean mortgage rates won’t go up.  
• There’s some inflationary pressures building and being talked about around the world. ANZ is at the highest level of job ads for 12.5 years.  
• They’ve brought predictions down for unemployment to be 4.5% by end of 2023. That may mean the cash rate could increase sooner.  
• Most don’t allow attach offset account – almost always pays to at least have a bit on variable. Limitations of how much you can pay.  
• Don’t want to get into a situation where you’ve offset your variable loan and then you’re limited with what you can do on the fixed. 
• None of the majors offer 100% offsets, there’s only 2 or 3 that allow this. If that tickles your fancy, have a chat to your great strategic mortgage broker.  
• I’m a first-time buyer, and I’m not sure whether I should buy a stepping stone home, investment or long-term home how do I decide? 
• If you can, stay at home and buy an investment.  
• Then buy a stepping stone home if that’s not an option.  
• Let’s say the stepping stone is worth $400,000 and the dream home is 800,000.  
• If you wait and just only save to purchase the long-term home, that’s gone to $880,000. 
• Get into good property as soon as you can.  
• What does your future home look like, if its within reach, that might be the one to go for? 
• Get into the market as early as you can, but sometimes if you’re getting in and jumping into a property that you won’t hold for at least 5 years, you could be making a mistake. Some of the gains could be chewed up by buying and selling costs.  
• Big risks we see often, is subject to their stage of life – it’s hard to narrow in on the long-term home when you’re young, living at home, don’t know who your life partner is, haven’t met them yet, don’t know where you’d like to live.  
• It gets easier the older you get and the more settled that you are.  
• Some people are more settled, others are more likely to move around and work overseas in various countries.  
• Try to stretch your thinking to 10 years and then bring the property decision back – consider how does it make you feel if you know you have to hold this property for 10 years, or you have to live in it for 10 years? 
• Big difference if it’s singles vs couples – got some clarity about where they want to live long-term, but can’t afford there at the moment. Get the stepping stone home in and around the same area as they would like to live. So, the market cycle is at least matched with the future long-term home.  

Gold Nuggets

Peter Koulizos – The Property Professor’s Golden nugget: the market is not at the top, it’s a great time to refinance, interest rates aren’t going anywhere and buy yourself a good property as soon as you can afford it, rather than waiting to save up for the dream home. 

Cate Bakos – The Property Buyer’s Golden nugget: we still have more questions that we didn’t get to cover, one of them is about our trading relationship with China and the potential impacts to the property market. Stay tuned for a podcast on this topic.