Market update – How to protect your war chest and the market outlook (Ep.42)

In the third Podcast in our Covid-19 specials recorded on Monday we turned our thoughts to focusing on what the property market is doing during this period, what it could look like as we come out the other side, and how to proactively protect your financial position through an effective mortgage strategy.

In this episode David Johnston, Cate Bakos and Peter Koulizos take you through:

  1. Why we think property values will have a floor put under them during this period, but rental yields may be more precarious.Airbnb was declared illegal in NSW after going to air. Presciently we covered off on how the demand for Airbnb was being decimated and what this and other supply factors will mean to the rental market.
  2. Gearing up for the property rebound as markets open up and how to get yourself ready to be a first mover.  
  3. Calling all upgraders –if you still have a stable income, now would be a great time to upgrade as the higher value properties will see the biggest discounting.
  4. What you can do to protect your financial position during this period. We once again talk through why ‘risk management’ is one of our 5 core mortgage strategies and how you can proactively protect yourself during the proverbial rainy day or months.
  5. “Hot off the press” ASIC allow switching from principal and interest to interest onlywithout completing a full application and financial assessment.
  6. Property prices in all capital cities except Hobart recorded value increases during March but what are some of the nuances with this data?
  7. Flattening the curve and the light at the end of the tunnel – we’ve gone from a peak of 28% increase in infections, and we are now down at 2%-3% in the last two days. These are the trigger points that economists are looking for to signal economic recovery. Despite some of the horrific news, many of the worst hit nations appear to have reached their peak and the number of infections are starting to decelerate.  As a result, we’ve seen more stability across the share markets over the world in recent days, including USA and Australia.
  8. How agent behaviour will change towards buyers  with agents facilitating inspections individually and how agents will be more particular with who they sell property to.
  9. Be wary of the mortgage repayment pause because your interest could be capitalising which means you will have a greater debt at the of the period.
  10. And of course, our ‘gold nuggets’!  

We wish you and your families the best of health and say a big thank you to all our health workers during this time. 

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Show notes

  • Flattening the curve – when the number of new infections reduces on a daily basis. We reached the peak at 28%, which dropped down last week to 14%, then in the last day or two to around 5% or even lower. It is flattening and hopefully it will start coming down, this is a sign as a nation that you’re getting on top of managing the virus.  
  • Light at the end of the tunnel – When the numbers start to come down, that is the moment after we’ve been at the worst point, but you are coming down the other side provided it is sustainable. These are trigger points that economists and markets are looking for. The primary country we want to see this happening in is the USA, being the financial and economic hub of the world.  
  • Property prices on the rise in March Melbourne and Sydney – We know that you can’t measure price growth in real time as some of the figures come through at settlement, which could be 90 days after purchase. We’ll be surprised if the actual figures for March record stronger results. At the coal face we have seen only a few sales that were above the reserve. The market is predominantly a mix of vendors who have had the faith and patience to let their agent complete a full campaign and panicked vendors who put time pressure on the sale process also discounting their property for a quick sale.  
  • Changes to property market – the weekend before Easter is normally a Super weekend for auctions. Once coronavirus gripped, property sales were flipped to private sale/expression of interest or auctions brought forward and they’ve all been sold prior to their original scheduled auction date.  
  • Gearing up for the property run – the property market will see a quick turnaround when there is a change in sentiment and supply is still low. Construction at the moment is slowing down and people will hold off selling (unless they absolutely have to) until they feel like the economic conditions are strong enough to get a satisfactory outcome, which will put a floor under property values. The volume of property on the market could more than half during this time.  
  • What are the most vulnerable segments – during downturns, the people who are most exposed are people who have serious mortgages and price points – the most vulnerable is the higher priced properties and lifestyle properties. When you get in a bind, people are more likely to flog the holiday house in Phillip Island before the family home. These properties will exhibit the strongest discounting if there is discounting.  
  • Opportunity for upgraders – you may be selling the family home at a discount, maybe 5%, but you know that you can upgrade and get a 10-15% discount on a bigger property.  
  • Looking for optimism – investors coming into the market will drive the rebound, those with stable jobs, significant savings or equity. Rates are the lowest they’ve ever been and they’re going to stay that low until the market rebounds. It is very achievable to neutrally or positively gear.   
  • What is the likely impact to regional markets – this depends on the job situation on the owners of the properties, a lot of Ballarat investors live in Melbourne. If they’ve owned the property for a bit of time and the asset is not too high on the bell curve for value, it will be positively geared. They shouldn’t need to sell unless they absolutely need the capital. 
  • Rental market – likely to see a decrease in supply, young kids who have moved out of home will move back home. Government funded jobkeeper and jobseeker initiatives is for Australian residents and citizens, not for those with working visas or temporary residents. Demand will slow and supply will increase as we see short-term rentals go to long-term rentals. NSW has declared Airbnb illegal to ensure that people are staying home.  
  • How long do we have to stay cooped up? This is the ultimate driver. The longer we stay at home, the more jobs will be lost. The Government is negotiating the fine line balancing act of when they allow the population to go back to activity. This is likely to be subject to the ability to test for the presence of antibodies on work force, we could be walking around with certificates to confirm if we can go back to work.  
  • Agents facilitating inspections individually – most buyers do not want to buy ‘sight unseen’. Can you trust the person who took the video when they have a vested interest in selling? We suspect there will be stories in the news about things that were not properly disclosed or the buyer was not aware. You may get a rise in professionals undertaking defect assessment, valuers that incorporate videos and buyers agents.  
  • Who are the buyers likely to pounce? Those with a stronger risk appetite, who are organised and experienced. Not typically what you’d see from a first time buyer. If you have concerns about employment status or hours, now is not the time for you to be searching for property.  
  • Now is the time to refinance, particularly if you have concerns over your income – if you face a reduction in hours or complete loss of income, you may not be able to refinance in a month or two months.  Pausing or moving to interest only repayments will only give you a benefit for a few months. A refinance will enable you to get into a long-term better position.  
  • How to manage your risk – Refinance is the first cab off the rank. You can look to reduce repayments buy taking out a new loan term over 30 years. Risk management is one of our top 5 mortgage strategies, precisely because it enables you to manage your finance through tough times. Touch wood, this is one of the toughest times that we will ever see. You can make your minimum repayment as low as possible, so all surplus savings can be put away for a rainy day which benefits to reduce the interest as if you were paying down the loan. Paying interest only, optimising your tax deductions, improving your rates and accessing equity so that your financial runway is longer.  
  • Building up the war chest – having a good conversation with your strategic mortgage broker about having buffers to see you through to the other side. We often talk about saving for a rainy day, it’s looking like a rainy quarter. You want to make sure you have exhausted every option before you pull the trigger to sell.  
  • Hot off the press! ASIC allow switching from principal and interest to interest only – without completing a full application and financial assessment. This is yet to flow through, lenders will be reviewing and working out how they will approach this, which we’d be surprised if it doesn’t happen by the end of the week. Reading of the tea leaves, it’s likely that they will offer interest only for 3 months, with potential to extend to 6 months – exactly the same way as offers of repayment pauses.  
  • This will be a game changer for those looking for mortgage relief, who can get by on interest only repayments without having to go on a repayment holiday. At the moment most lenders are capitalising interest to the loan, except for CBA as far as we know, which means that you end up with higher debt and paying more interest at the end. Taking a repayment pause should be the last option of resort for residential mortgages.  

David Johnston – The Property Planner’s Golden nugget: The residential property market is too big to fail. There are vested interests in keeping a floor under values, it’s fundaments to Government, to taxes, to banks and to Australians. Policies will be thrown in, such as First Home Buyer schemes to support and try to maintain property values – that’s something to remember. Things will be thrown at policies, FHB schemes, support provided to try and maintain property values.  

Cate Bakos- The Property Buyer’s Golden nugget:  Be as pleasant and accommodating to agents as you can. This period will stick around for a while and agents hold more power for negotiations and open for inspections than ever before. If they have preferential treatment for any buyer, put yourself in the box seat for it to be you. 

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