How the current market is affecting property investors
With new tax rules for residential rental properties and stricter regulations for the banks, the market is a different beast for property investors to deal with compared to what it was 6-12 months ago.
Here are my observations:
- Credit is tight. The banks have new rules that they must comply with, and they are required to verify the information borrowers give them. This means it is taking much longer to process loan applications.
- With new restrictions on how much low-deposit lending they are allowed to provide, the banks have been withdrawing some preapprovals or not renewing preapprovals once expired.
- Investors need to have finance approved for the specific property in question before making an unconditional offer or bidding at auction. Don’t go to auction or make unconditional offers unless your finance is confirmed as approved, or you may find you can’t settle the purchase.
Because the market has been so hot, and people are so desperate for homes, there have been many instances of buyers purchasing without even looking at properties and without preapproval. As a consequence, some of them have been unable to settle because the bank won’t advance the funds as they don’t consider the buyer and/or the property itself meet their criteria. This comes with all sorts of problems, including forfeiture of deposit, interest payable to the seller while they remarket the property, any loss the vendor suffers if they later sell for a lower price, plus legal, selling and holding costs.
- You must ensure that the property has its code compliance certificate (CCC) because the bank will check. If there is no CCC, your finance will be rejected.
- The test interest rates banks use to assess whether a borrower qualifies for finance are much higher than the actual interest rates you will be charged.
- As part of their assessment, the bank will look at your past three months of bank statements. These need to be clean, or you are unlikely to have a loan approved. The banks are looking for evidence of imprudent purchases, including frequent takeaways, impulse buying, and gambling. Don’t withdraw cash from ATMs near casinos or pokie machines, as the bank will assume you are gambling.
- Because of all of the above, a significant portion of borrowers – up to 20% by some estimates – will likely go to non-bank lenders. While second tier lenders have more lenient criteria, there is a greater cost to the borrower (higher interest and loan fees).
- The new tax rules denying interest deductions are hurting smaller ‘mum and dad’ property investors whose reduced cashflow means they will struggle to keep up with their mortgage payments, especially with increasing interest rates. So some of them are already starting to sell. This has resulted in cashed-up investors snapping up deals and negotiating hard because they know people are in trouble.
- Investors with cash are active in the market and hunting for properties, particularly land banking or cash flow assets.
- People who don’t need to sell will likely hold on to stock.
- The property market is starting to change. What was $1m went up to $1.5m after the first Covid lockdown with the extraordinary demand for property and lack of supply. I expect the price of such an asset to settle back down to about $1.2m to $1.3m, i.e. where it technically should have been without the interruption of Covid. Long-term, values on average will keep going up but will experience fluctuations along the way as part of typical property cycles, with prices stagnating or even dropping slightly for shorter periods of time. So if you can hold on long term, relax. Look at property as an investment for 10 years plus, not 1-2 years.
If you’d like to see examples of deals that active property investors are currently doing in this market, have a look at the Property Investment & Education Webinar I presented in November – it is free to watch.
And keep an eye on our Tax Changes webpage for updates on the new tax rules.
Wishing you a happy festive season and property investing success in 2022.