The Active Home Loan Manager

What property owners who bought in Sydney in the last 4 years should be doing right now

Surprising new data from The Shadow Reserve Bank, The IMF, APRA and The Australian Financial Review may hold the answer: Many expect Sydney property prices to drop.

Property owners who’ve made big capital gains in the last 4 years may have just a small window of opportunity to refinance their home loan while their Loan-to-Value ratio is low – potentially saving them thousands.

Prices Stalling

Sales volume has also topped out.

Regulator Crackdown

Banking regulators are determined to cool the mortgage market.

Interest Rates

Tipped to rise by the Shadow Reserve Bank

If you purchased Sydney property in the last four years, then you’re likely sitting on a healthy profit cushion. That profit could be anywhere from tens of thousands of dollars… to hundreds of thousands of dollars.

So, the question is – what should you do next?

If your property value has skyrocketed, chances are your Loan-to-Value ratio – the size of your loan as a portion of your property value – has decreased. Which is a good thing – because it often means you could refinance and pay a lower interest rate.

Compelling new data suggest the possibility of a property price drop. And should that happen, the current window of opportunity to refinance at a significantly sharper rate could vanish.

If you’re not sure whether now is the right time to reduce your repayments and lower your risk – and, in general, sleep better at night – there are six compelling trends unfolding in the Sydney market you need to know about.

Warning Signal #1: Sydney’s Price Growth Stalling

Daily Home Value Index Core Logic

The nation’s biggest housing market recorded its first quarterly fall since May 2016, bringing the quarterly loss to 0.6%.
And in October, Sydney’s home values continued to slide with prices dropping by 0.5%.

Darwin and Canberra also saw prices fall – 1.6% and 0.1% respectively. Meanwhile, Perth and Adelaide grinded to a halt with zero posted growth in October.

Commenting on the NSW capital’s poor results, CoreLogic’s head of research Tim Lawless: “Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events.”

As further evidence, housing sales seem to have topped out:

House Prices are Linked to Sales Volumes

Warning Signal #2: APRA Is Cracking Down

Banking regulators are determined to cool the mortgage market.

In March, The Australian Prudential Regulation Authority (APRA) cracked down on banks by ordering them to lower the proportion of new interest-only lending to 30% of new residential home loans.

CoreLogic’s Tim Lawless comments, “Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan-to-valuation ratios or higher loan-to-income multiples,” he said.

Warning Signal #3: Clearance Rates Are Dropping

As you probably know, clearance rates are a measure of a buyer’s willingness to buy and a seller’s willingness to sell.

Capital city auction statistics (preliminary)

As you can see, the two biggest Australian markets have experienced a sharp dip:

– Sydney’s clearance is down to 64.1% from a high of 80.5% a year ago

– Melbourne’s clearance is down to 71.7% from a high of 77.5% a year ago

Warning Signal #4: Chinese Money Is Drying Up

The ABC covered a report by Swiss banking giant Credit Suisse about Chinese investment in Sydney.

“Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,” ABC quoted Credit Suisse.

The report found that Chinese investment had fallen in recent months causing, in part, to a flattening of our property market, according to the ABC.

“Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls.

Property transfers and Chinese capital flows

Warning Signal #5: Investors Pulling Out Of The Market

When investors leave the market, it’s a leading indicator the market is cooling.

According to The Australian Financial Review, at the start of the year investors accounted for 40.2% of all residential dwelling finance.

It’s now down to 36.5% – a drop of almost 10%.

That’s a big red flag.

Warning Signal #6: Interest Rates Tipped To Rise According To The Shadow Reserve Bank

Two former RBA board members – and an eminent group of economists – make the The Shadow Reserve Bank board at the Australian National University.

While no means conclusive, the 9 member board rates a 73% probability of a rate rise within 6 months.

But the RBA is walking a tightrope.

Australian household debt has exploded and we’re almost double the debt of other developed nations.

In fact, the International Monetary Fund issued a sober warning that Australia’s high levels of household debt leave it potentially exposed to a global economic shock or banking crisis.

What this means: The RBA can’t raise rates because we’re so indebted – so a rate rise could be the straw that breaks the camel’s back. But, given rates have been so low for so long, they may not have a choice.

And countries from around the world, including the US, Canada and Hong Kong have already started hiking. And it looks like The Bank Of England is set to follow suit after dropping their loudest hint that rates will rise by the end of the year.

How long can Australia wait, really?

Result: If houses prices start to fall, they could rapidly fall off a cliff. And if you’re flat footed, you’ll be caught in the tailspin. If you’re considering fixing your interest rates to minimise your exposure, you can find a rate within seconds here – 

Should You Consider Refinancing?

Firstly, based on what you’ve read in this article, let’s look into the why you might want to refinance.

As you probably know, loan-to-value-ratio (LVR) is the proportion of money you intend to borrow compared to the value of the property.

Example: You’ve saved up $80,000 for a deposit and you come across a 2-bedroom apartment for $800,000. To buy this apartment, you’ll need a loan of $720,000. Since you’re borrowing 90% of the property price, your LVR is 90%.

But here’s where it gets interesting. Let’s say Sydney housing prices rise 10% – just as they did from June ‘16 to June ‘17. According to ABS figures, your apartment is now worth $880,000.

More importantly your LVR has dropped to 82%.

And, if you bought in Sydney four years ago, your LVR is probably even lower – as much as 50% lower – because that’s how much prices have risen in Sydney. Which means your apartment’s worth $1.2 million.

What this means: With a lower LVR, banks perceive you as a better risk so you have a stronger negotiating position. This, in turn, means you become eligible for discounts – and sometimes big discounts – on their published rates, saving you tens of thousands.

What To Do Next

While no single warning sign is a clear indication you should refinance your property, the mounting evidence should give you pause.

If you’ve enjoyed a tremendous capital gain on your first or second Sydney property – then you should seriously consider refinancing.

At the very least, consider your options and chat to an expert about how much you can save.

Because prices have risen so much in four years, right now might be the ideal time to look into your options. But if you delay – and if housing prices take a hit next year – your LVR might go back up.

That means the negotiating power you hold at this moment is diminished. And the chance to better reduce your debt goes with it.

There’s a belief that looking into one’s refinancing options takes lots of time and paperwork. And whilst that may be true with some financial institutions, you can kick things off in only five minutes if you go here. Go ahead and and discover how much debt you can pay down with a simple click of your mouse.

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