The month in review: Melbourne
By Herron Todd White
The General Election
The major talking point is negative gearing where the interest being paid on the loan plus the expenses associated with renting the property is greater than the rental income and therefore loss making. In terms of investment, in addition to the expectation of capital appreciation, the tax law allows deduction of this loss against income, allowing the investor to use negative gearing as a tax benefit.
The Government has openly said that there will be no change to its policy on negative gearing in the short term. However it does acknowledge that it needs to be addressed in some form in the future. On the other hand, Labor wants to reduce negative gearing to only newly constructed properties, however current investors using negative gearing can continue to have negatively geared investment properties. The party will also cut the Capital Gains Tax to 25% rather than 50%.
The purpose of the proposed new policies is to try to combat housing affordability, especially in Melbourne and Sydney, and allow more people to become home owners. However some commentators believe that cutting negative gearing will result in a major rise in rents as current investors look to get a greater return from their investment. The other major concern is speculation that there will be a flurry of investors purchasing properties in the next month in a bid to secure negative gearing benefits before the potential change of government.
The property market is one of the biggest markets in Australia and the outcomes of any possible policy changes are hard to gauge at this stage.
Interest Rate Reduction
The RBA has reduced the cash rate by 25 basis points to 1.75%. This occurred on 4 May 2016 and brings the interest rate down to a historic low, well below the average of 4.92% from 1990 to 2016 (source: RBA, 2016).
It is commonly thought that interest rate reductions can stimulate the property market as lower borrowing costs may increase demand for properties. However, so far this has not been the case for Melbourne this time around. The auction clearance rate of 74.3% for Saturday, 14 May was steady but lower than the rate of 76.8% for the same weekend last year (source: Domain, 2016) concluding that the interest rate cut is yet to provide a substantial increase in demand for housing.
Furthermore, the RBA does not expect that the decrease in the interest rate will cause a property boom. The Reserve Bank Governor, Glenn Stevens, has stated that in reaching its decision, “the board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate” (source: RBA, 2016).
National Australia Bank Chief Executive, Andrew Thorburn, stated “I think interest rates are so low anyway, whether it’s 2% cash rate or 1.75%, people aren’t going to go and buy another house based on that” (source: The Sydney Morning Herald, 2016).
There is speculation that the interest rate cut may have more of an effect on the lower end of the market, however, this has not been seen as yet (source: Domain, 2016). Over the coming weeks we are likely to see whether or not the interest rate cut has had a notable or a minimal effect on the Melbourne housing market.
With the Foreign Investment Review Board (FIRB) estimating that up to 20% of real estate transactions in Australia are to overseas buyers (source: RBA, 2016), any lending restrictions to overseas buyers have potential implications for this buyer group. The June 2016 quarter has seen the big four banks tightening lending criteria to overseas buyers to varying degrees. On 18 April, CBA reduced the maximum LVR from 80% to 70% for temporary residents living in Australia and paid in Australian dollars. It also announced that it will no longer lend to temporary residents with overseas income. This follows ANZ’s cessation in April of loan applications based solely on foreign income as well as a limit of 70% on construction. Westpac and its subsidiaries St George, Bank of Melbourne and Bank SA stopped lending to non-resident and temporary resident buyers entirely on 27 April.
NAB further tightened its lending criteria from 14 May with a new LVR of 60% (previously 70%) and foreign income can now only account for 60%, down 25% from 80%. Citibank has also placed restrictions. While the Bank of Bendigo and Adelaide saw an increase in loan applications in the immediate aftermath of the restrictions placed by the big four, it has also since stopped processing overseas loan applications (source: Australian Financial Review, 2016).
These tougher lending criteria are prompting some commentators to issue warnings about settlement risk where overseas buyers who have already paid a deposit to purchase a property may find themselves unable to secure finance to settle the purchase. This risk pertains in particular to off the plan unit sales as this is the type of property most frequently purchased by overseas property buyers (source: CoreLogic RP Data, 2016; RBA, 2016).
This risk sits alongside further factors – the number of overseas property buyers is declining due to a weakening Chinese economy, tighter lending rules from APRA (the Australian Prudential Regulation Authority) and surcharges and higher stamp duties introduced by the Victorian State government in 2015 and 2016. In addition, the Australian Securities and Investment Commission (ASIC) is investigating fraudulent mortgage application documentation used by Chinese buyers to purchase an estimated $1 billion of property in Australia amid reports that forged employment and income statements can be purchased for as little as $200 (source: AFR, 2016).
Melbourne Apartment Market
The apartment market for central Melbourne has started to soften for the first part of 2016. According to CoreLogic RP Data, there was a 0.5% drop in unit prices for the first quarter of 2016, including a fall of 0.9% in March. Based on figures provided by the REIV, Melbourne CBD had a 17.2% drop in the median unit price while Docklands had a 6.7% increase in the median price and Southbank had a 6.3% median price rise.
Melbourne v Other Capital Cities
Victoria is Australia’s fastest growing state, with a net growth rate of 1.7% in the year leading up to March 2016. This has seen the state overtake New South Wales which had a growth rate of 1.4%. With the steep price of housing in Sydney, home buyers are finding it unaffordable and are looking to other capital cities such as Melbourne. Melbourne is expected to overtake Sydney as Australia’s largest city by 2056. The driving factor behind this is Victoria’s strong economy. Migration to Victoria is currently greater than that to any other state in Australia. In the year to September 2015, Sydney gained the most migrants of any state with 87,800, but lost 95,300 residents, whereas Melbourne is reported to have gained the second largest amount of migrants at 73,500, but only lost 62,400 residents.
Melbourne is expected to overtake Sydney in 2016 as the best performing capital city in terms of market growth in house values with property price growth expected to hover around 8% in Melbourne while Sydney is expected to see growth of about 4%. Comparing Sydney’s median house price of
$995,804 at the end of the March 2016 quarter with Melbourne’s median house price of $713,000, housing is evidently more affordable in Melbourne. The decline in the resources sector has also seen the recent deflation of Western Australia’s property prices with the median house price falling 4.7% over the year leading up to March 2016, whereas Melbourne’s median house price has had a steady growth over the past few years since the GFC demonstrating the strength of Melbourne’s economy and overall property market.