The month in review: Newcastle
By Herron Todd White
The following column is prefaced by saying that what is stated herein was known at the time of writing. Future events have a way of making charlatans of us all or if we are lucky, prophets of great foresight.
Westpac has recently indicated they are going to increase their lending rates for variable homes loans by 20 basis points. You could say this came without warning but that’s not really the case. APRA has been making noises about the capital raising of lenders for some time. The general consensus appears to be that several markets are overheated and a correction could be a major economic issue for Australia. The first attack came in the form of an increase for investors on their loans and this recent move is a natural follow-up. The other major lenders have not yet committed to a similar rise although expectations are widespread that they will soon follow.
The recent move to increase the interest rate for investors has had the effect of subduing the ardour from some investors to portfolio build, likely the prime goal of the rise. While the actual increase itself is minor, the psychological effect is something more substantial. We have had a long sustained period of interest rate decreases. The last increase by the RBA dates back to November 2010 and since that time investors have seen capital values rise, rental rates rise and portfolio values increase with little to no effort. To suddenly see an interest rate increase is a fundamental shift in mindset that may rock a few and place on the back foot those investors who have leveraged their portfolios too high.
Discussions with agents indicate that investor enquiry in the Hunter is waning slowly. Previously agents could sell investment stock to a list on a database without the irritating hard work that open homes and general listing duties generally require. Instead of setting a price on the off chance that someone takes the hook, prices now require a little bit of prep work prior to unleashing them on the market. One might say that purchasers are at that point where they are exercising a small, but increasing amount of power to be choosy. Are the days of the seller’s market over? We aren’t that keen to declare that statement fact yet, but fledgling signs are there, as if a tiny seedling is emerging in the first few days of spring from the damp, steaming ground. What could stop it? Why, your retired dad doing you a favour and attacking your weeds with Roundup ™ of course. Nothing like dad maintaining a garden.
Rental rates in the Hunter region have been stagnant for a period of time now, unless you are in an area impacted by mines where the rates have been falling for a number of years now. Rental rates are one side of the yield/value/income triangle. Recently values have been increasing, so if the income portion of the equation remains largely unchanged, then the yield portion of the equation does only one thing and that is fall. Recently we have seen a number of yields in the 3.5% to 4.5% range which is exceedingly low and investors in that case have an over-reliance on capital growth to keep their investment equation in balance. This is also likely to mean that unless rental rates start increasing again, values may have to correct themselves.