Latest / The Money Puzzle / Can’t pay that mortgage? Three ways to fix it

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Can’t pay that mortgage? Three ways to fix it · The Money Puzzle

0:15
Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
0:18
Speaker 1: James Kirby, the wealth editor at The Australian. Welcome aboard, everybody.
0:23
Speaker 1: I don't know about you, but I'm just looking at
0:24
Speaker 1: these property figures that have been coming through in the
0:27
Speaker 1: last few days, few weeks, I suppose, and something perhaps
0:32
Speaker 1: of a soft patch emerging in the national property market.
0:36
Speaker 1: Those auction levels are certainly not as strong as they were,
0:41
Speaker 1: I think, this time last year. Prices going the right way,
0:44
Speaker 1: but not going at quite the speed they were at
0:46
Speaker 1: the start of the year, say on a monthly basis.
0:50
Speaker 1: Rental vacancy rates are, of course, rock bottom. But in fact,
0:54
Speaker 1: they are from a teeny level starting to widen. That is,
0:59
Speaker 1: there's slightly more to rent. And that will affect, I imagine,
1:02
Speaker 1: prices and rates in the fullness of time. But I
1:05
Speaker 1: might be wrong. And I'd like to know more about
1:07
Speaker 1: it all. And I've got the idea of guests to
1:09
Speaker 1: tell us. It's Nerida Conisby. She's the chief economist at
1:12
Speaker 1: Ray White. Lovely to have you here in our lovely
1:14
Speaker 1: Sydney studio. Thanks for coming in. Tell me about this.
1:16
Speaker 1: I had this sense all year that it would slow
1:19
Speaker 1: down through the year. Is that what we're seeing?
1:23
Speaker 2: It does depend on where you are. If we go
1:26
Speaker 2: to the absolute top market at the moment, strongest market
1:29
Speaker 2: at the moment, it is Perth and Perth is continuing
1:32
Speaker 2: to show very rapid rates of growth. Prices are up
1:36
Speaker 2: around 25% compared to last year. Compare that to the
1:40
Speaker 2: poorest performing market, and that's Melbourne. Properties are piling up.
1:44
Speaker 2: There's a lot coming to market. Prices are barely moving,
1:48
Speaker 2: falling in some places, and we are seeing a distinct
1:51
Speaker 2: difference to the rest of Australia.
1:53
Speaker 1: Yeah, and we'll have to do this. I mean, because
1:56
Speaker 1: it's a national show, we'd love to just talk on
1:58
Speaker 1: a national basis all the time, but property is local.
2:01
Speaker 1: And in this market, it's really sort of two-speed in
2:04
Speaker 1: many ways. Is it true, this is our question you
2:07
Speaker 1: didn't see coming, is it true what they say, that
2:10
Speaker 1: the people in Perth are resisting selling to eastern staters?
2:13
Speaker 2: I'm sure of them if the price is right.
2:16
Speaker 1: I would have thought if the price was right, they
2:17
Speaker 1: wouldn't care what state they were from.
2:20
Speaker 2: I don't know.
2:20
Speaker 1: There was a slightly, an entertaining, if slightly, unbelievable story
2:25
Speaker 1: making the rounds a few days ago that the Perth
2:28
Speaker 1: sellers were resisting selling to eastern staters, which is very funny.
2:32
Speaker 1: But I doubt it's true. Yeah, and I imagine it's
2:34
Speaker 1: a free market in every state, so that's how it goes.
2:37
Speaker 1: There is, though, just a little bit closer on Perth
2:39
Speaker 1: than that 25% lift. It is a fact, though, isn't it,
2:42
Speaker 1: that it's pretty tightly held and that those numbers reflect
2:46
Speaker 1: a relatively small number of properties being sold in terms
2:50
Speaker 1: of the volumes reduced to, say, Sydney and Melbourne.
2:53
Speaker 2: Yeah, the thing with Perth is time at market has
2:55
Speaker 2: dropped to very low levels. So I think homes, on average,
2:59
Speaker 2: are selling within about five days. So Very different to
3:03
Speaker 2: where we were just prior to the pandemic when time
3:05
Speaker 2: on market was sort of 30 days. So Perth either
3:09
Speaker 2: is red hot or stone cold. It really is in between.
3:12
Speaker 1: What's a healthier average rate?
3:14
Speaker 2: Look, I think normally sort of 10 to 15 days
3:17
Speaker 2: would be a more normal rate. So if selling within
3:20
Speaker 2: five days is... I mean, look, even 10 to 15
3:23
Speaker 2: is pretty strong. I mean, if you look at the
3:24
Speaker 2: average auction campaign, it's around four weeks. So it is
3:28
Speaker 2: a very strong market, even to the extent what we're
3:30
Speaker 2: seeing is that homes aren't even getting listed. They're selling
3:34
Speaker 2: prior to listing.
3:35
Speaker 1: That's a red hot market. That is a red hot market.
3:37
Speaker 2: Yeah, yeah.
3:38
Speaker 1: Okay. But are the volumes ultimately pretty slim that those
3:43
Speaker 1: figures are coming from the 25% lift?
3:46
Speaker 2: There's definitely a shortage of stock on market and there's
3:48
Speaker 2: also a shortage of homes being built. I mean, what
3:50
Speaker 2: we are seeing is very strong conditions in premium markets,
3:54
Speaker 2: places like Cottesloe, Permanent Grove, things are moving very quickly,
3:58
Speaker 2: but also in very cheap markets. If you go to
4:00
Speaker 2: places like Beldivis, which have always been very affordable, we're
4:04
Speaker 2: seeing homes sell quickly. So they seem to be driven
4:07
Speaker 2: by different things. I mean, one hand... Expensive markets, a
4:10
Speaker 2: little bit of interstate money, a lot of mining money.
4:12
Speaker 2: Lithium is doing very well there, whereas on the fringe,
4:15
Speaker 2: it does seem to be rising construction costs that have
4:18
Speaker 2: led to existing homes being pushed higher as a result.
4:21
Speaker 1: Okay. And then at the other end of the spectrum,
4:24
Speaker 1: still is the Melbourne market, the softest market. It shouldn't be.
4:28
Speaker 1: There's no good reason for it. It's 5 million people.
4:32
Speaker 1: It's growing to be the biggest city in the land.
4:35
Speaker 1: Its fundamentals are more or less the same as the
4:37
Speaker 1: other states. So are there actually pockets or suburbs where
4:40
Speaker 1: the prices are dropping?
4:42
Speaker 2: Look, there is. I mean, what we're seeing in Melbourne
4:45
Speaker 2: is probably less related to long-term fundamentals, which, as you said,
4:49
Speaker 2: are positive. We are seeing strong population growth. We're also,
4:53
Speaker 2: it's a relatively affordable market. There's jobs.
4:56
Speaker 1: There is some jobs growth.
4:57
Speaker 2: But I think what the problem in Melbourne at the
4:59
Speaker 2: moment is the taxation regime, which has put increased taxes
5:03
Speaker 2: on investors, which doesn't help. I'm not sure, we will
5:07
Speaker 2: know for sure how the Victorian economy is going later
5:10
Speaker 2: or early next year when we get those state GSP figures,
5:14
Speaker 2: but we can see that unemployment's the highest in the country.
5:19
Speaker 2: I mean, it's fairly marginal, but it's still highest in
5:22
Speaker 2: Victoria and also it's not population growth, but I think
5:25
Speaker 2: there's some underlying weakness in the economy at the moment.
5:28
Speaker 1: But it would at the same time be the big
5:30
Speaker 1: immigrant population city. Is that fair to say? Yeah.
5:33
Speaker 2: And so this is what will probably keep Melbourne pricing
5:39
Speaker 2: more elevated long-term is that it does continue to attract
5:42
Speaker 2: a lot of international migrants. We've also got very high
5:46
Speaker 2: construction costs at the moment. So to give you an idea,
5:50
Speaker 2: Melbourne has been relatively affordable for a long time, particularly
5:54
Speaker 2: the apartment market. But Talking to developers in the Melbourne market,
5:58
Speaker 2: they just can't build at the same levels that they
6:00
Speaker 2: were able to build four or five years ago.
6:03
Speaker 1: Is that unique to the city of Melbourne?
6:06
Speaker 2: No, it's not unique. I mean, I suppose there was
6:08
Speaker 2: one example that was given to me around Collingwood. So Collingwood,
6:12
Speaker 2: you can still buy a two-bedroom apartment relatively new for
6:15
Speaker 2: around $ 600, 000, $ 650, 000. But apparently when developers are trying to
6:21
Speaker 2: build new stock in Collingwood, it's costing them around $ 900, 000
6:25
Speaker 2: to build a similar apartment. So there's a real mismatch
6:28
Speaker 2: at the moment nationally, but showing up particularly in outer
6:32
Speaker 2: suburban areas where we see a lot of new home
6:35
Speaker 2: builds and also in apartment markets.
6:37
Speaker 1: And when we talked about Perth, we mentioned what was
6:40
Speaker 1: really strong and what was weakest. What would be the
6:42
Speaker 1: situation in Victoria in terms of geography?
6:46
Speaker 2: In terms of the performance, I mean, regional Victoria is
6:48
Speaker 2: not doing too well. So we are seeing a lot
6:51
Speaker 2: of weakness in places like Ballarat and Bendigo at the moment.
6:55
Speaker 2: Waddington Peninsula is fairly weak, but prices did move very
6:59
Speaker 2: quickly during the pandemic. So I think Victoria is, I mean,
7:02
Speaker 2: one to watch. I mean, certainly a market that's probably
7:06
Speaker 2: more affordable relative to its long-term fundamentals than some of
7:10
Speaker 2: the other markets, but he's going through a bit of
7:12
Speaker 2: a rough patch.
7:13
Speaker 1: Just to go back up again, if you like, to
7:15
Speaker 1: the national picture, like are prices generally slowing on a
7:20
Speaker 1: nationwide basis, on a month-to-month basis? Price growth's slowing.
7:24
Speaker 2: Yeah, look, it just, I mean, I suppose if you
7:26
Speaker 2: look on average, things are being dragged up by Queensland, Adelaide, Perth,
7:32
Speaker 2: Sydney's sort of hovering in the middle, and then you've
7:34
Speaker 2: got Hobart and Melbourne, which are are both pretty weak
7:38
Speaker 2: at the moment. It's hard to tell. I mean, we're
7:40
Speaker 2: not really seeing a slowing, but there does seem to be,
7:45
Speaker 2: I guess, a sense of cautiousness. And I don't think
7:49
Speaker 2: it's necessarily to do with the threat of interest rate rises.
7:54
Speaker 2: I think it's probably just fatigue around how high interest
7:57
Speaker 2: rates are at the moment.
7:58
Speaker 1: But isn't it interesting that the concern is interest rate rises,
8:03
Speaker 1: how far we've moved from... potential of interest rate cuts.
8:07
Speaker 2: I know, one inflation point and we've since shuddered through us.
8:11
Speaker 1: I suppose on the broader picture, there's also anyone who
8:14
Speaker 1: would be looking at global economy or global economics knows
8:17
Speaker 1: that rates are lifting. They are lifting in Europe, everything
8:21
Speaker 1: in the US points. I know they were due to
8:24
Speaker 1: have a cut, but I mean, obviously if Trump was
8:27
Speaker 1: to win and today on today's numbers, it looks like
8:29
Speaker 1: he will. then he's an inflationary figure. He's going to lift.
8:33
Speaker 1: Interest rates are going to go higher under him. It
8:35
Speaker 1: wasn't so much a drama the last time, but then
8:37
Speaker 1: the last time was 2016 and rates were flat on
8:40
Speaker 1: the floor when he came into office. So they started
8:42
Speaker 1: to lift from there. I suppose a better way of
8:45
Speaker 1: covering that for listeners is to ask you, do you
8:48
Speaker 1: think these concerns about rates going up are valid? Look,
8:52
Speaker 1: I don't.
8:53
Speaker 2: I think it's likely the next move will be a cut,
8:56
Speaker 2: but at this point it's unlikely to happen until early
8:59
Speaker 2: next year. So if we have a look globally, what's happening,
9:02
Speaker 2: rates are being cut. So we saw cuts in Europe.
9:05
Speaker 2: We're probably going to see cuts in the UK in
9:07
Speaker 2: the next month or so. The US will probably cut
9:12
Speaker 2: sometime this year. Do you think that's still a possibility?
9:14
Speaker 1: Yeah, I think so.
9:15
Speaker 2: I mean, their inflation number came in at a level
9:18
Speaker 2: at which they could start to cut. Yeah. I think,
9:22
Speaker 2: as you said, the challenge in the US, if we
9:24
Speaker 2: do see Trump being elected, a lot of the policies
9:29
Speaker 2: he has in place will overheat that economy and that
9:32
Speaker 2: inflationary pressure will affect us as well. I think it's
9:35
Speaker 2: still a while away before that happens and hopefully we
9:37
Speaker 2: squeeze a cut in before then, but it is obviously
9:41
Speaker 2: probably the major risk to Australia, the Australian economy.
9:45
Speaker 1: What would you say to people who listen to the
9:47
Speaker 1: show today who aren't into deep economics but would just
9:51
Speaker 1: like to know what's the outlook for rates, what would
9:54
Speaker 1: you say?
9:55
Speaker 2: The big challenge at the moment is inflation isn't coming
9:57
Speaker 2: down as quickly as we hoped. and and that's really
10:01
Speaker 2: what changed the outlook back in April that inflation came
10:05
Speaker 2: in a lot higher than expected and the outlook shifted
10:08
Speaker 2: from an October cut to a an October 24 cut
10:11
Speaker 2: to an October 25 cut Inflation is coming down. I
10:15
Speaker 2: think if you are someone concerned about rates, you obviously
10:19
Speaker 2: should be watching the inflation number very carefully. The Reserve
10:21
Speaker 2: Bank aims to keep it between 2% and 3%. So
10:24
Speaker 2: as it does get closer to that 3% mark, that's
10:27
Speaker 2: the point at which we will hopefully see a rate cut.
10:29
Speaker 1: Okay, hopefully. We don't know, folks. That is Nerida, who
10:33
Speaker 1: is Chief Economist at Ray White. That's as good a
10:35
Speaker 1: voice and an authoritative comment on that issue as we
10:39
Speaker 1: are likely to get. All right, we'll take a short
10:41
Speaker 1: break and we'll be back in a moment. Hello, welcome
10:50
Speaker 1: back to The Australian's Money Puzzle. I'm James Kirby, Wealth
10:53
Speaker 1: Editor at The Australian. I'm talking to Nerida Conispe, who
10:56
Speaker 1: is the Chief Economist at Ray White, someone I've known
11:00
Speaker 1: a long time, when she was an economist in different positions,
11:03
Speaker 1: but always in this area and always interested in national economics,
11:06
Speaker 1: particularly in property. And we've talked on and off for
11:09
Speaker 1: a long time about this. I don't know, the last
11:11
Speaker 1: time you were on the show, one of the issues
11:13
Speaker 1: certainly would have been about the idea of a mortgage cliff.
11:17
Speaker 1: And this was, of course, if everyone recalls, there was
11:19
Speaker 1: this extraordinary period, which is now roughly four or five
11:23
Speaker 1: years ago, which is almost hard to believe that it
11:26
Speaker 1: happened now, of course. But it did, where rates were,
11:29
Speaker 1: I mean, rates didn't just go to zero. They went
11:32
Speaker 1: negative around the world. And people were paying people to
11:35
Speaker 1: have their money in banks. I mean, it was just
11:37
Speaker 1: in a strange way. It was actually a scary time
11:39
Speaker 1: because it was so unnatural that rates were so low.
11:43
Speaker 1: In any event, slowly but surely, the news percolated through
11:46
Speaker 1: to the wider public, not just property investors, but everybody,
11:48
Speaker 1: I think, in Australia was damn aware that rates were super,
11:52
Speaker 1: super low, that our long-term average might be, what, six
11:55
Speaker 1: to nine? Would that be about right? And here they
11:58
Speaker 1: were at 2% or whatever. And the banks were offering
12:00
Speaker 1: not just 2%, but fixed-term rates. Hundreds of thousands of
12:04
Speaker 1: people took loans, fixed terms, as long as they could,
12:07
Speaker 1: three years, five years at these rates, 2%. And now
12:11
Speaker 1: the last of them, the last of the Mohicans, the
12:13
Speaker 1: last of these very lucky people are getting their little
12:17
Speaker 1: notes from the bank saying, hello, piece of news for you.
12:20
Speaker 1: Your mortgage, which is currently two, will go to what, six, seven,
12:24
Speaker 1: like that overnight. It's tough. It's tough. But what I
12:28
Speaker 1: want to ask you is, was that a bit of
12:29
Speaker 1: a wind up, the whole mortgage cliff thing? Because we
12:31
Speaker 1: were told... And I thought to myself, gee, this is
12:35
Speaker 1: going to be trouble when these people come after mortgages.
12:37
Speaker 1: What happened?
12:39
Speaker 2: I think there was a few things. I think the
12:40
Speaker 2: first one is that people saved a lot of money
12:42
Speaker 2: during the pandemic. And so we have seen people spending
12:46
Speaker 2: down those savings, which is obviously unfortunate.
12:49
Speaker 1: So they had a savings buffer and the banks talked
12:51
Speaker 1: about that, but they don't talk about it now because
12:53
Speaker 1: they're gone. They're gone.
12:54
Speaker 2: Yeah.
12:54
Speaker 1: Time passes. Nothing stays the same. That's gone. I think
12:57
Speaker 1: they're the second.
12:58
Speaker 2: factor was that banks became super profitable as interest rates
13:02
Speaker 2: started to rise. And if you have a look at
13:04
Speaker 2: Australian banks, they made $ 30 billion worth of profit over
13:07
Speaker 2: the past 12 months. So they have been able to
13:10
Speaker 2: be fairly, not lenient, but they have been able to
13:12
Speaker 2: work with customers more easily than, say, following the global
13:16
Speaker 2: financial crisis when that money wasn't available. When we talk
13:19
Speaker 2: to banks, they have been doing things like extending loans.
13:22
Speaker 2: They've been putting people on interest only. Basically anything to
13:26
Speaker 2: try and Keep their customers, I guess, fundamentally.
13:28
Speaker 1: So what is going on? Is this what people are doing?
13:31
Speaker 1: So I'm thinking about someone who has a mortgage that
13:34
Speaker 1: is half a million or a million. The rate was 2%.
13:38
Speaker 1: Suddenly it's 6%. Their salary, whatever that salary is, hasn't changed.
13:42
Speaker 1: Their partner's salary hasn't changed. Apparently, and I haven't seen
13:45
Speaker 1: the numbers. Maybe you've seen the numbers. People are doing
13:48
Speaker 1: all sorts of things. They're extending the length of their mortgage.
13:51
Speaker 1: That's one. Or they're moving to 50%. interest only. Could
13:55
Speaker 1: you explain, first of all, why people are doing that
13:58
Speaker 1: and what it might mean for the market?
14:00
Speaker 2: I suppose they're doing it. I mean, obviously doing it
14:02
Speaker 2: so they pay less. Or at least they can continue
14:05
Speaker 2: with the type of life they have. And keep their homes.
14:08
Speaker 2: I think fundamentally, when we looked at what was happening
14:11
Speaker 2: when interest rates started to rise, we did expect two
14:15
Speaker 2: sorts of properties to sell more rapidly, and they were
14:17
Speaker 2: holiday homes and investment properties. And holiday homes are started
14:22
Speaker 2: to come to market really quickly as interest rates started
14:24
Speaker 2: to rise. At that point, I mean, that was probably
14:26
Speaker 2: a couple of years ago now, we started to see
14:28
Speaker 2: New South Wales, South Coast, Mornington Peninsula, a lot of
14:31
Speaker 2: those markets starting to see a rise in listings and
14:34
Speaker 2: prices softening. Investment properties took a bit longer, I think,
14:39
Speaker 2: probably because rents rose, increased a bit to sort of
14:43
Speaker 2: offset those increased mortgage repayments.
14:45
Speaker 1: And they were fully occupied.
14:47
Speaker 2: And they're fully occupied. Yeah, absolutely. So that took a
14:51
Speaker 2: bit longer. But I mean, if you look in Melbourne
14:53
Speaker 2: at the moment, that's probably a big factor is that
14:56
Speaker 2: there are a lot of investment properties coming to market
14:59
Speaker 2: because you don't, I mean, you need your family home.
15:02
Speaker 2: You need somewhere to live and you need shelter. Rental
15:04
Speaker 2: market's very tough. So the alternative isn't much better. But
15:07
Speaker 2: if you've got an investment property, it's probably something that
15:09
Speaker 2: you can sell and free up a bit of.
15:12
Speaker 1: So people are throwing in the towel.
15:14
Speaker 2: Yeah, I mean, look, it's not like catastrophic conditions, but
15:20
Speaker 2: it would certainly be the case that they're the properties
15:22
Speaker 2: to go. So I think that's the other factor.
15:23
Speaker 1: And when you extend your mortgage, so let's say I'm
15:27
Speaker 1: on a 25-year, or let's say I have 25 years
15:31
Speaker 1: left on my mortgage and I go back into the
15:33
Speaker 1: bank and I say, okay, open it back up to 30,
15:35
Speaker 1: so my mortgage drops.
15:37
Speaker 2: Your repayments drop, yeah.
15:39
Speaker 1: But I end up paying more to the bank. You
15:41
Speaker 1: do pay more to the bank.
15:43
Speaker 2: Yeah. I mean, to the extent that I think some
15:46
Speaker 2: of the banks now are offering up to 40-year mortgages,
15:48
Speaker 2: which is quite extraordinary given that you'd have to be
15:52
Speaker 2: quite young to be able to pay that off in
15:55
Speaker 2: a working lifespan.
15:56
Speaker 1: Have you ever seen them before in the market? Not
15:58
Speaker 1: 40 years. No, that is new. Interesting. Who's doing it?
16:02
Speaker 2: I think CBA. Look, that's a few months ago I
16:05
Speaker 2: heard that. Yeah, they'd be capable of it. I haven't
16:07
Speaker 2: tried to access one, but I have heard that they
16:10
Speaker 2: are offering them.
16:11
Speaker 1: I don't know. I mean, I'd see the difference between
16:13
Speaker 1: 40 and 30, really. I mean, they're both inconceivably long
16:17
Speaker 1: when you're starting paying a mortgage. But the point I
16:20
Speaker 1: want to make to listeners is be careful on this.
16:23
Speaker 1: Not to do it or not do it, but to
16:25
Speaker 1: be aware. That, for instance, very roughly, if you do
16:29
Speaker 1: go from a 25-year mortgage to a 30-year mortgage and
16:32
Speaker 1: your monthly mortgage does go down by whatever it might be,
16:35
Speaker 1: put a number on it, 100 or 200 a month.
16:38
Speaker 1: The thing is that, of course, the mortgage itself swells
16:41
Speaker 1: on the far side. It goes up by whatever. On
16:43
Speaker 1: very rough figures, an average mortgage on an average house
16:46
Speaker 1: might go up by 100 grand. Are you willing to
16:48
Speaker 1: borrow another 100 grand at the rates they have today?
16:50
Speaker 1: Because that's what you're saying you're going to do. It's
16:52
Speaker 1: tough if you have to make that decision. It's nice
16:54
Speaker 1: to know there are options there. For people on fixed
16:57
Speaker 1: salaries especially, it's great to know there's another way to
16:59
Speaker 1: pay a mortgage. And this goes for investors too. Interest
17:03
Speaker 1: only then. Investors traditionally like them anyway. I would have
17:07
Speaker 1: thought banks wouldn't hand them out too easy to owner-occupiers.
17:12
Speaker 2: Again, I think it's a bit of a last resort option.
17:15
Speaker 2: I mean, banks have spent a lot of money getting
17:17
Speaker 2: customers over the last decade or so, so they don't
17:21
Speaker 2: want to lose them now. They also don't want to
17:23
Speaker 2: lose them given that rates have probably peaked and rates
17:27
Speaker 2: probably will come down next year. So I think there's
17:31
Speaker 2: a view that now is probably the worst. It will
17:34
Speaker 2: get better, so better to get people through.
17:37
Speaker 1: Again, with the interest only, it's kind of similar, isn't it?
17:41
Speaker 1: You say... OK, it's interest only now. It's not principal interest.
17:45
Speaker 1: That's great. We don't have to pay as much each
17:46
Speaker 1: month as we used to. But just be aware you
17:49
Speaker 1: are like, as Stuart Weems said on the show, you
17:51
Speaker 1: are kicking the can down the road. Because similarly, if
17:54
Speaker 1: you're not paying down the principal, guess what? It sits there.
17:57
Speaker 1: It's still there at the end of the year. So
17:58
Speaker 1: when you get to the end of the year, you say,
18:00
Speaker 1: what's changed on the mortgage?
18:01
Speaker 2: Nothing.
18:02
Speaker 1: Because all you did was pay the interest. And you
18:06
Speaker 1: really should try and think these things through if you're going.
18:09
Speaker 2: To do it.
18:10
Speaker 1: Now, one other thing I want to ask you about, Nerida,
18:12
Speaker 1: was about our banks and how they're linked with home markets.
18:17
Speaker 1: Here we go. Commonwealth Bank is about $ 130 now. It's
18:20
Speaker 1: a $ 225 billion bank thereabouts. It's past BHP as the
18:24
Speaker 1: biggest stock in the Australian stock market. It's also the
18:27
Speaker 1: nation's biggest lender. It's the biggest mortgage bank. So there's
18:31
Speaker 1: a real nexus between mortgages and the health of the
18:34
Speaker 1: property market and the health of the banks. The banks,
18:37
Speaker 1: in turn, dominate The top 10, there's five of them
18:40
Speaker 1: in the 10 if you include Macquarie. And the number
18:43
Speaker 1: one is Commonwealth Bank. So what I'm saying to you is,
18:46
Speaker 1: are the banks kind of becoming a real proxy for
18:50
Speaker 1: the housing market itself?
18:52
Speaker 2: I mean, the Australian banks are very sensitive to the
18:55
Speaker 2: property market. I think the Commonwealth Bank pricing, though, was
19:00
Speaker 2: probably driven in part by offshore buyers of Commonwealth Bank shares.
19:06
Speaker 2: And I think a lot of them, a lot of
19:07
Speaker 2: the uncertainty and instability overseas is making some Australian stocks
19:12
Speaker 2: seem quite safe.
19:13
Speaker 1: Can I ask you something? All the major brokers, including
19:16
Speaker 1: the global ones, Morgan Stanley, UBS, have sell notes. Yes,
19:21
Speaker 1: there's only one, I think, that said.
19:22
Speaker 2: There's only one that hasn't, that's right.
19:24
Speaker 1: And I don't want to say who it is because
19:26
Speaker 1: I might get it wrong. But if all the brokers,
19:29
Speaker 1: including the overseas brokers, have sell notes at Commonwealth Bank,
19:32
Speaker 1: Does that mean that the offshore institutions ignore them when
19:35
Speaker 1: they bought the stock?
19:36
Speaker 2: I don't think they would ignore them. I think it
19:38
Speaker 2: would be compared to what else they would be looking
19:42
Speaker 2: to buy. So I think it's always, I mean, it's
19:45
Speaker 2: looking at commercial property, looking at the office market, that
19:48
Speaker 2: if you're looking to buy an office building, in the
19:50
Speaker 2: US at the moment, they seem a lot less secure
19:53
Speaker 2: than one in Australia. We have offshore buyers looking at
19:55
Speaker 2: Australian office markets. We think very high vacancies and rents
19:58
Speaker 2: aren't going anywhere. But at the same time, compared to
20:02
Speaker 2: other parts of the world, it's pretty good. So I
20:05
Speaker 2: think it's probably that. And I think the other thing
20:07
Speaker 2: too is that the US banks came in with very
20:13
Speaker 2: high profit numbers in their results season last week. So
20:16
Speaker 2: I think that possibly played into it. But it'll be interesting. August,
20:20
Speaker 2: I think, is when we're going to see the results.
20:23
Speaker 2: So I think with that point, we'll get a better idea.
20:26
Speaker 2: But you're right. I mean, the sensitivity to the mortgage
20:28
Speaker 2: market is the issue.
20:30
Speaker 1: And has the sensitivity to the mortgage market increased?
20:34
Speaker 2: Over a long time period? Absolutely. Yeah, it must have.
20:38
Speaker 2: I think over recent past 12 months, probably not, but definitely.
20:42
Speaker 2: I mean, if you look at, as you said, CBA,
20:44
Speaker 2: the biggest home loan lender, they would be very sensitive
20:47
Speaker 2: to what's happening to housing. I mean, also, I suppose
20:49
Speaker 2: the other thing, the bounce back in house prices would
20:52
Speaker 2: have benefited them as well. That We didn't see that
20:55
Speaker 2: crash that many predicted. So I suppose that was also
20:59
Speaker 2: a factor that played into it.
21:01
Speaker 1: Okay. Just before we go to questions, is there a
21:04
Speaker 1: number you use in terms of what... Last year, Australian
21:06
Speaker 1: house prices nationally, and it's an average, obviously, and it's nationwide,
21:09
Speaker 1: so it tells us so much. But last year, calendar 2-3,
21:16
Speaker 1: prices went up about 9%. Is that right?
21:17
Speaker 2: Yeah.
21:17
Speaker 1: Across the board.
21:19
Speaker 2: And what sort of number are you thinking this year?
21:22
Speaker 2: It's probably a little bit... I don't know, pulling a number, 7%,
21:25
Speaker 2: but then you've got zero for Melbourne, 25% for Perth.
21:29
Speaker 2: So it's an average.
21:30
Speaker 1: It's an average that may not be very useful, but
21:33
Speaker 1: we have to use it. It's like my joke about
21:37
Speaker 1: the average January temperature in Melbourne, 26 degrees, except it's
21:41
Speaker 1: never 26 degrees, 16 or 36. Yeah, so same sort
21:45
Speaker 1: of thing. So I suppose it's a time where those
21:48
Speaker 1: nationwide figures really don't tell us a lot. If you're
21:51
Speaker 1: sitting in Perth, then... You should know that there's double
21:55
Speaker 1: figures there. They're doing 20% plus. And if you're sitting
21:58
Speaker 1: in Melbourne, you should know that there are parts of
22:00
Speaker 1: the city which are actually going backwards. And that's not
22:03
Speaker 1: a surprise because I think the entire city went backwards
22:05
Speaker 1: in the first quarter this year. Just the first quarter. Yeah.
22:10
Speaker 1: So everyone that comes on the show reckons that's not
22:14
Speaker 1: going to last forever, that long term, that it's actually
22:17
Speaker 1: an investment opportunity. We should remind people of that. All right,
22:20
Speaker 1: we'll take a break and we'll be back with some
22:22
Speaker 1: great questions. Hello and welcome to the Australian's Money Puzzle.
22:33
Speaker 1: I'm James Kirby with Nerit Ekonisby and we're talking all
22:37
Speaker 1: things property and we're also talking about not just property,
22:41
Speaker 1: house prices, investment properties but you know the degree to
22:45
Speaker 1: which our big banks are dependent on the health if
22:50
Speaker 1: you like of the property market and not just our
22:53
Speaker 1: big banks but our entire market because The big banks
22:56
Speaker 1: were always important in the Australian Stock Exchange, and they
22:59
Speaker 1: might have been, whatever, ranging between 15% and 20% of
23:02
Speaker 1: the whole thing. But in recent times, they've just become
23:05
Speaker 1: so powerful, and ComBank has now ascended, if you like,
23:08
Speaker 1: over BHP to be the biggest stock in the market.
23:10
Speaker 1: So keep that in mind, just how powerful our banks are,
23:14
Speaker 1: but also how they're very closely linked with house prices.
23:16
Speaker 1: So you can't really separate them anymore. Macquarie, perhaps, but
23:21
Speaker 1: the other four. Very much. I think it was Ashley
23:24
Speaker 1: Owen said the other day who was on the show
23:26
Speaker 1: a few weeks ago. He called them glorified building societies,
23:28
Speaker 1: which is a bit severe. But I know what he's
23:31
Speaker 1: trying to say, that they are very dependent on house
23:34
Speaker 1: prices compared to the American banks, whatever that you might
23:37
Speaker 1: read about their results, the city or whatever. They're more
23:39
Speaker 1: like Macquarie than they are like Combank, shall we say. Okay, now, questions. Beryl,
23:44
Speaker 1: I purchased an apartment. I lived in it for five years.
23:46
Speaker 1: I moved out and I've been renting it for 20 years.
23:49
Speaker 1: I'm now looking at downsizing for my home and moving
23:51
Speaker 1: back into that apartment. I've heard if I move back
23:54
Speaker 1: into this property and live there for the rest of
23:56
Speaker 1: my life, those who inherit this property are not liable
23:59
Speaker 1: to pay CGT if they then sell it. Is it
24:01
Speaker 1: true that all those years that I rented out and
24:03
Speaker 1: had consequent CGT liability are wiped out and we're off
24:07
Speaker 1: the hook? Never advise Burrell. We'll get someone actually to
24:11
Speaker 1: take a closer look at this in the weeks ahead.
24:13
Speaker 1: But look very broadly. I'm sorry to say that CGT
24:17
Speaker 1: is applicable. If you rent out a property, it's an
24:19
Speaker 1: investment property. So if you have a property, you have
24:21
Speaker 1: it for five years, you live in it. You leave it,
24:24
Speaker 1: you rent it out for 10 years, you come back
24:26
Speaker 1: and you live in it for 10 years. The 10
24:27
Speaker 1: years that you rented it, it was an investment property.
24:30
Speaker 1: For those 10 years in the life of the transaction,
24:34
Speaker 1: when it comes to pass, when that house is ultimately
24:36
Speaker 1: sold somewhere down the line, It's liable for CGT. I
24:39
Speaker 1: would think on face value, this is not personal advice
24:43
Speaker 1: in any way. This is a general observation on properties
24:46
Speaker 1: in that situation. And leave it with us. And we
24:49
Speaker 1: will take a second look at this one because there's
24:51
Speaker 1: all sorts of variations on this. Like how is it held?
24:53
Speaker 1: What's the ownership structure? For instance, these things can vary
24:56
Speaker 1: if they're held in trusts, in your sole name, by
24:59
Speaker 1: a self-managed super fund. But CGT to an extent is
25:04
Speaker 1: very hard to actually avoid. especially if a property was
25:08
Speaker 1: run as an investment property for a period of time.
25:10
Speaker 1: I'm speaking from my own experience there. Okay, we'll be
25:12
Speaker 1: back to that one. That was general information for the moment. Now, Lucy,
25:17
Speaker 1: I love the show on villa units. Villa units, if
25:19
Speaker 1: you don't know what villa units are, folks, they are
25:22
Speaker 1: those simple, often a red brick, single story, little unit
25:28
Speaker 1: developments that you get in every city in Australia. They
25:30
Speaker 1: are not fashionable. And they are highly valued. And let
25:35
Speaker 1: me tell you, we've had several different people on the
25:36
Speaker 1: show this year who said villa units. That's where the
25:40
Speaker 1: value is in Australia. Buy them now. People think of
25:43
Speaker 1: them as little old ladies bringing out the bins and
25:45
Speaker 1: all that sort of thing, which is true. But I
25:48
Speaker 1: certainly understand the theory that it's land value and you're
25:52
Speaker 1: buying land. in the middle of the city with three
25:55
Speaker 1: bedrooms and a garden and a garage and hay. So
25:58
Speaker 1: they're not the coolest thing around. But Lucy, I think
26:01
Speaker 1: that the people on the show who said this were
26:04
Speaker 1: on the right track. So Lucy says, I've always ruled
26:06
Speaker 1: them out and now I see them everywhere. They've always
26:08
Speaker 1: been there, Lucy. My concern would be that other residents
26:11
Speaker 1: are beyond your control and the development might go downhill
26:15
Speaker 1: in the years after I purchase. Any thoughts? Yeah, entirely possible.
26:19
Speaker 1: That's the thing. It's a shared concern. It's shared, right?
26:22
Speaker 1: There's six, invariably six. You look up the driveway, there's
26:24
Speaker 1: three on the left, three on the right. And that's right.
26:27
Speaker 1: You can't really control, you can't control the behavior or
26:31
Speaker 1: otherwise of other people in the complex. But that goes
26:34
Speaker 1: for any, anything. That goes for anywhere you live. An
26:37
Speaker 1: ordinary street, you can't control the people next door. We'll
26:39
Speaker 1: leave that one swinging out there. Any observations on that?
26:41
Speaker 1: Narod Akana, chief economist of Ray White.
26:45
Speaker 2: Look, I think often they would also have some sort
26:47
Speaker 2: of management, I would have thought, body corporate of some sort.
26:50
Speaker 2: So I think that would probably be the area. Probably
26:53
Speaker 2: look at the body corporate when you look to buy.
26:55
Speaker 1: But I agree.
26:56
Speaker 2: I think they're often in very well-located areas. So if
26:59
Speaker 2: you are looking to get into a great suburb at
27:01
Speaker 2: a more affordable price point, they're definitely worth looking at.
27:04
Speaker 1: And I think you'll find that rather than neglect, Lucy,
27:08
Speaker 1: often the issue is that there's people who are just
27:10
Speaker 1: extremely interested in their body corporates. And I mentioned on
27:15
Speaker 1: the show that to our surprise, we ended up in
27:18
Speaker 1: a set of villa units not that long ago when
27:21
Speaker 1: we were renting because we were moving house and we
27:24
Speaker 1: were building a house and we wanted to rent near
27:27
Speaker 1: the house that we were building. And on the street,
27:30
Speaker 1: there was a villa unit and we went in and
27:31
Speaker 1: we lived there for a year. And we had a guy,
27:34
Speaker 1: he had taken it upon himself to be the master
27:37
Speaker 1: of the place. And if there was a weed out
27:39
Speaker 1: of place, this guy would be out there in the
27:41
Speaker 1: morning fixing it all up. And he was absolutely all
27:43
Speaker 1: over it. And it looked great. And it was a
27:46
Speaker 1: very nice, it was really good. And I always thought
27:49
Speaker 1: that they were undervalued. And I'm absolutely persuaded of it now,
27:52
Speaker 1: having lived in one not that long ago.
27:54
Speaker 2: Okay.
27:55
Speaker 1: Our final question is from Stephen. My question, why do
27:59
Speaker 1: we say 30% of houses have a mortgage? Isn't it
28:02
Speaker 1: that 30% of houses that are the primary place of
28:06
Speaker 1: residence have a mortgage? We say rates don't do much.
28:11
Speaker 1: By that, Stephen, would probably mean rates as set by
28:14
Speaker 1: the RBA in terms of moving them up and down
28:16
Speaker 1: don't have much effect on the economy because only 30%
28:20
Speaker 1: of people have a mortgage. But isn't this forgetting investment
28:23
Speaker 1: in properties? What's the stats on that one, Nerida?
28:27
Speaker 2: Yeah, so that 30% one is more– it's from the census,
28:31
Speaker 2: the population and housing. So it looks at households. No,
28:35
Speaker 2: so it's 30% of people own their property outright, 30%
28:38
Speaker 2: of people have a mortgage, and 30% of people rent outright.
28:41
Speaker 2: So the ownership of those rental properties, he's absolutely right.
28:46
Speaker 2: A lot of them would have mortgages, but we don't.
28:48
Speaker 2: Just the methodology for collecting that statistic is based on
28:52
Speaker 2: people's reporting in the census.
28:55
Speaker 1: Okay. But when they talk about how the RBA can't
28:58
Speaker 1: really affect, because it's a blunt instrument, et cetera, with
29:02
Speaker 1: official rates, they are talking about homeowner mortgages, aren't they?
29:05
Speaker 2: Yeah. They'd be looking at everything. I mean, I guess
29:08
Speaker 2: one of the challenges we've had this cycle is that
29:12
Speaker 2: one of the big drivers of inflation has been rents.
29:16
Speaker 2: So rising rents has increased inflation. So increasing inflation means
29:21
Speaker 2: increased rates. Increased rates means fewer investment properties, which again
29:26
Speaker 2: leads to rising rents. So there is a circular problem
29:29
Speaker 2: that we're seeing at the moment because of these factors.
29:33
Speaker 2: I don't know if that answers the question, but they
29:37
Speaker 2: absolutely would. There's a whole building full of economists that
29:42
Speaker 2: look at everything very closely, so.
29:44
Speaker 1: There's no doubt. As an economist, if I asked you,
29:47
Speaker 1: is it the case that private ownership of rental property
29:50
Speaker 1: is a positive for the market?
29:52
Speaker 2: What's your answer? They provide 90% of rental properties. I mean,
29:57
Speaker 2: if you have a look overseas, we do see a
29:59
Speaker 2: much larger proportion of corporate owned rental properties. So in
30:03
Speaker 2: the US, particularly UK as well, big institutions own a
30:08
Speaker 2: lot of, The companies that have done very well overseas
30:12
Speaker 2: owning rental properties are very interested in Australia because we
30:14
Speaker 2: have such a small proportion. And for a long time,
30:17
Speaker 2: they weren't interested in Australia because Australia had such low yields.
30:21
Speaker 2: But because rents have increased so much, it is attracting
30:24
Speaker 2: a lot more interest.
30:24
Speaker 1: Ah, I see. Okay. They have that issue of vulture funds,
30:27
Speaker 1: of course, which has been a problem with corporate ownership,
30:31
Speaker 1: but that really is just one wing of it. And
30:34
Speaker 1: there are people making an effort to do something similar
30:37
Speaker 1: like the Longview Group. here in Australia, which is being built,
30:41
Speaker 1: being sort of put together by Evan Thornley. And as
30:44
Speaker 1: you probably know, he's out there putting that point view across,
30:48
Speaker 1: which of course, needless to say, makes sense to him.
30:50
Speaker 1: But obviously, he's able to put together pretty articulate arguments
30:53
Speaker 1: on that too. Okay, very good. Look, thank you very
30:56
Speaker 1: much for coming in, Nerida. Thanks for having me. Great
30:58
Speaker 1: to have you on the show again. Always good, always
31:00
Speaker 1: interesting to get the national picture. And we'll talk to
31:03
Speaker 1: you again soon. And thank you, everyone, for listening to
31:05
Speaker 1: today's episode. Love to have some more questions. or comments,
31:10
Speaker 1: send them in. The email is themoneypuzzle at theaustralian.com.au. Talk
31:16
Speaker 1: to you soon.