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Do Cash Rate Decreases Help People Get Into The Market? · The Follio Property Podcast

• 0:05
  Welcome to I Call Bullshit Property Podcast, where we separate real estate fact from fiction. I'm Rhys, and in every episode, we uncover the truth behind the property market's biggest claims and trends. Joining me is our resident expert, Lachlan Delahunty. He's seen it all, and he isn't afraid to call the bullshit when he sees it. Welcome, Lachy. Thanks, Rhys. Let's crack on. All right, let's jump into the first topic. Cash rate decreases will help people get into the property market.
• 0:30
  So looking at a few articles, we've got news.com.au. Combank predicts FOMO will leave house prices up at the end of the year despite the rate cuts.
• 0:41
  Australian Property Update has property markets set to take off after RBA rate cuts. And AFRA home loan demand rises as buyer rate for rate cut. So I guess the first question is, you know, we've had our first cash rate decrease in some time and for the year. And, you know, many experts are predicting there's going to be multiple over 2025. How does that cash rate help serviceability? Yeah.
• 1:08
  So the 0.25% cut that we just had recently, depending on independent situations, is going to give an increased serviceability of 3% up to 5%. So someone who's going out there that was capped out at $1 million can now buy a property up to $1,050,000. So in that scenario, it increases serviceability by about $50,000. Yeah.
• 1:33
  If that is to continue at the rate that's been forecasted, and depending on which paper you read, there's a forecast of three, potentially four rate cuts at 25 basis points a pop. That would put us in a position where we've seen a full percent rate cut potentially by the end of the year. Not saying that's going to happen, certainly not what I think is going to happen, but that's what some of these media outlets are reporting.
• 1:56
  Now on that basis, it would increase serviceability between 15% and 20%, which is significant. So that same scenario that we spoke about, when you capped out on a million dollars, that now goes to 1.2%. So that's sort of the threshold that we're talking about.
• 2:09
  I was doom scrolling on LinkedIn recently and I saw a mortgage broker say, you know, with the 0.25% decrease that would reduce a 500k loan by 80 bucks a month. Yep. And if you paid the similar repayment that you were paying before, it could actually reduce your loan term by two years. So, you know.
• 2:31
  We'll net that out on a full percent and you're looking at eight years. That is significant. Correct. And I think it's, you know, not everyone is going to be in that situation where they can't afford that repayment and actually the rate decreases are there to provide some relief. But I thought that was some good antidote for those that maybe have
• 2:48
  had a good history of paying the higher repayment and have got used to that. And actually maybe the, you know, the cash rate could actually be beneficial. Cash rate is going to be beneficial, but could actually pay the home loan off quicker. Yeah, definitely. And I think what we fail to see here in Perth is that we've had a very, you know, prosperous market over the last five years. So people have invested in property and it's gone up in value. Therefore your equity positions improved. So albeit it's costing you more to hold that property, but,
• 3:14
  There's constantly a good news story about, you know, you go to the bank or they do a desktop valuation, it gets refinanced, it's a positive news story, right? Your investment is making you money. People don't understand here in Perth, and obviously we've got family in Victoria and, you know, colleagues and family in Sydney.
• 3:29
  A lot of these people got caught out and they bought properties at the top of the cycles in Victoria and Sydney and New South Wales in general. The peak of COVID, 2021, 2022, when interest rates and cost of money was extremely cheap. Now we're talking...
• 3:45
  two and a half, three percent, and paid big dollars and took advantage of the cheap money at the time. Fast track to 2025, the properties that they paid, you know, one and a half, two, two and a half, three million dollars for, are now down anywhere from 10 to 30 percent. And we're talking, you know, some markets across parts of Victoria and New South Wales have dropped as much as 30 percent. There's evidence to suggest that.
• 4:11
  And the cost of money has gone from 2.5%, 3% to 6.5%. These people are in a lot of pain and a lot of stress. So albeit there's two ways to look at it. The increase of serviceability means people borrowing capacity goes up. So locally here in Perth, we'll probably see that into the market.
• 4:31
  Over on the East Coast, it's a different story. People are force-selling and force-selling at a loss. There's a lot of really tough stories out there for people in the East Coast markets. People here in Perth, they had 10 years of positive growth. We shouldn't feel sorry for them. But for those who only entered the market late, it's certainly been tough. Do you think those people over East, as you mentioned, property market's been gangbusters over there for the last 10 years, do you think the ones that maybe have felt the brunt of the rate increases were overexposed?
• 5:00
  So in a previous life, I worked for a bank that supported...
• 5:07
  people that had maybe some adverse credit in the past. And the data that we used to track was actually first-time buyers had the lowest delinquency rate out of any of our borrowers because they were generally at the start of their journey. A bit more conservative. A bit more conservative. You know, they're going to have their incomes going to increase over the next sort of 5, 10, 15 years. So, you know, looking at maybe where people are starting to feel it at the moment, do you think it is people maybe that are overexposed that maybe got their investment properties or...
• 5:37
  maybe shopped for the stars for a property that was maybe out of their reach at the time. Yeah, that's exactly what we're seeing in Perth now, right? So when a market goes through a run, like we're seeing here in Perth, everyone's an expert. Go to your barber, he'll tell you where to invest. Jump in a taxi or an Uber, he'll tell you he's bought a property out in a suburb you've never even heard before and he's made 40% or 50% in two years. So that confidence just breathes more confidence and that's exactly right. It's what we saw in Victoria and New South Wales.
• 6:04
  eight years of positive growth no one can lose money in property right that's the sentiment so that sort of you know conservative risk-averse attitude of this is the biggest financial decision you're going to make maybe we should be a little bit more cautious maybe we should speak to an expert maybe we should you know be a little bit more probably hesitant rather than just jumping in
• 6:24
  When you have that level of growth, everyone's making money. It's completely de-risked. So the people, you know, from a mindset point of view, so people are just jumping in, buying one, which was a positive experience. They made 50% in a short period of time. Buy a second, quick 20%, 30%. They're like, well, this is too easy. I've just got to buy more properties.
• 6:41
  How can I get more debt? How can I get more equity? And all of a sudden, they overexpose themselves late in the cycle and that's what we saw in these East Coast markets. I mean, it's a good point you make as far as everyone's talking about property. Everyone's making money. Everyone's talking about rates now. Everyone's got a podcast. I know.
• 6:58
  Do you know, I would have friends come to me over the years just with my background and ask me questions. Now, I can't get a word in. I just let them go because everyone's got an opinion. Everyone's making money on property. Everyone wants to talk property. Everyone's talking investments. Everyone's talking about rates now. So I think, you know, the sentiment, especially like isolating Perth, obviously, other markets have had been on a run for a while now. But I think people in Perth now are very conscious on rates and love to talk about the success on properties as well, I think.
• 7:27
  Yeah, and we're going to see that because, like I said, I still think the market's got plenty of legs. So I just think people want to be more cautious at the back end of the cycle. I'm not saying we're at the back end of the cycle here in Perth. I don't think we are. But just not getting caught into the same trap that we saw, what happened in Sydney and Melbourne, you know, through that COVID buzz and hype. But try not to listen. My advice to the listeners...
• 7:49
  My advice to listeners here today is try to only take advice from experts or people who have done this religiously through cycles, not just one cycle, not just this cycle, but people who have been and seen boom and bust, they've been kind of secular, meaning they've invested in other markets.
• 8:07
  around Australia because regardless, markets around the world, and particularly in Australia, follow a very consistent cycle. And that's typically seven to 10 years of growth, followed by four to six years of stagnation. That's what history has told us in Australia for the last 100 years. That's our markets. And there's obviously exceptions to the rule, but across the board, each market is operated in the same context and the same cycle.
• 8:35
  So with that in mind, you know, Perth at the moment, we're arguably in our fifth year or fourth to go into our fifth year of growth. Still, you know, quite modest, probably nine o'clock, if you looked at that at a property clock in terms of where we are in a timing point of view. And we look at Sydney, that went for its full run of, you know, just over 10 years of growth. So just got to look at that and take that into context and learn from mistakes others have made in other markets.
• 9:02
  And just going back to what we saw in February with the 0.25% drop, how did that affect the property market? Perth locally, we've seen the highest amount of sales that we've seen since 2023. So there's 1,056 sales within that following week. So is that a coincidence? I don't think so because it breathes sentiment. So we saw an immediate impact in terms of demand into the market.
• 9:28
  And it's just the commentary leading up to it as well, I think. Exactly. Since December, the commentary has been amping up, amping up, amping up about
• 9:38
  cash rate decreases and I think that kind of spits balls before we even see the drop as well. Yeah, I think the sentiment around it and the commentary around it does more to the market than the cut itself. It only really just confirms what the markets believe was going to happen. And now I believe markets, albeit we're coming up to an election, so what you may see over the next 30 to 60 days is some stagnation in the market because there's a national election happening.
• 10:03
  And no matter which period of time, when we look back, there's always typically a stagnation in the market as we lead up to these major events. So we may not see the same level of activity as we did following the rate cut. But post that and potentially throw another rate cut on the back end of that election, and depending which way it goes, whether it's Liberal, which is very pro-property,
• 10:25
  very anti-negative gearing reforms, very much looking to make banking policy deregulated in some aspects versus the Labor government. It's certainly, along with the Greens, around getting rid of negative gearing and those sorts of things, that could have a huge play on... We could have a whole podcast on negative gearing, I think. Yeah, but that will have an impact on sentiment as well. Yeah. And I guess in terms of, sort of touched on that briefly, but, you know,
• 10:52
  Are there better ways the Reserve Bank can support the people into the market, particularly first-time buyers? That's a podcast on itself, Rhys. I think there's so many reforms, stamp duty reforms, that we need to look at to help those that can't get in there. The hardest thing to get into the market is a deposit right. So I think the way they're going with reducing the stamp duty or increasing the stamp duty exemption point
• 11:17
  So that locally in Perth, that's been increased to allow the exemption for stamp duty. I think that's a positive way because that's, again, it's an out-of-pocket expense, typically not wrapped up in the loan. And getting some deposit relief. And there's been a lot happening in this place. Obviously, not everyone can rely on the bank of mum and dad. So the government are providing support to help with that deposit because that is the hardest thing to get into the market, as we've discussed previously.
• 11:42
  Yeah. And I mean, reflecting on some of the earlier conversation in terms of the difference in repayments or the percentage...
• 11:52
  Increase or decrease, it helps from a rate cut. And then you've obviously mentioned the buyer sentiment increasing. Feels like I know where the answer's going. There's other tools I think we can use outside grants and outside the RBA with announcement. Serviceability buffers are a big talking point amongst banks and lenders in Australia. And APRA has a 3% buffer at the moment, which covers any of those...
• 12:18
  Which is crazy to think, right? Particularly when interest rates are at 6.5%, they're getting assessed on 9.5%. You know, this is your space, Rhys. You know it better than any because this is your background. Is that just a joke? And where would an appropriate amount threshold be? And the thing is we've...
• 12:34
  they've been flexible with these buffers before, so it's not set in stone that it hasn't been amended in the past. And, you know, if we do see ourselves now in a decreasing rate environment, have we hit the peak of this cycle? And do we now look to drop that serviceability buffer down to 2%? 12 months ago, the UK had a similar process, and they weren't even in a decreasing environment. They were in a period of stagnation with their equivalent of the RBA, and they decreased it down to 2%.
• 13:01
  So yeah, definitely feels there has been a lot of talk in the media, especially towards the back end of last year regarding the serviceability buffer. But it does feel like if we have a lot of economists out there at the moment predicting there's going to be multiple rate cuts this year, we've had one in February already. I think it's time to start to look at that and that will show some real impact. And we could even maybe look to tailor those solutions. So yeah,
• 13:28
  If we – certain type of clients help them get into the market, whether there's a – An exemption for different clients. Correct. Type of investors. Because what it will do is you think if we were to say hypothetically with the end of 2025 and we saw a 4% rate cut, four rate cuts at 25 basis points apiece, and we saw the serviceability buffer come down from 3% to 2%,
• 13:52
  That is significant. You know, we're talking your borrowing capacity would increase in some situations up to 40%. So what do you think happens to the market? Yeah. But that's the crazy thing. It's like what happens to the property market? Of course it does. All these gains from serviceability are realised in property prices. So all it's going to do in turn is going to put more fuel on the fryer and we're going to see further price growth or price inflation.
• 14:21
  I think what you've discussed there of tallying the serviceability buffer to those who probably need it more than others. Otherwise, we're just going to see the flow on effect, which is great for investors, great for people that are already in the market, but it's going to make it more challenging for those trying to get into the market in the future. Correct. If there's some sort of reform on that, or as you mentioned earlier, if we start reviewing some of these other first home buyer schemes and
• 14:44
  We discussed that can be another episode altogether in terms of what the grants... Yeah, stamp duty exemption for those like... Stamp duty is a terrible tax, right? Particularly for those who are going through situations, say, of divorce. Then you then get penalised to then enter back into the market. These are specific cases, individualised cases, that should be identified in isolation. Yep. So, Lachlan, what's the verdict? Cash rate decreases will help people get into the property market. Fact or fiction, do you call bullshit?
• 15:10
  In isolation, I call bullshit. I don't think it will help people get into the market. I think it will actually make it more challenging because it's only going to add to price growth into the market and therefore make it more unattainable for those new entrants. Make sure to join us next episode. Stay informed, stay curious and keep going on bullshit.