Australia’s thriving property market has recovered so swiftly since the brief pandemic-induced recession of 2020, that authorities have stepped in to pull the reigns on runaway real estate prices. As a result, lenders have been asked to tighten serviceability criteria.

Nationally, dwelling values are up 20.3% higher over the past 12 months, every capital city experiencing significant growth across the board. Melbourne, despite ongoing lockdowns dampening the market, still increased by 15%.

That’s where the Australian Prudential Regulation Authority (or APRA) comes in. On October 6, it wrote to lenders announcing an increase to the minimum interest rate ‘buffer’ it requires them to use when assessing the serviceability of home loan applications. APRA told lenders that from November 1, they must assess new borrowers’ ability to meet loan repayments at an interest rate at least 3 percentage points above the loan product rate – a 0.5 % increase to the previous 2.5 % buffer.

Month-on-month change in dwelling values

What are macro-prudential measures?

This is a big picture measure taken by one of the regulators [the Council of Financial Regulators includes; APRA, the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA) and The Treasury] to secure financial stability for both lending institutions and borrowers. If APRA, in this instance, thinks the current lending system is unsustainable then it will step in to protect banks’ profits and the stability of the whole banking system, while also not letting borrowers get in over their heads.

Why did APRA do it?

The early October announcement by APRA was a “targeted and judicious action” designed to reinforce the stability of the financial system according to chairman Wayne Byres. “In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” he wrote in a letter to lenders.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building,” he added.

More than one in five new loans approved in the June quarter were in excess of six times the borrowers’ income and APRA’s fear has clearly been that housing credit growth will run ahead of household income growth. “With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” Mr Byres said.

What difference will it make to you?

Overall, such a small tweak will probably not make a huge difference to average borrowers who may not have been borrowing at their full capacity anyway. However, for those who are stretching their borrowing budgets to almost the last dollar, such as first-home buyers struggling to meet rising prices, this move could be significant.

Ultimately, APRA has stated that the change will cut the maximum amount available to a typical borrower by approximately 5 per cent.

• Borrowers who were previously approved for a $500,000 loan would now be able to borrow $475,000
• Anyone with the green light to take out a $1 million mortgage would now be looking at $950,000

The impact this will have on prices or the current sky-high demand throughout most markets is yet to be determined as anyone who obtained a three-month pre-approval towards the very end of October would be under the previous 2.5 % serviceability buffer well into the new year. These changes will affect investors and owner occupiers in differing ways.

The changes are likely to have more of an impact on the investment segment of the market, as investor rates are higher than owner occupier mortgage rates. APRA also highlighted in their announcement that investors tend to borrow at higher levels of leverage and often have other existing debts, which would also be subject to the increased serviceability assessment.

What other changes are on the horizon?

Although APRA’s recent announcement will unlikely make a huge impact on demand for credit or even push down prices, it may well be a sign of future changes. While the announcement may seem like a subtle change to housing lending conditions, there may be more tightening to come as the level of housing credit and household debt are monitored, the high debt-to-income ratios being a focus.

In his letter to lenders, Mr Byres highlighted that if new home loan lending led to high debt-to-income ratios, a statistic expressing a borrower’s pre-tax income divided by their total debt levels, APRA “would consider the need for further macro-prudential measures”.

To find out how the tightened lending criteria will impact your borrowing power, get in touch with us today.

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Stay up to date with what’s happened in Australian markets over the past month.

All eyes were on the September quarter inflation figures in October, as speculation mounted that the Reserve Bank may be forced to raise interest rates sooner than planned. Click here for our November update video.

Please get in touch if you’d like assistance with your personal financial situation.

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Croydon, Victoria 3136

Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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After spending their working life building retirement savings, many retirees are often reluctant to eat into their “nest egg” too quickly. This is understandable, given that we are living longer than previous generations and may need to pay for aged care and health costs later in life.

But this cautious approach also means many retirees are living more frugally than they need to. This was one of the key messages from the Government’s Retirement Income Review, which found most people die with the bulk of the wealth they had at retirement intact.[1]

One of the benefits of advice is that we can help you plan your retirement income so you know how much you can afford to spend today, secure in the knowledge that your future needs are covered.

Making the most of super

According to the Review: “It appears (most people) see superannuation as mainly about accumulating capital and living off the return on this capital, rather than as an asset they can draw down to support their standard of living in retirement.”

The figures back this up. The average super account balance on the death of a member in the year to June 2020 was $102,660.[2] While not a huge amount, it is an indication that retirees may be able to withdraw more than the minimum amount from their super to live more comfortably without breaking the bank.

Minimum super pension withdrawals

Under superannuation legislation, once you retire and transfer your super into a pension account you must withdraw a minimum amount each year. This amount increases from 4 per cent of your account balance for retirees aged under 65 to 14 per cent for those aged 95 and over. (These rates have been halved temporarily for the 2020 and 2021 financial years due to COVID-19.)

One of the common misconceptions about our retirement system, according to the Retirement Income Review, is that these minimum drawdowns are what the Government recommends. Instead, they are there to ensure retirees use their super to fund their retirement, rather than as a store of tax-advantaged wealth to pass down the generations.

In practice, super is unlikely to be your only source of retirement income.

The three pillars

Australia’s retirement income system is built around three potential sources of income, known as the three pillars:

• A means-tested Age Pension
• Compulsory super, and
• Voluntary savings both in and out of super.

The Retirement Income Review, and the government, argue that the family home should be included with voluntary savings or as a fourth pillar, but more on that later.

Most retirees live on a combination of Age Pension topped up with income from super and other investments. Despite compulsory super being around for almost 30 years, over 70 per cent of people aged 66 and over still receive a full or part-Age Pension.

While the Retirement Income Review found most of today’s retirees have adequate retirement income, it argued they could do better. Not by saving more, but by using what they have more efficiently.

Withdrawing more of your super nest egg is one way of improving retirement outcomes, but for those who could still do with extra income the answer could lie in the nest itself.

Unlocking housing wealth

Australian retirees are some of the wealthiest in the world, with median household wealth of around $1.4 million. Yet close to $1 million of this wealth is tied up in the family home.

Studies have also shown that most people use a form of mental accounting which sets aside super for income, other financial assets for emergencies and the family home for future bequests.[3]

That’s a lot of money to leave to the kids, especially when many retirees end up living in homes that are too large while they struggle to afford the retirement lifestyle they had hoped for.

For these reasons there is growing interest in ways that allow retirees to tap into their home equity (see box). Of course, not everyone will want or need to take advantage of these options, but they are available if you would like some extra income.

Here are some options to use your home to generate retirement income:

• Downsizer contributions to your super. If you are aged 65 or older and sell your home, perhaps to buy something smaller, you may be able to put up to $300,000 of the proceeds into super (up to $600,000 for couples). Strict rules apply, so speak to us for more details.
• The Pension Loans Scheme(PLS). Offered by the government via Centrelink, the PLS allows older Australians to receive tax-free fortnightly income by taking out a loan against the equity in their home. The loan plus interest (currently 4.5 per cent per year) is repaid when you sell or after your death.
• Reverse Mortgages (also called equity release or home equity schemes). Similar to the PLS but offered by commercial providers. Unlike the PLS, drawdowns can be taken as a lump sum, income stream or line of credit but this flexibility comes at the cost of higher interest rates.

The big picture

Discussions about retirement in the media and around the kitchen table often focus on how much super you have and whether it’s enough. Super is important, but it’s not the only source of retirement income.

If you would like to discuss your retirement income needs and how to make the most of your assets, give us a call.

Notes

[1] Retirement Income Review, https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-complete-report.pdf

[2] APRA  data spreadsheet, https://www.apra.gov.au/sites/default/files/2021-01/Annual%20superannuation%20bulletin%20-%20June%202015%20to%20June%202020%20-%20superannuation%20entities_1.xlsx

[3] https://householdcapital.com.au/third-pillar-forum/retirement-insights/prof-hazel-bateman/

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If you are surprised at how prices in cities and regional areas have risen even in the face of the social and economic havoc caused by COVID-19, you’re not alone. If you are thinking of buying property, you may even be a little concerned about what the current property market means for your buying decisions.

Is timing everything, or is time in the market more important? Whether you’re a first home buyer, upgrader, or investor, let’s look at what a property cycle is and how important it may, or may not be to your buying decision.

What is a property cycle?

Generally, home prices follow a four-phase cycle of Stabilisation, Growth, Boom and Decline. Over the last 40 years, property prices boomed in Australia in 1981, 1987, 1994, 2003, 2010 and 2017. This is why many people work on the assumption that property cycles last roughly seven years. But remember, this is an assumption, not a fact.

The longest phase in the property cycle is usually Stabilisation. This is when buyers and sellers have enough confidence to enter the market in relatively equal numbers, keeping prices fairly stable.

Many factors contribute to a rising market, but a Boom tends to end as more sellers enter the market, causing an over-supply as prices tumble and the market moves into a Decline phase.

What factors influence the property cycle?

Low interest rates contribute to market increases, as does strong economic performance and consumer confidence.

The supply of property on the market also plays a big part in contributing to rising (or falling) prices and rents, as does shifting demographics including the number, age and incomes of people in households and where people are living. A good example of the impact of shifting demographics is the recent spike in regional home prices as younger people leave cities for the regions.

How many property cycles are there at any time?

Although we talk about the property ‘market’ there are as many property markets as there are suburbs around Australia. While we have seen unusual consistency in increases across the board in Australia recently, different states, cities and suburbs can be at varying stages of their property cycles.

Aligning your property goal to the current cycle

The recent price surge could be what’s known as a mid-cycle ‘second wind’ caused by buyers cashed up with government incentives and lockdown savings, taking the property plunge or making a lifestyle change. It could also be viewed as a correction, as people who put off buying at the start of the pandemic, enter the market. Or, as it is in most cases, it can be a combination of factors.

Either way, the fear of missing out, is a contributing factor to the growth phases of property cycles and it’s what makes many people anxious about when they should enter the market. That’s why it’s important to take a step back and remind ourselves that over the long-term, property prices have historically risen.

What this means, is your property goals will dictate how much attention you should pay to where the market is currently in the cycle. Are you looking for your forever home, a long-term investment or a do-er upper you can quickly sell for a profit? Your answer will tell you how important your entry point in the cycle is. For many, it’s not what should be driving your buying decision.

Keep in mind that market forecasting is difficult. Rather than trying to time the market for short-term gain, many buyers prefer to look further into the future and aim for longer-term property growth.

The important thing is to buy according to your goals and means. Ensure you are comfortable with your purchase including the area you are buying into and the amount you are borrowing.

We’re always happy to discuss your property plans and current market movements with you. So please get in touch.

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For many people, there’s much more to choosing investments than focusing exclusively on financial returns. Returns are important, but a growing number of people also want their investments to align with their values.

Everyone’s values are different but given the choice most people would wish to make a positive difference to their community and/or the planet. Or at least to do no harm.

Indeed, four out of five Australians believe environmental issues are important when it comes to their investment decisions. [1]

As a result, there has been a surge in what is called responsible investing. Also known as ethical or sustainable investing, responsible investing includes investments that support and benefit the environment and society, rather than those whose products or ways of conducting business have a negative impact on the world.

Millennials driving growth in sustainability

The trend toward responsible investment is growing rapidly. According to the Responsible Investment Association of Australasia (RIAA), Australians invested $1.2 trillion in responsible assets in 2020.[2] While money flowing into Australian sustainable investment funds was up an estimated 66% in the year to June 2021.[3]

Responsible investing is particularly popular among millennials, now in their late 20s and 30s and beginning to get serious about building wealth. Many in this group are getting a foot on the investment ladder via exchange-traded funds (ETFs). A recent survey of the Australian ETF market found 28% of younger investors had requested more ethical investments.[4]

More sustainable investment options

As awareness of responsible investing grows, so does the availability of sustainable investment options, beginning with your super fund.

Most large super funds these days offer a sustainable option on their investment menu. While relatively rare even 10 years ago, the availability and performance of sustainable options has grown strongly over the past three to five years.

According to independent research group, SuperRatings, the top performing sustainable options now surpass their typical balanced style counterparts in some cases.[5]

If you run your own self-managed super fund (SMSF) or wish to invest outside super, there is a growing number of managed funds that actively select sustainable investments or ETFs that passively track an index or sector.

There were 135 sustainable funds in Australia and New Zealand in 2021, so there is plenty of choice.[3]

How to screen

So how do you find the ethical investments that best suit your values?

There are several methods used with the most common being negative screening. This is where you exclude investments in companies engaged in unwelcomed activities such as gambling, tobacco, firearms, animal cruelty, human rights abuses, or fossil fuels.

Positive screening is the opposite, where you actively seek out investments in companies making a positive contribution. Some examples might be companies involved in renewable energy, health care, or education.

Another criterion is to look at companies that monitor their environmental, social and governance risks. This cuts across all industries and is more about the way the company conducts its business.

Environmentally they may monitor their carbon emissions or pursue clean technology, socially they may be active in ensuring a safe workplace and on the governance front they may pursue board diversity or anti-corruption policies.

Greenwashing on the rise

As the popularity of responsible investing grows, so do concerns about the practice of so-called greenwashing. This is where a company or fund overrepresents the extent to which its practices live up to its promises. The Australian Securities and Investments Commission (ASIC) recently announced a review into the use of greenwashing in Australia, prompted in part by the demand for such funds.[3]

Another trend is impact investing in companies or organisations helping to finance solutions to some of society’s biggest challenges. This might include investments in areas such as affordable housing or sustainable agriculture.

Solid returns

While some investors are driven by their values alone, many more want value for their money. The good news is that it’s possible to have it both ways.

The RIAA survey found super funds that engage in responsible investments outperformed their peers over one, three and five years. Clearly, responsible investing is a trend that is gaining momentum, with the financial performance of sustainable investments attracting a wider following.

If you would like to discuss your investment options and how they might fit within your overall portfolio

Notes –

[1] https://www.canstar.com.au/investor-hub/ethical-investing/

[2] https://responsibleinvestment.org/resources/benchmark-report/

[3] https://www.morningstar.com.au/funds/article/australias-sustainable-funds-market-is-growin/214505

[4] https://www.betashares.com.au/insights/millennials-on-top-betashares-investment-trends-etf-report-2020/

[5] https://www.lonsec.com.au/2021/07/21/media-release-stellar-fy21-returns-as-super-funds-deliver-for-their-members/

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For many people, debt is a dirty word. But not all debt is created equal. There’s good debt and there’s bad debt, and then there’s the good debt that can get pretty ugly if it’s not managed properly. Learning to use debt intelligently could make all the difference to your personal bottom line.

Good debt

Debt is considered good when it helps you buy wealth building assets. That can be an asset that grows in value over time and /or provides you with income.

Borrowing is often referred to as leverage because it helps you get more for your money.

Shares and property are regarded as growth assets because, when chosen well, they should grow in value over time. Shares can also offer regular dividend income while investment property provides rental income. In both cases, the income you receive can be used to help meet your loan repayments.

In many instances you can also claim a tax deduction on the interest paid on your investment loan.

Bad debt

Debt is bad for your wealth when you borrow to buy assets that fall in value, don’t provide any income and are not tax deductible.

Using a credit card or a personal loan to pay for holidays or expensive toys is an example of bad debt.

The trouble with bad debt is that you can often be paying for it long after the holiday has worn off or that new car has halved in value. If your bad debt is on a credit card, then it can be all too easy to let the debt roll over each month.

When bad debt turns good

Used well, bad debt can be put to good use. If you are disciplined and pay off your credit card in full each month this can help you manage your cash flow. It might also allow you to leave money sitting longer in a high interest savings account.

Credit card debt turns ugly when you buy things you can’t afford and pay only the minimum repayment each month. Because of the high interest rates that apply to credit cards, your initial debt can balloon and take many years to clear.

When good debt goes sour

Using good debt to pay off bad debt could also cost you dearly. Say you consolidate your debts by increasing your mortgage. The end result could be that you spread the cost of that debt over 20 years or more, dramatically increasing your total interest payments into the bargain.

The family home

Buying a home to live in will not provide you with income but it can still be regarded as good debt. Not only is it a form of enforced saving but in time it may also be used as leverage to fast track your wealth creation.

Once you build up equity in your home you can use this as security to take out an investment loan. Any income you earn from your investments— your good debt — can be used to make extra repayments on your mortgage. This can accelerate paying off your home loan and free up cash for more investments.

A power of good

Whether debt is good or bad, it’s generally wise to clear it as quickly as possible. Pay off your bad debts first – beginning with the debt that has the highest interest rate – as you should be able to take advantage of the tax concessions that may be available on your good debt.

In years gone by it was common to wait until you had saved up for what you wanted. Nowadays the ease of obtaining credit can lead to reckless behaviour. But there’s still an important place for good debt.

Given most of us will spend many years in retirement and would like to be self-funded, borrowing to accelerate wealth can be a very successful investment strategy. It’s just important to remember to keep bad debt to a minimum and make sure you use good debt wisely — otherwise it can all turn a little ugly.

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