Dominique Grubisa: Where do investors stand?

A federal politician recently argued that radical action was needed to prepare the Australian economy for disaster. Was he right?

With Australian household debt at an all-time high and a potential global downturn looming, the Australian economy is in dire trouble. What’s needed is a radical shake-up of our economic policies – and fast.

That’s what Liberal MP Tim Wilson argued when he stepped onto the fl oor of Parliament at the end of February to deliver an impassioned speech. Pointing to the low cash rate of 1.5%, “overvalued housing assets” and the fact that our collective housing debt is now almost the size of our GDP, he said the federal budget in May must confront structural imbalances in the economy.

While there’s no doubting Wilson’s passion, I believe he has got it wrong. Current government policy is actually right on track to bring the housing market back into balance over the next few years, and there are likely to be plenty of opportunities for investors as a result.

Basically, what the government is striving to achieve is a balancing act between a gentle cooling of the hot end of the market while trying to keep the overall property market buoyant. Because 60% of the country’s economy is derived from spending, it knows that the more money we put into servicing our mortgages, the less we have to spend on other things – and that hurts the economy.

The RBA is too worried about quashing the housing market entirely – and the flow-on effects on the economy – to raise rates any time soon, so the government is opting for a clever middle-of-the-road approach. It realises that by controlling the source of credit and making credit harder to obtain, it can reduce the amount we spend on housing and remove some of the heat from the market.

How is it doing this? One major way is by targeting interest-only loans. Through APRA, the government has mandated that such loan products must be reduced in the marketplace. Rather than just paying the interest and waiting for capital growth, investors and owner-occupiers will increasingly be forced to pay down their debts.

Current government policy is actually right on track to bring the housing market back into balance over the next few years

The number of interest-free loans in Australia is immense. Michele Bullock, assistant governor of the RBA, said in a recent speech that in early 2017 some 40% of debt did not require principal repayments. A particularly large share of this debt is held by property investors, although some owner-occupiers have also not been paying down principal. The interest-only period of most loans is only fi ve years, and according to the ABC, some $640bn in interest-only loans is currently outstanding. The holders of many of these loans will need to start paying down principal as well as interest between 2018 and 2022.

So what will this mean for your clients? They are going to experience significant flow-on effects from a reduction in the availability of interest-only loans. Sadly, many people who were able to make ends meet when they were only paying interest will struggle to pay off principal as well. Because the loans market is changing, they are likely to fi nd it hard to switch to another interest only loan.

As a result, we’re likely to see baby boomers, retirees and fi rst home buyers forced to sell their properties. Anyone in that situation should be aware that there are interest-only loans still out there, as well as provisions in the Banking Code of Conduct and the Credit Code, that people experiencing such difficulty can rely on in order to vary their loans. Also, CBA and Westpac both lowered fixed interest rates on interest-only loans for new customers recently, so clients can look at switching and fixing.

What does this mean for investors? Those who are cashed up and ready to buy will benefit from an increase in supply and a reduction in pent-up demand – both resulting in lower property prices. However, the big joker in the deck is disruptive changes to the lending arena, like peer-to-peer and marketplace lending and crowdfunding. APRA does not control non-bank lending, and if the banks stop lending due to APRA’s rules, this could free up space in the market for nonregulated lenders to move in.

There’s no doubt that the next five years will be an interesting time for both investors and the mortgage market.

Dominique Grubisa is the founder and CEO of the DG Institute, a wealth management education service specialising in making property investment possible for all Australians. She is also a practising solicitor and property investor.