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Biggest Blockage In Real Estate System

Biggest Blockage In Real Estate System
March 31, 2021 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

There is clearly something major wrong when an advanced country such as Australia has umpteen thousand families who are unwillingly anchored to where they are currently living and unable to pursue life’s most important aspirations, all because they cannot gain access to alternative housing (to buy or rent). It is unAustralian!

Some of these people are owner-occupiers who want to move but cannot. Others are tenants (or former owner-occupiers) who moved out of one home and are now living in makeshift ‘accommodation’ such as cars, caravans, on couches and in tents. They have jobs and income, but there is no suitable accommodation available.

The single biggest blockage in the ecosystem of Australian housing is related to housing finance. The current housing finance system is invasive, unproductive, highly inefficient and does very little to instil confidence in those wanting to transact in real estate.

It beggars belief that, if home loan applications could be approved within a day or two when the world did not have modern technology, it now takes two or three weeks.

Any system that fails to fully assess something as simple as a borrower’s credit application within 2-days of receiving it is a failed system.

The primary cause of the finance system blockage is the manner in which banks are currently required to assess a borrower’s ability to service their debts.

An intelligent credit system confirms a borrower’s employment, uses judgement to determine a reliable annual income amount, calculates whether that income is sufficient to pay all financial commitments, taxes and general living expenses, and places some value on an adult’s ability to make adjustments to budgets if / when circumstances change.

The fact that a modern society embraces a digital economy (there are very few cash transactions these days) does not mean it is suddenly irresponsible for a bank to assess a credit application without an invasive investigation into exactly how a borrower spends their discretionary income.

Australian banks have been providing finance to purchase real estate for more than 200-years. We have turned a relatively simple exercise into something that now takes borrowers and banks significantly longer than necessary to collate the relevant documentation and then assess it.

From a government borrowing money to build new infrastructure, to a business borrowing money to support an expansion, or a household purchase of real estate, debt is not bad. When used wisely, debt brings dreams to reality.

Indeed, every state government and the federal government have recently increased their debt more than ever.

There is a concert of highly risk averse people whom, every time property prices rise, quickly ring the alarm bell about rising debt levels. These lemon-suckers of life fail to understand that, of the very small portion of people who occasionally get into trouble with debt, it is the ability to service debt (not the size of debt) which causes the problem.

As a percentage of household income, the current interest expense within Australian household budgets has never been lower and the RBA has all but guaranteed that interest rates will remain incredibly low for umpteen years to come.

It is a complete nonsense to suggest that interest-only loans are ‘high risk’ or that volume increases in interest-only loans equates to a ‘drop in lending standards’.

Most interest-only loans are for the purchase of an investment property, a discretionary action exercised by a small portion of borrowers with more financial discipline than most.

We walk-the-walk. Here’s a recent example of our work for a client.

Investors typically request an interest-only loan structure as part of a strategy to accelerate debt reduction on their principal place of residence. Meanwhile, their ability to service borrowings is assessed on the basis of paying principle and interest and at a significantly higher interest rate (that’s prudent assessment, not a drop in lending standards).

For umpteen decades, banks have assessed a borrower’s ability to service debt by applying built-in buffers that include interest rates rising by between 1.5 percent and 2 percent (that assumes 6 to 8 RBA rate rises and no increases to a borrower’s income streams).

In this current climate, many of us will dead before before interest rates rise to those levels.

What is the point in applying these buffers if, every time property prices rise, the system allows the Nervous Neville’s at APRA to whack yet another clamp around credit?

The historical evidence confirms that, throughout decades of property booms and downturns, Australian home loan arrears have been consistently under 2 percent. Similarly, Australian bankruptcy rates have consistently been very low.

A property boom is not a bad thing, particularly when the criteria for assessing loans is as prudent as it is in Australia.

Right throughout Australia’s history, there has never been a situation of a property boom ending in widespread pain, but the last 6-years is proof that excessive regulatory constraints does create unintended consequences.

People forget that property markets in large parts of Australia have seen very little price growth for more than a decade. Even in Sydney and Melbourne, where the median house price doubled over the last decade, a large portion of apartments have seen modest price growth.

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We walk-the-walk. Here’s a recent example of our work for a client.