Should you invest in the First Home Super Savers scheme?

The question for first-home buyers today is should you be investing in the government’s new First Home Super Savers Scheme?

The question for first-home buyers today, is should you be investing in the government’s new First Home Super Savers Scheme? Will it help you achieve your home ownership dreams? How does the system work? What are the downsides?

We take a look at how the system will work, and look at the pros and cons.

Differences around the country

A person earning $100,000 a year who puts $10,000 a year into the scheme for three years, reaching the $30,000 contribution cap, would end up with $24,777 after tax to put towards their home deposit.

That will mean different things depending on where you want to buy.

In Sydney, the median house price is $1.1 million, so a 20 per cent deposit is $220,000. Even if two members of a household can pool their contributions to just under $50,000, you’re nowhere near the deposit. In fact, the money saved through the scheme would only be enough to cover stamp duty on a median-priced house in Sydney.

In Hobart, Australia’s most affordable city, the median house price is $390,000. A 20 per cent deposit is $78,000. The contributions of two people will be in the vicinity of the deposit; for single investors it will be more difficult.

The tax advantages

But money invested in the scheme is tax advantaged, and therefore is certainly one way to consider saving for a home.

First-home buyers who have their employers put money from their pre-tax income into their super account will have that money taxed at 15 per cent, instead of the standard marginal rates of 19, 32, 37, and 47 per cent (plus the increased Medicare levy), depending on your income.

As well as being tax advantaged, investing in the scheme can lower your taxable income, and therefore lower the tax you pay on your income.

Earnings generated on the money in your super account will be taxed at only 15 per cent.

When it comes time to withdraw the funds, the withdrawal will be taxed at your marginal tax rate minus 30 percentage points.

Do you have the spare cash?

Of course, not everyone will have enough cash to put into the savings account.

“Most of the people who might take this up will be able to afford a deposit anyway,” Dr Sam Tsiaplias told The New Daily.

Past schemes

The federal government has tried schemes like this in the past. The Rudd government introduced the First Home Saver Accounts in 2007. Under this scheme, savers were taxed at 15 per cent on the first $5,000 they deposited, and interest was taxed at 15 per cent. The government also made a 17 per cent contribution each year on the first $6,000.

But Labor’s scheme had very little uptake, and was eventually scrapped by Abbott in 2015.

What happens if you don’t use the funds saved?

It’s also important to note that once your money is invested in the super fund, it can only be withdrawn for the purpose of buying a property. If you don’t use it to buy a property, it will be locked into the fund until you reach retirement age.

Returns are fixed

One last thing to consider is the rate of return. Money put into the scheme will return 3 per cent plus the 90-day bank bill rate each year. That would currently be around 4.78 per cent. If your super fund achieves a better return, the excess will stay in your super account until your retirement. If a lower return is achieved, the extra amount will be deducted from your retirement nest egg.

Jessica Irvine writes in the Sydney Morning Herald that young Australians have finally been thrown a “tax bone” by the government.

“Sure, it’s more chicken wing than femur,” she writes. “But it’s worth considering for anyone looking to buy a home in coming years.”

Source: The Real Estate Conversation

Strong auction clearances hose down cooling theory

Strong auction results on the weekend adds “complexity” to the theory the property market is topping out.

The preliminary auction clearance rate for Australia’s capital cities was 76.2 per cent last week, a strong result that adds “complexity” to the theory the property market is moving through its peak growth rate, says Cameron Kusher, head of research at CoreLogic.

Volumes were also strong with 2,376 auctions held in the nation’s capital cities.

High clearance rates and volumes in Sydney and Melbourne suggest selling conditions are particularly strong in those markets.

Sydney recorded a clearance rate of 79.4 per cent, while Melbourne’s clearance rate was 76.6 per cent.

REINSW deputy president Leanne Pilkington told SCHWARTZWILLIAMS that agents have been reporting to her lower numbers at open house inspections. But the decline in numbers doesn’t appear to be affecting clearance rates, she said.

“With Auction numbers up by 63 per cent over the previous week, and clearance rates a really strong 79.4 per cent, the reports of lower levels of attendees at open homes being reported in some areas of Sydney are yet to have an impact on results,” she said.

Vendors could be adjusting their reserve prices to clear properties, speculated Kusher.

Source: CoreLogic.

REIV President Joseph Walton told SCHWARTZWILLIAMS, “Auction activity remains strong across [Melbourne], with more than 2,000 homes set to go under the hammer before the end of the month.”

“Melbourne’s inner suburbs recorded some of the strongest auction results this weekend, with the City of Boroondara topping the list for both volumes and sales.”

In the City of Boroondara, 68 auctions properties went to auction, and 51 sales were recorded.

“The premium end of the market performed strongly this weekend with high auction sales in Kew, Glen Iris and Camberwell,” said Walton.

Ten homes were sold under the hammer in Kew, Preston and Glen Iris, followed by Camberwell with nine sales, said Walton.

The City of Hume (30 properties), Hobsons Bay (24), Craigieburn (8) and Williamstown (7) all recorded 100 per cent clearance rates.

View on Luxury List one of Queensland’s top listings this week. The five-bedroom house at 23 Drysdale Street, Mount Ommaney, achieved a record price at auction last week through agents LJ Hooker Paddington.

Source: The Real Estate Conversation

Are houses a better investment than units?

Ask anyone and there will always be a huge argument about whether houses or units are better investments because a lot of people think that houses are superior to units and vice versa.

But to me, it’s not about which is the best dwelling type, it’s about which one is the right property for you.

In fact, both dwellings have a very important place in your portfolio as long as they are the right type of property.

Houses vs units

Typically, with houses, you have the land component plus the ability to value-add internally and externally.

You also may have the upside of zoning advantages to allow you develop the site and construct additional dwellings. Houses generally also attract a different demographic such as families, too. However, more and more families are choosing units over houses because they are often in better locations.

What I mean is that with units and townhouses, they’re usually built on better infrastructure and are located on transport hubs and near shopping precincts already, so they can have better access to services.

Another advantage to units and townhouses is they traditionally have a better yield but you must ensure you’re investing in a property that has a low cost to operate such as low body corporate fees.

When it comes to units and townhouses, my preference is to invest in ones that are walk-up, which means no elevators or lifts, that aren’t located in large complexes. Plus, you must be an active member of the body corporate to play a part in its management.

A question of price

Some people still believe that if it’s a question of price, then perhaps they should invest in an affordable house in an outlying suburb rather than a unit or townhouse closer to the city.

But, again, that’s the wrong way to approach it.

That’s because it really still comes down to your own unique financial situation.

If you’re someone who doesn’t have a lot of disposable income then maybe a unit or townhouse might be a better scenario because of the possibility of better cash flow.

From a portfolio point of view, if you’re a multiple property owner, I believe it’s absolutely necessary that you have a mixture of both houses and units.

Having a mix will help you balance your books in terms of cash flow. It may also be advantageous, if you’re investing strongly in one particular State, to own units as it could help you from a land tax point of view.

No longer a poor cousin   

When I first start investing, I refused to buy a unit because I thought it was a waste of money and it wouldn’t grow in value.

But I didn’t realise that you have to think about strata as a kitty with continual contributions to take care of major repairs and expenses on the building.

Five years later, I felt like an idiot because that unit that I had turned down had increased in value significantly.

The thing is, today, a well-located and well-managed unit or townhouse can grow in value just as much as a house.

Years ago, units and townhouses were considered the poor cousin to houses but we are now in the midst of a societal and cultural shift that’s changing that perception.

Sydney is a really good example of that because it has been building more units than houses for decades.

Even when the market might temporarily slip into oversupply territory, it doesn’t take very long for that unit supply to be soaked up because of the strong demand from people to live in these types of dwellings.

And that demand is growing quickly in Melbourne and Brisbane, too.

But I don’t recommend that you invest in new units. Established properties are my preference – even dwellings that are quite old because they are larger and are generally better built.

So the takeaway from this age-old argument is that there is no definite answer to whether units or houses are the better investment.
As long as you buy the right type of property, and have balance in your portfolio, either dwelling could be an ideal investment for you.

Source: Steve Waters

Budget tackles the fundamentals of housing affordability

The 2017-18 Federal Budget has lived up to the hype of being a Budget that makes substantial progress on tackling housing affordability.

“The Budget is a serious attempt at tackling Australia’s housing affordability problems”, said Ken Morrison, Chief Executive of the Property Council of Australia.

“The Budget offers substantive policy solutions to many of the challenges facing home buyers and renters on low incomes.

“The focus on improving housing supply, keeping rental growth low and closing the deposit gap are all welcome, but the initiatives targeting foreigners will damage Australia’s reputation and will do nothing to help housing affordability.

“We have consistently said that you can’t change the trajectory of house prices in our cities without making progress on housing supply – and that means tackling blockages and providing non-distortionary incentives to invest in new supply.

“This Budget has a good mix of initiatives to unleash significant new housing supply in our cities, although implementation will take a lot of work.

“Central to removing these blockages is a new National Affordable Housing Agreement and the use of City Deals to ensure that we deliver real progress on new housing supply. These measures will bring state and local governments to the table using financial incentives to drive new housing supply. It is right that future City Deals include housing supply targets.

“The Budget is not just about home buyers, it also provides significant incentives for new investment in affordable rental accommodation. We want to work with the government and non-government sectors to ensure these measures work.

“Addressing the deposit gap for first home buyers is a critical part of addressing our housing challenge. Our fear was that a scheme that used superannuation would be inflationary. However, the architecture of the First Home Super Scheme appears to be a non-inflationary measure that will help hundreds of thousands of Australians save for a deposit for their first home.

“Our only disappointment with the Budget is that the Government has announced a range of measures aimed at punishing foreign investors. These seem designed to provide the government with a few good headlines but these measures will do nothing to improve housing affordability and potentially send a message about Australia’s openness to investment.

“Getting our cities working better is also fundamental to the productivity of our cities. That is why the decision of the Commonwealth to back-in metro rail lines in our cities is the right one, but we note that most of the promised $10 billion funding falls outside of the forward estimates.”

Source: KEN MORRISON

How to prepare for a rental inspection

Most Australians will rent a home at some point in their lives and, if you do, its inevitable that youre going to experience a rental inspection or several.

Rental inspections can cause tenants a lot of unnecessary stress simply because many people dont know what to expect or whats expected of them.

Here are a few easy ways to prepare for your rental inspection, so you pass with flying colours and score another year on your lease.

1. Start preparing early

Landlords and agents are required by law to provide at least 24 hours notice before an inspection but most will give you at least a weeks notice.

As soon as you know when your rental inspection is booked in, start to do little things to prepare for it. Clean the shower one day, sweep the front porch another.

As soon as you know when your rental inspection is, start to do little things to prepare for it.

Its much easier to clean incrementally, rather than spend an entire evening exhausting yourself scrubbing the place from top to bottom.

2. If you’ve been allowed pets

Rental inspections can be very stressful for pets, especially if youre not present while the landlord or agent is there.

Arrange for your pets to visit a friend or family member for the day and save them the stress of having strangers trampling around inside their house.

3. List issues to discuss

Rental inspections arent only for the benefit of the landlord, theyre also an excellent opportunity for you to let them know about any ongoing maintenance problems that you have that are not your responsibility.

For example, if the toilet keeps blocking or if theres a dodgy light fitting that keeps blowing light bulbs – these are structural problems that need be taken care of by the landlord and as a tenant its your responsibility to inform of them of these issue.

However if you smash a window because you were playing indoor football, thats your responsibility. 

4. Clean properly

If you like where you live, youre happy with the rent and the landlords are practically non-existent (dream renter’s scenario) then you should be doing everything within your power to stay there – which means doing a brilliant cleaning job on the property youre renting.

This means scrubbing in the corners of the shower screen, giving all the windows a good clean, spot cleaning the carpets and maintaining the garden.

You dont need to be on your hands knees scrubbing at the kitchen tiling with a toothbrush but both a landlord and an agent will be impressed if you keep their property extra clean and it will certainly influence a decision to keep you on as a tenant.

5. Do any necessary minor repairs

Here I am talking about things like dings in walls, carpet stains or blown lightbulbs.

There seems to be a bit of a grey area with whose responsibility it is to fix things in the home but a good rule of thumb is that if its your faultyou need to fix it.

Its not the landlords problem that you slammed your couch into her wall and its also not her problem that you spilled a glass of red wine on the carpet. If theres a problem with the structure of the building, like plumbing or electrics, the landlord needs to take care of that.

6. If there’s a garden, look after it

Gardens and landscaping are a huge investment of time and money for landlords, which is why theyre often so strict about the maintenance of the gardens on their properties.

Landlords will strongly favour tenants who do a good job of maintaining the landscaping, so make sure you keep everything watered, fed, happy and trimmed so it looks good for the rental inspection. Make sure you keep everything in the garden watered, fed, happy and trimmed.

7. Dont freak out

Rental inspections are not designed for the landlord or real estate agent to berate you and kick you out of their house.

Most rental inspections last about 10 minutes and consist of the agent doing a quick turn around the property to check for any major damage or potential problems.

Its honestly not a big deal and definitely not worth getting stressed over. Clean your place up, make sure they can get inside the property and just chill out.

Source: Carly Jacobs

What questions should you ask when buying off the plan?

For those who have never bought off the plan or for those who haven’t moved for many decades, it can be a daunting experience. Whilst owning any property off the plan often involves a leap of faith, you have the right to ask as many questions of the selling agent or developer as you need to in order to make an informed decision.

Below off-the-plan sales expert and director of Marshall White Projects, Leonard Teplin shares the answers to some of the most pressing questions that buyers should consider before committing to any paperwork.

1. What happens to my 10% deposit?

The 10% deposit, by way of either cash or bank guarantee (if allowable), will be retained by the Vendors Legal Representative in their trust account until the project is completed or alternatively the sunset period expires.

The sunset period refers to the formal date set within a property contract by which a project must be completed. If the project is not completed within this timeframe then the contract is void and buyers will have their deposits refunded.

2. What happens if my circumstances change and I need to sell my purchase prior to settlement?

Firstly, you need to seek advice from your legal representative in regards to your obligation to the Vendor under a nominee sale. You have the right to assign your contract of sale under the nominee provision, however, rarely will a developer allow you to promote your purchase, particularly if the developer still has unsold stock prior to or even after a settlement period.

Most contracts of sale will detail your rights and obligations in such circumstances.

3. What are the owners corporation fees and what do they cover?

Essentially owners corporation fees cover the general administration, maintenance, insurance and other ongoing costs of a building or complex.

Your selling agent or developer should provide you with an estimate of your quarterly contribution to the fees levied by the Owners Corporation Manager. Within the contract of sale there should also be a budget estimate which sets out both your and other purchaser’s quarterly contribution.

4. Who are the people behind the development?

Often buyers will ask “who is the developer”. Whilst this is certainly a valid question, few go on to ask “who is the architect”, “who is the project manager”, and “has a builder been appointed” (or at least is there a panel of builders who have been asked to tender the construction cost).

You should visit each alliance partner’s website in order to establish their credentials and gain an understanding of the caliber of projects they have delivered in the past.

5. How do I know what I see in the renders and marketing material will correspond to what is actually delivered?

Again this is where it pays to do your research and go with trusted developers, with a proven track record.

You should seek professional advice regarding your rights and obligations under the contract of sale. This includes the developer(s) rights to substitute “like for like” should a promoted product be unavailable during the construction period.

6. If I am an investor, what is the best time to lock in a managing agent?

Often the appointment of a Managing Agent three months prior to the forecast completion is appropriate. It is often beneficial to appoint the same company you bought the apartment from to handle management of it, provided they have an ongoing relationship with both the developer and project manager. This often gives you the “inside running” prior to any proposed settlement – speak to your property manager for more details.

Source: Leonard Teplin

Melbourne – a city of variable markets

At the outset of this Melbourne update, it’s important to understand that it’s a city of market quadrants – and they’re each performing differently at present.

There continues to be a lot of talk about new apartment oversupply in the inner-city of Melbourne, which is the first quadrant, but that talk is true.

Some developers can’t find the buyers to settle their contracts – it appears they’ve simply disappeared.

Developer lenders are also very anxious due to falling prices because there’s just too much supply coming to completion.

However, the second quadrant, which are detached dwellings close to the city, are performing very strongly.

We forecast some 12 to 18 months ago that section of the market, once you cross the river out of the CBD, will be buoyant and it will continue to do so this year.

A “regional” question

The third quadrant is the affordability corridor, which is down into the Geelong and Malvern regions, where buyers are getting big bang for their bucks.

Many people have realised that transport infrastructure from these areas into the Melbourne CBD is great as well as the local economies are generally self-sufficient.

There is extraordinary value in these places so people are willing to travel.

What’s interesting about Melbourne is that many people almost classify “regional” as being one hour’s travel distance from the CBD, whereas that’s not the case in Sydney and Brisbane.

The fourth quadrant for us is that “sweet spot” of older units in and amongst suburbs like Sunshine, Sunshine West and Albion, where the population generally stays for the long-term.

We’ve achieved some phenomenal results in these locations with attached dwellings in the low $200,000 price range.

Cash flow is king

Everyone has their own interpretation of what good cash flow is, but at RPG we believe a six per cent is the minimum benchmark in today’s environment.

A lot of people think 4.5 or 5 per cent is spectacular but we’re actually easily achieving yields of six per cent in these affordable pockets.

Another benefit of these types of units is they have lower costs to operate, including more affordable body corporate fees than other capital cities.

As we head into this year, I think that first quadrant of inner-city new units will continue to suffer.

I can potentially see some administrators and liquidators coming into play, as well as mortgagee-in-possessions starting to occur, in that quadrant over the next 18 months to two years as some developers struggle to meet their financial commitments.

Over the next six months, detached dwellings will continue to do well with steady growth, but perhaps not 10 or 15 per cent annual growth like they’ve been used too.

As the year goes on, if we get an increase in the price of money via higher interest rates, there will be a negative impact on consumer confidence and then investors will start to seek out cash flow.

So, wherever you can achieve good cash flow, such as six per cent and above in the fourth quadrant that I previously mentioned, those properties will start to climb in value because of that increasing demand from buyers.

Even if we do get interest rate rises, investors need to remember that rates will still be historically low.

A higher rate environment, however, is likely to remove a lot of the speculation out of the market, which will be a good thing.

Investment picks

Investors need to understand the fundamental differences between investor and owner-occupier unit stock in Melbourne, which is more obvious there than anywhere else.

Of course, one of the keys to capital growth is property that appeals to owner-occupiers so investors should always look for these types of properties.

My investment picks for this year in Melbourne would include older dwellings within one hour of the CBD that give good cash flow.

If you’re seeking capital growth over yields, then detached dwellings in the same locations could also be a wise investment selection.

Source: Steve Waters

Young Aussies fear being locked out of property market forever

The rampant rises in property prices are taking an emotional toll on Australians, especially the younger generations who worry they will be permanently locked out of the housing market.

A survey by ME Bank asked 1,000 hopeful house hunters how the rampant rises in property prices makes them feel.

Of those surveyed, just over half (55 per cent) said they are worried they will be permanently locked out of the property market. The figure rises to two – thirds (68 per cent) for those in generation X.

But Ben Peters, who lives with his family in north-east Melbourne, hasn’t given up hope on his property dreams.

“I’ve worked hard for the past 10 years, including during my physiotherapy degree at uni, to save up a house deposit,” Peters told SCHWARTZWILLIAMS.

“Once I had a decent deposit I started looking for my home. I’ve actively been looking for the past four months and have bid on four properties but have yet to buy anything,” he said.

Peters said he consistently sees properties being quoted well below the final sale price.

“Before I’ve gone into auctions the estimated sales prices are generally within my budget, which does give me hope that I’ll have a chance, but when the bidding goes beyond that because of strong demand it can be disheartening,” he said.

But having some experience of the auction process under his belt, Peters now trusts his own judgment when he goes to an auction.

“I’m finding it’s important to take a realistic approach when it comes to auctions now, because as I’ve experienced, prices tend to go well above my budget,” he said.

Peters remains living with his parents while he pursues his property dream, a decision that has had a big impact on his lifestyle.

“While I’d love to have my friends over for dinner or drinks at any given time, living at home means this isn’t as easy. Not being able to buy a property has limited my independence.”

Peters said he is fortunate to be able to live at home, as it allows him to keep saving. He doesn’t have to rent, which would eat into his savings.

But he admitted that “no one wants to live at home with their parents forever.”

Peters said he is “anxious” to get into the market “sooner rather than later”, but said “it’s hard to decipher what my chances are”.

“I’m just hoping I can get in soon, before prices grow more quickly than I can save,” he said.

“I’ve been working hard and saving for about ten years, so even though I’ve had a few setbacks, I’m determined to achieve this dream.”

The ME Bank survey also showed that just under half of the respondents (46 per cent) said they feel inadequate because they don’t own a home. And a similar percentage (43 per cent) said they can’t imagine feeling “fulfilled” in the future if they don’t own a home.

One-third (38 per cent) feel “envious or jealous” when others reach the property ladder before them; that figure rise to half for Gen Y.

The ME Bank survey was conducted in with the help of psychologist Elizabeth Neal, who said negative emotions stemming from non-home ownership are understandable.

“Property is such a hot topic in Australia with constant reminders everywhere you turn, so it’s unsurprising many feel somewhat cynical and experience low self-worth as a result,” she said.

But Neal said that rather than wasting energy trying to keep up with others, “focus on the one thing you can control: your own financial wellbeing.”

ME head of home loans, Patrick Nolan, said, “For those still striving to get their foot on the ladder, it’s important to stay positive and to consider alternative strategies, like buying an investment property, a unit instead of a house, joining forces with friends or family, or looking to neighbouring suburbs where properties may be cheaper.”

Nolan said owning a home isn’t the only way to build wealth.

He said contributing more to superannuation, or using the monthly savings they might have been paid to a mortgage for another type of investment, would be good examples.

“Australians have become fixated by property,” but added that “for many people, not owning a home just opens another door.”

ME Bank is owned by industry super funds. The online survey was conducted nation-wide and was targeted at non-property owners.

Source: SCHWARTZWILLIAMS

5 Maintenance Tips for your Autumn Lawn and Gardens

It’s the end of summer. As the leaves change color and the grass grows slower, you can feel nature preparing for the long winter ahead.

Autumn is a time of preparation. Each plant and each blade of grass on your property is storing nutrients and energy so it can survive the winter and blossom in all its majesty come spring. Why not help our green and growing friends along this fall with these helpful outdoor maintenance tips?

Mulch

Mulching every autumn is important for your plants. Mulching helps retain soil moisture and prevent erosion while improving overall soil quality. If you want to make your own mulch, fall is the best time to do it. Rake up your fallen leaves before they get wet and sticky and chop them up into smaller bits. You’ll need about three inches deep of mulch to sprinkle around your shrubs and flower beds.

Mow Your Lawn

You’ll need to continually mow your lawn, even in autumn, to keep it vibrant and healthy. The recommended autumn height for lawns is three inches. This height helps lock moisture inside every blade of grass. Leave a third of your clippings on the lawn to act as a natural, organic fertilizer.

Fertilize Your Lawn

Don’t forget to feed your grass and other plants every autumn because this is in fact the most important yearly feeding they will get for a couple of reasons.

First of all, your lawn needs to recover from any damage it may have sustained from the summer sun. Secondly, it needs to prepare for the winter by storing up nutrients, just like a bear going into hibernation. Feeding your lawn in Autumn will take care of both.

Weed Control

Because plants – and that includes weeds – are busy absorbing energy and nutrients in the fall, apply an organic weed killer that the weeds will also absorb and you’ll guarantee they won’t return next spring.

You have many natural weed killers on the market to choose from or you can make one yourself. If you buy an organic weed killer, the main ingredients to look for are citrus or corn gluten. Because these types of weed killers cost a bit more than traditional chemical herbicides, you may want to make your own natural weed killer.

To mix your own organic weed killer, dilute vinegar in water if your lawn is sensitive; but for tougher, sturdier lawns, you can use the vinegar by itself. Apply the solution directly to the weeds. You may have to use more than one application to completely kill the weeds.

Perennials

Be sure you are planting native, Australian perennials that provide shelter and food sources for native wildlife, such as bees and birds. In the autumn, leave these perennials alone and wait until spring to cut them back and promote new growth. This technique will help the critters who help our lawns, our gardens, and the world’s food supply to flourish.

It’s important to remember that although things seem to slow down in autumn, our lawns and gardens are as busy as ever and they need your continued, loving care to stay healthy and vibrant.

Source: Jim @ ACT

Interest rates are on the way up. But it’s not all bad news.

INTEREST rates are on the way up. But it’s not all bad news.

Higher interest rates do mean higher mortgage repayments, but before you start worrying you’ve missed out on a cheaper home loan, there is a silver lining. Higher interest rates mean less competition and lower house prices.

Why? Low interest rates encourage people to go out and spend money because they aren’t getting much interest from keeping it in the bank. This makes buying an asset, such as a home, more attractive. Homebuyers can pay less for a mortgage on a house that is going to give them a better return than a term deposit or savings account.

But with more people buying houses, this means more competition and higher prices. And in an environment of historically low interest rates, this translates to even crazier house price growth.

Over the growth cycle to date, house prices have risen by 75 per cent in Sydney and 54 per cent in Melbourne, according to CoreLogic data. Across the capital cities combined, prices have jumped 47 per cent.

“The counter argument in this case would be that for the hot markets — Sydney and Melbourne — raising rates should help cool them down and make them a more stable and a less risky market,” AMP chief economist Shane Oliver told news.com.au.

“That’s the benefit [of rate hikes].”


INVESTORS BE GONE

When interest rates increase, overall demand for property drops, which results in falling prices. However, there is one group of property punters that are traditionally more sensitive to the relationship between interest rate movements and property prices — investors.

“Investor demand will start to cool down and it is psychological,” Mr Oliver told news.com.au.

“One big driver of investor demand is that home prices in Sydney and Melbourne have been rising 10-15 per cent per year over the last five years, so investors naturally think prices will continue to go up 10-15 per cent per year.

“But if they read the headlines about interest rates rising, an increase in concern that rising rates will dampen price gains in the property market will also dampen their own expectations of capital growth. Investors might be a bit more cautious rushing into the property market.”

Suddenly, investing in property doesn’t seem so urgent anymore. And this becomes a self-perpetuating cycle that puts even more downward pressure on house prices, Martin North, banking analyst and principal of Digital Finance Analytics explains.

“Demand from property investors will ease because price growth won’t rise as quickly,” Mr North told news.com.au.

“Investors will review their position in regards to property investment and reconsider their overall strategy in regards to wealth creation. That is the phenomenon and it is self-perpetuating — as investors walk, and try and sell their investments, that puts downward pressure on prices. And as prices fall, more investors will try to exit the market.”

Higher interest rates may actually bring some relief to first homebuyers.Source:AAP

This is significant because investors, which in the same way are more sensitive to interest rate cuts, have been fuelling much of the competition in the housing market.

In January 2017 — the latest housing finance figures released by the Australian Bureau of Statistics — investors accounted for 41 per cent of total mortgage commitments. Ten years prior in January 2007, investors accounted for 30 per cent.

To a lesser extent, investors can also be more sensitive financially to movements in the interest rate, making rate hikes even more of a disincentive to invest in real estate.

According to an analysis by Digital Finance Analytics, based on extensive surveys of 26,000 Australian households, 38 per cent of investor households are at risk of mortgage difficulty with a rate hike of 1 per cent, compared to 28 per cent of owner-occupier households.

“If rates went up, investors would be able to offset those interest costs because of negative gearing, so they shouldn’t be that badly impacted but what it might do is tip the balance,” Mr North said.

“A lot of investors are relying on the rental streams from their properties to pay the mortgage but about half of them aren’t receiving enough in the rental stream to cover the cost of their mortgage, even at these low rates. So they have to find the difference from their other sources of income.

“This means as interest rates rise, the gap between the rental stream and the interest rate costs rise, and they will have to find a way to cover that out of their own pockets.”


FIRST HOME BUYER RELIEF

All of this translates to good news for first homebuyers. Especially because it isn’t the cost of servicing a mortgage that is locking many first home hopefuls out, but the sky high deposits from unrelenting house prices.

“I don’t think first homebuyers should worry about the rate hikes because they are very modest,” Mr North said.

Mr Oliver said that rate hikes would impact investors mostly and calm the market, leaving more room for first home buyers.

“It could turn out well for first homebuyers. We did see an element of this two years ago when APRA [the Australian Prudential Regulation Authority] tightened the screws on lending to investors. But it was a brief widow,” he said.

Mr North agrees. However, he said first home buyers should still bide their time.

“If I were a first home buyer I would be sitting on my hands and I would not be buying at this stage because we are at the peak of the cycle,” he told news.com.au.

“I do believe prices will begin to correct themselves but it is a question of how quick and how fast. My own view is, first home buyers shouldn’t panic but they should stay on the sidelines a bit longer because you’ll be seeing some relief down the track.”