By Steve Waters
If you believed everything you read in the media lately, you’d think that the property market is about to bust but it’s just scaremongering – plain and simple.
There are still buyers out there, but some have been halted by the huge number of negative headlines.
This negativity may be partly due to the constraints that have been placed on lenders by APRA when it comes to investor lending as well as interest-only loans.
There’s no doubt that the balance sheets of banks are off-kilter but this is not a sudden occurrence – it’s been building for at least two years now.
In fact, we’ve been saying that the market had to change for a long while, because as investors we don’t want to see big peaks and troughs.
We want stability in the market, which will give us some assurance around future growth and budgets.
At the moment, the RBA can’t lift rates so the heavy lifting is being forced on banks, who are increasing investor and interest-only interest rates – for all borrowers.
I’m not sure how that is supposed to improve their investor loan ratios? It does seem like all it will improve is their profitability at the expense of investor borrowers.
Even though rates are increasing for some loan products, there is no need to be fearful about the current environment.
Instead, some investors may have to put their plans on hold due to serviceability issues, but there is actually a significant investment upside to the current market conditions.
You see, a softer market and tighter lending conditions will remove the hype as well as all of those unsophisticated investors from the market – and that is a good thing.
That gives us, as professional investors, more choice and more leverage.
It’s important to understand, now more than ever, that your numbers are imperative. What I mean by that is the property’s performance, your portfolio’s balance sheet, as well your own liquidity.
Sophisticated investors can exploit any weakness in the market but they must have the liquidity to do so, which means financial buffers as well as easy access to equity.
Naturally, lending is always the key to successful investment.
If you don’t get it right from the outset, you could be lulled into a false sense of financial security.
As we’ve talked about before, many borrowers will be faced with their loans switching from interest-only to principal and interest (P&I) repayments in the months ahead.
So you must be prepared for that to happen or work out strategies to reinstate your interest-only loans, such as through refinancing.
Some lenders are reportedly offering “attractive” P&I deals to their clients at the moment so they can reduce their interest-only ratios, but those deals are usually limited and we don’t know what the repayments will be in a year or two.
The reality is there is no reason to be fearful of the current interest rate environment because only two years ago we were celebrating the fact that rates were below five per cent.
Let’s be real about it. Even if you’re paying five per cent, that’s still a wonderful interest rate that you can use to your advantage to grow your portfolio.
If rates increasing by half a percentage point have put you in some sort of financial distress, well, you’ve probably over-extended to start off with.
Unfortunately, some unsophisticated investors are already struggling with rising rates, but that’s actually an opportunity for educated investors – again, as long as the numbers and fundamentals stack up.
The market is fine
Contrary to the constant negative headlines in the media, the market isn’t busting.
We all know that fear creates a sensational headline, but it’s not reflective of the current market conditions.
If you’ve bought in an area that has great investment fundamentals then life goes on.
The bottom line is be real about the market and don’t panic. It’s actually an exciting time if you ask me.
One of the keys to investment success is to buy counter-cyclically, which is when the market is softer.
From a professional investor’s point of view, I actually welcome the momentary turmoil that is being championed by the media, because there are still some great deals out there as well as fewer buyers!
Everyone still needs accommodation and the banks still need to lend money to make money.
You just need to make sure you have a sound investment strategy, are buying the right property with the right numbers, and are forecasting your cash flow accurately.
There is nothing to fear but plenty to gain.
By Steve Waters