Melbourne properties in background

Mortgages In Australia Now Cheaper

RBA (Reserve Bank Of Australia) had cut the cash rate for the first time in 3 years earlier this month (4 Jun 2019), bringing it down to a historical low of 1.25%, in a resolute bid to extend a record 28-year run (its last recession in 1991) without going through a recession for the Australian economy. And the cash rate is now widely expected to drop below 1% before the end of the year.  Is this a good time to enter the Australian property market?

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Over the past decade the central bank’s benchmark interest rate has been steadily falling from over 7% to the current 1.25% and analyts are expecting that this might even go below 1% very soon should the trade row between US and China, the two global economic powerhouses, deteriortate further.  The latest cut represents the government’s resolve to stave off ill effects of rising unemployment, low wages, a property market in doldrums and a below-target inflation.

On the bright side, things may have bottomed out a little as global real estate investors sit up, take notice and smell the opportunity to enter the market soon. Some analysts are forecasting that the property market would bottom out before end of the year especially with the feel-good factor from the return to power of the Coalition Government in the May 18 elections.  Already the monthly declines in home prices in the two major cities of Sydney and Melbourne are slowing to within 0.50% drop in May, going by figures released by CoreLogic the leading property research firm in the country.  Indeed on the Australia mortgages front, we have also seen renewed interest from clients in both Hong Kong and Singapore leveraging up to snap up bargain deals especially in cities like Melbourne where prices have corrected more than 10% from its peak in Nov 2017 (figures from CoreLogic). This steep fall in home prices for Melbourne, a favourite purchase destination for Singapore and Hong Kong investors, over the last 2 years is now slightly more than property price correction seen in the last recession of 1991.

A number of factors have helped to contribute to the optimism of a housing market pickup in Australia this year, barring any further ramifications from US-China trade war:

  • The central bank has lifted a cap of 30% on interest-only mortgages for new loans since Jan 2019
  • The new coalition government installed in May has quickly announced a new purchase deposit scheme for first-time homebuyers where locals who qualify would need to just put down 5% deposit instead of the usual 20%
  • APRA (Australian Prudential Regulation Authority), the stat board that supervises the financial industry in Australia, has proposed changes to the serviceability assessment of borrowers. Since 2014 the regulator has required lenders to apply a 7% interest tests on borrower’s repayment ability (akin to Singapore’s TDSR interest rate of 3.50% used when calculating loan limits for residential properties).  Previously this test threshold was set at 7% or a 2% buffer above the actual interest rate, whichever is higher.  The problem is that with cuts in cash rate since 2014, the prevailing interest rate most Aussies are paying are hovering around 3.50%-4.00% for owner-occupied properties and effectively this means 7% would be used across the board for all Australian mortgages be it for own-use or investment. APRA is now proposing scraping the floor of 7% and allowing lenders to set their own buffer for affordability test as long they keep to a mandatory minimum of 2.50% above the actual interest rate charged.  This would likely see Australians gain access to more mortgage loans going forward.

Incidentially, CoreLogic is forecasting a drop in prices of up to 18-20% in this current trough cycle for the two prime cities of Sydney and Melbourne and expect the Australia property market to bottom-out by mid of 2020.  It might happen earlier than expected as the current downturn is triggered not so much by rising mortgage rates or slowing demand, but a credit crunch or clampdown in borrowing.  Prices might recover earlier than expected should there be more credit easing from the new liberal government commited to show results.

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Here in Singapore, following the cut in Australia’s cash rate, we have seen on average a drop of 0.20% on most lenders’ cost of funds (COF) for 3-month AUD .  Some Singapore banks pegged their Australian mortgages (financed in AUD) to this COF wich is internal to the bank but which tracks the cash rate closely from our observation.   Hence, the prevailing interest rate for financing in AUD has now dropped somewhat to 3.60-3.80% which is more or less in keeping with rates from Aussie banks downunder.

Back to the question of investing in Australian property market?  It was reported only this week that one of the world’s largest asset manager BlackRock is shorting the Aussie dollar as it is betting on RBA cutting the cash rate all the way down to 0.50% in order to revive the economy.  Against the backdrop of falling mortgage rates and hence a weakening Aussie dollar, and with property prices in favourite cities like Melbourne and Sydney likely to hit rock bottoms by mid of next year maybe earlier, we certainly believe the case for investing in Australia looks fairly attractive again, as long one has the holding power.

Global real estate investors in Hong Kong, Asia and elsewhere may be pleased to know that they can finance their Australian property purchases from Singapore banks who offer competitive floating rate mortgages close to rates offered downunder, but with an additional choice of currency in AUD or SGD. Investors could then benefit from movements in the currency pair of AUD/SGD and switch financing from one to another depending on the economic cycle.  Financing in AUD with a weakening Aussie dollar means a smaller loan when converted back to SGD terms later and benefit investors who could then pay down using SGD funds when they also start a Premier banking relationship with banksin Singapore.  So, speak to us today to find out more details on Australia property loans.

Since 2014, has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals. That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.

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