CQU property expert reveals home truths on housing affordability

CQU property expert reveals home truths on housing affordability

It’s never been harder for younger Australians to enter the property market, we regularly hear.

That’s why federal, state and local governments need to do something about it, media commentators urge.

A range of potential solutions often get bandied around, some sensible, others fanciful.

So what, if anything, can governments do to put downward pressure on property prices?

This is a question that property economist Garrick Small has spent a lot of time studying.

Dr Small, who is an associate professor at Central Queensland University, says there are two essential points that need to be made up front.

First, property prices are set by the market, not by government agencies. Second, property must be affordable – at least for some Australians – because people keep buying.


Governments can increase supply and reduce demand

That said, Dr Small believes there are some policy measures that governments could implement that would put downward pressure on prices.

Garrick Small

For example, governments could release more land for residential development or change zoning laws to allow for greater population density.

The idea is that an increase in the supply of properties would lead to a fall in demand, and therefore put downward pressure on prices.

Dr Small says another thing governments could do would be to weaken the financial incentives for investors to buy property.

Governments could reduce investor income by introducing rent controls, he says. Or they could increase investor expenses by raising council rates and land taxes.

Doing some or all of these things would cause investment yields to fall, which would probably drive some investors out of the market, he says.

Real estate is a strange market

All of these potential policy measures reflect basic ideas of supply and demand.

However, real estate is a strange market, Dr Small stresses, which means that it does not fully conform to standard free market principles.

Take a typical market – for, say, beer. If the producer’s profit margins are too high, rivals will be tempted to enter the market and sell their own beer, probably for less. If the producer doesn’t respond by lowering its prices, it will maintain its margins but lose market share; if it does lower its prices, it will maintain its market share but erode its margins.

But these dynamics don’t apply in real estate, according to Dr Small, because most of the value of a property comes from the land – and land is unusual, for three reasons.

First, land can’t be manufactured. Second, its value comes not from its elements (grass, rock, mud, etc) but its location (say, inner ring versus outer suburbs). Third, it can’t be replicated – a developer can open up new land elsewhere, but it can’t build new land on someone else’s land.

“That means you don’t have the normal market dynamics that you would have in manufacturing,” he says.


Developers run businesses, not charities

That’s why Dr Small disputes a claim made by some developers – that they would be able to sell properties for less if governments lowered their mandatory contributions.

Dr Small says that while developers would pass on these savings (at least in part), it would be to the home owners they buy their land from rather than the home buyers they sell their land to.

Why would developers pay home owners more? Because if they didn’t, a rival might use their extra cash to swoop in and snap up the land.

By making that higher payment, the developers would be taking the bonus money they’d been gifted by the government and handing it on to the owner – leaving nothing left to pass on to the home buyer.

“The end user never sees the difference in price in terms of the construction costs, because if the construction costs go down, it simply means that the land owner gets a little bit more money,” Dr Small says.


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How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

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What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

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