City rents could drop for years before bouncing back

City rents could drop for years before bouncing back

Renters living in the nation’s largest capitals are likely to pay less rent in the coming years, according to a government agency, as thousands of units in the city centres are expected to sit empty gathering dust.

The conditions are likely to free up funds for renters and help them move towards city centres, but the shortfall is expected to squeeze investors -- particularly those heavily in debt.

When supply outweighs demand

A population shortfall and throttled overseas visitors could lead to apartments outnumbering renters in Sydney and Melbourne, the National Housing Finance and Investment Corporation (NHFIC) said, in its first major report forecasting the next five years in housing.

“Housing demand is projected to fall over this year and next due to the dramatic impact of COVID-19 on net overseas migration,” Nathan Dal Bon said, chief executive of NHFIC.

“This in turn is projected to result in new housing supply temporarily exceeding new demand.”

But the relief of renters and strain of investors are also forecast to be short lived, provided pandemic health restrictions can be eased and health restrictions are dropped.

By 2023 to 2025, NHFIC estimates there will be more people vying for fewer rental homes.

“Any cumulative excess supply could be negligible if effective vaccines are available earlier and international borders reopen sooner than expected,” Mr Dal Bon said.

A million less people not needing a new roof

About a million fewer people than previously forecast due are expected to be living in Australia within the next five years, NHFIC said, in large part to the COVID-19 pandemic.

This is expected to lead to 286,000 fewer people needing a property between 2020 and 2025, when compared to the forecasts developed before the pandemic.

“With new supply expected to exceed new demand over the near term, it is likely to put downward pressure on rents in Sydney and Melbourne where vacancy rates are higher,” the NHFIC report said.

“This could improve overall rental affordability, although the real impact will differ across geographies and household income distributions.”

Apartments in city centres will likely be impacted the most, which tend to be favoured by international students and overseas migrants.

Then by 2023, on the back of a strengthening economy and the anticipated opening up of international borders, rents are expected to rise, as the number of people looking to sign a lease outweighs the number of homes listed on the market.

But by then, due to the pandemic and the circumstances surrounding it, fewer homes will be in the development pipeline, leading to demand outpacing supply.

NHFIC expects about 148,000 houses, townhouses and units will be developed and put onto the rental market by 2025.

There’s a key variable that could influence the accuracy of these forecasts, NHFIC said. And that’s if a vaccine is developed and implemented earlier than expected, leading to the reopening of international borders sooner.

The state of the market today

Sydney and Melbourne are already experiencing falling rents and elevated vacancy rates, although most other capital cities remain stable.

Rents fell across the two city capitals for houses and apartments over the year to December, according to SQM Research, pushing the national average down.

The only other city to experience falling rents was Hobart -- but just for units.

Renting a unit in Sydney cost 9.6 per cent less than it did a year earlier, the research firm said, with the average apartment costing $447 in the week ending 12 December. House rents were down 6.7 per cent to $638.

A similar story is unfolding in Melbourne, where units fell 6.7 per cent to $383, and houses dropped 4.1 per cent to $512.

SQM Research Weekly Rents Index

Week-ending: 12 Dec 2020 Rent

Chg on

prev week

Rolling month

% chg

12 month

% chg

Sydney All Houses 638.4

0.6

0.90%

-6.70%

All Units 446.5

-0.5

-0.60%

-9.60%

Melbourne All Houses 512.5

0.5

-0.10%

-4.10%

All Units 382.6

-1.6

-1.40%

-6.70%

Brisbane All Houses 469.7

2.3

0.50%

0.20%

All Units 378.9

2.1

0.40%

0.10%

Perth All Houses 485.2

-0.2

1.30%

10.50%

All Units 365.5

0.5

0.90%

9.50%

Adelaide All Houses 421.8

1.2

0.70%

4.90%

All Units 314.8

0.2

1.90%

0.30%

Canberra All Houses 655.8

8.2

3.50%

1.10%

All Units 473.9

-2.9

-1.20%

2.40%

Darwin All Houses 585.4

5.6

6.70%

21.20%

All Units 395.2

4.8

4.30%

3.80%

Hobart All Houses 461.1

4.9

6.40%

1.70%

All Units 401

-2

3.30%

-5.10%

National All Houses 483

-1

-0.40%

7.80%

All Units 381

-1

0.00%

4.70%

Cap City Average All Houses 540

0

0.40%

-1.80%

All Units 408

0

-0.20%

-6.00%

The falling property prices correlate to the rise in properties sitting vacant across the city centres.

The national vacancy rate sits at 2.1 per cent as of November, SQM Research said.

But about 9.1 per cent of properties are vacant in Melbourne’s CBD, while 9.5 per cent gather dust in Sydney’s CBD.

"Rents for units in our two largest cities are still falling, though … there appears to be a commencement of a reversal in the abundance of listings in the CBD’s of these two cities,” Louis Christopher said, managing director of SQM research.

“They are still very elevated, but we could be starting to see some of the population moving back to the CBD and inner city locations.”

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What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

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.

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration.