Category: Articles

Investors are continuing their momentum-gathering return to the property market, outpacing the growth of owner-occupiers and first home buyers.

Over the last year, property investors have ignored higher interest rates, with the annual growth in the value of investor home loans rising 30 per cent in June from a year earlier.

Australian Bureau of Statistics (ABS) data released Friday (2 August) revealed that the value of new owner-occupier loans grew by 0.5 per cent to $18.2 billion in June, while the value of new investor loans jumped a hefty 2.7 to $11.0 billion during the month.

Over the year, the value of new investor loans surged 30.2 per cent, more than double that of owner-occupier loan values, which rose 13.2 per cent, The value of loans to first home buyers rose just 3.4 per cent from a year earlier.

Simon Arraj, founder and director of private credit investment manager Vado Private, said first home buyers were being priced out of the market but investors chasing capital growth were largely undeterred.

“Notwithstanding this, house prices could consolidate from their record levels, as the Australian economy slows and higher rates feed through the economy.”

Interest Rates No Barrier

Over the last 12 months, the national average has risen by $56,357, an increase of $154 a day, despite the fact the cash rate is at its highest level since November 2011.

The average new owner-occupier mortgage in Australia is now $636,597 – a new record high that is set to keep on rising alongside property prices in key states.

New South Wales is leading the nation in terms of loan sizes. Over the past 12 months, NSW continued to have the highest average loan sizes for both owner-occupiers and investors. In June, it rose to $780,000 for owner-occupiers and $818,000 for investors, compared to $636,600 across Australia, $604,300 in Victoria, Queensland’s $599,300, $545,800 in SA, $566,700 in WA and $467,500 in Tasmania.

RateCity.com.au’s Research Director, Sally Tindall, said the average new owner-occupier loan size has just hit another record high, as property prices in key capital cities continue to soar.

“Across the country, the average new owner-occupier mortgage has risen by $154 a day over the last 12 months, and on a 30-year mortgage you can basically double that figure when adding in interest costs,” she said.

“In Western Australia, the average new mortgage for an owner-occupier is now almost $100,000 more than it was just 12 months ago – rising by a gobsmacking $257 a day.

“It’s incredible to think this has unfolded under the weight of a rising cash rate.

“While there is seemingly no shortage of buyers prepared to up their bids at heated auctions in key capital cities, many would-be first home buyers have their hands tied by the double whammy of rising rates and property prices.”

The number of owner-occupier first home buyer mortgages, meanwhile, is stuck in neutral, clocking in at just 9,947 in the month of June.

“This figure has managed to lift above the 10,000 mark just once since the start of the rate hikes – a far cry from the most recent peak in first home buyer numbers recorded back in January 2021 when over 17,000 first home buyer mortgages were written for owner-occupiers,” Ms Tindall said.

The proportion of new and refinanced loans opting for a fixed rate clocked in at 2.6 per cent in the month of June. While this is just a fraction of what it was at the peak in July 2021, when 46 per cent of new and refinanced loans chose to go with a fixed rate, it is the highest level of fixing since September of last year.

Reflecting Australians’ love affair with property, recent data from the ABS reveals that household net wealth was a record $16.2 trillion in the March 2024 quarter, boosted by a record level of property assets of $11.0 trillion. As a proportion of household wealth, residential property comprises 67.9 per cent, up from 61.7 per cent in December 2020.

The key driver of household wealth gains in recent years has been rising property prices.

Housing Industry Association Economist, Maurice Tapang, the number of loans issued for the purchase and construction of a new home has been steadily increasing since the start of 2024, from a very low base.

“Market confidence appears to be stabilising following nine months without a change in interest rates.”

The number of loans issued for the purchase or construction of a new home increased by 9.2 per cent in the June quarter 2024 compared to the previous quarter.

“This quarterly increase was broad-based, with all states recording more loans issued for new homes in the June quarter 2024 than in the March quarter.

“This increase in lending is partially driven by a return of first home buyers to the market.

“The number of loans issued to first-home buyers in the June quarter 2024 was 5.8 per cent higher compared to the March quarter, which suggests building activity is at, or near, the trough in this cycle.”

Recently the Bank of Mum and Dad was ranked the biggest player in the Australian property market.

According to Housing Monitor Research, 40 per cent of parents in 2024 aided their first home buyer kids with housing contributions.

The reality is that parental support has been around for a long time, but it’s changed recently.

From pre-nuptial agreements to gifted deposits, the landscape is changing. Legal considerations are also a point of contention for some beneficiaries. Navigating the property ladder with parental support isn’t what it used to be.

I interact with the fortunate offspring and doting parents on a regular basis. I’m often asked, “How can I help my kids get into the property market?” I have witnessed all types of assistance, and some work better than others.

Let’s start with the parents who wish to gift their children a home.

It starts from an early age; in fact, some parents dream about what they’ll gift their children before they’re even born, and plenty of parents start mapping out their property investment journey when the children are pre-schoolers.

But for most parents who consider what their post-school children’s housing needs could be, their generosity usually kicks in during the high school years.

Things get exciting when the children actually want to pursue home ownership. Kids can ask their parents in all kinds of ways to assist, and parents aren’t always in a financial position to help.

Various Ways Parents Help Children Into Home Ownership

Assistance can range from outright gifting of a home to gifting of a deposit. Some assist with a contribution towards a deposit, while others may come up with a tailored loan arrangement.

And then there is the guarantor option.

Lenders cater well to the parental third party guarantor arrangement, whereby parents with available equity in their property lend a helping hand by releasing that equity to their child(ren).

The way that this technically operates has a lot of nervous parents flummoxed, and for good reason. Parents who have scrimped and saved to secure their home will be particularly nervous about risking that asset.

It’s more than just a financial product; it’s their security and the very roof over their head.

The thought of a loan arrangement going bad sends a shiver up their spine and has them fearing a mortgagee sale and homelessness.

The interesting thing about parental equity guarantees and associated risk is all about the percentage of the loan that is at risk to the parent, and the fear that such an arrangement can embed within a nervous parent’s psyche.

Guarantor Is No Gift

The guarantor arrangement is not well understood by parents and children.

Marketers pitch this to recipients as a no deposit option.

Parents get the request over a BBQ lunch, or an awkward coffee and they are often torn between aiding their kids on this all-important voyage and protecting their most valuable asset.

They fear several things; from reckless property decisions to bad partner selection, (and everything in between).

After all, these are the parents who have witnessed bad teenage behaviours and terrible financial mistakes in the previous decade. It’s little wonder many of them feel their blood run cold when their children ask them to consider going into a binding legal and financial arrangement for a property purchase.

But what does it really mean? These days, ‘Family Pledge Loans’ or ‘Parental Loan Guarantees’ are highly detailed, legally regulated and particularly effective for those parents and children who can take up the opportunity.

For parents, the deal can be sweet because they aren’t ‘gifting’ funds to their child(ren), but they are enabling them to take use of the equity they have built up in their home. Equity is best described as “the value of mortgaged property after deduction of charges against it”, or in other words, the amount that remains when the debt is subtracted.

Banks will generally allow an eligible borrower to access up to eighty per cent of the value of their home, and in many cases, parents have this amount available due to the combination of debt repayments and capital growth.

The part many assume wrongly is that their entire equity position is at risk when supporting a child.

In fact, lenders broadly rely on up to 25 per cent of a parent’s home for this equity. It represents the deposit and the stamp duty for the purchase of a home. In many cases, children have already amassed savings to cover a portion of the deposit obligation, so sometimes the parent’s equity obligation is even lower. The equity loan is just that, a loan. Children can access it, but they must pay for it.

Furthermore, most lenders require a lawyer to oversee and explain the documentation to the parent before they embark on the loan arrangement.

Mortgage Arrears And Risk

Importantly, the lender is clear about the risks that the guarantor takes on in the event of mortgage default (i.e. mortgagee not making their loan repayments).

The parental loan component is restricted to the percentage that they offer up in equity, being a limited amount, and not the full debt obligation. The security property (i.e. their children’s property) would be sold first in the event of mortgage default, not their property. As alarming as this sounds, Australian mortgage arrears are currently sitting below 1 per cent.

The young recipients are usually determined to pay down the debt and release their parent’s property at their earliest convenience. It is usually evident that they truly treat the parents’ contribution as a privilege rather than an expectation, and most are vitally aware of their parent’s sense of concern.

Thanks to rising house prices, many are able to release their parent’s security in a matter of two or three years as rising asset prices carry the loan to value ratio (LVR) above the required 80 per cent very quickly.

The parents who assist in non-direct financial ways are often those who spot the government incentive opportunities; and there are plenty of these in our various states/territories and national offerings.

Parental Guidance Recommended

Then there are the parents who help with the strategy, the inspections and the self-education. Sometimes these are the greatest gifts that parents can impart, because they teach their children how to ‘fish’.

From pocket money incentives for their young ones to moral support as their twenty-somethings embark on their home ownership adventure, they are the parents who are by their side, offering as much advice as they can muster.

But who gets it right? And can we adversely impact our best intentions with kindness?

Every child is different. Some need to run their own race and valiantly claim home ownership as their own. Others benefit greatly from a financial helping hand, particularly when we consider the negative impact of wasting time waiting for the right time to buy.

There are chose children who cherish the opportunity to have a deposit secured from parental equity, and I can relate to the prospective buyers who have mum and/or dad by their side, helping with the inspection checklist or backing them on auction day.

What we can’t underestimate is the power of self-achievement. Sometimes just cheering from the sidelines is the best gift we can give.

Recognising what our kids can achieve themselves, versus what is incomprehensible or unachievable for them is important. We can’t rob them of their own achievement, and nor should we. But if we can make that incredible difference at a time that is critical in life, why wouldn’t we?

You’ve probably heard this before: if you want to beat the market’s growth rate, stick to A-grade properties as they always perform best.

Is this true? And what is A-grade anyway and how can you tell if the property you’re looking at is A-grade, B-grade or C-grade?

What Is A-Grade Real Estate?

Thirty years ago, the terms A, B or C grade were just catching on and it’s taken up to now for buyers to start asking agents about them.

A-grade property and investment-grade are different but related concepts – but we’ll come back to this.

Generally speaking, agents refer to A-grade properties as those having high emotional appeal because they are in a great location and don’t have any compromises.

B-grade properties are seen as an otherwise A-grade, with one significant compromise or a few small compromises.

But a C-grade property has multiple significant compromises affecting its appeal.

What Do We Mean By Compromises?

Compromises can be an ambiguous term but the way I think of it is something that will put off relevant buyer types for this property.

Some of the more obvious compromises are location, build quality, position and floor plan.

Location seems pretty obvious but it’s also a term with different meanings.

Let’s think about some often-mentioned great areas for property over the last decade, like Kedron in Brisbane, Brunswick East in Melbourne or Annandale in Sydney.

These are great inner suburban locations, but a property on a busy road or has neighbouring light industry fails the A-grade test. Similarly, investors need to consider how the property is positioned: is it far enough away from traffic noise and other uses which would interfere with quiet, amenable living?

But positioning goes beyond this and includes how a property is positioned on the street and how the building is located on its block.

If a house sits on top of a rise in the street that improves its view, that is certainly a positive. But if its position on the block leaves it too close to a neighbouring property, that can affect its outlook and privacy.

As an investor, you’re aiming to buy a property that doesn’t have anything to detract from the quality of life offered or saps buyer appeal on auction day.

The Property Itself

Moving past location and position, there are other compromises to look out for.

Inferior build quality is a serious factor that should count investors out of the bidding and give home buyers serious pause due to the expense of rectifying such issues.

A floor plan that doesn’t deliver open plan living is another but assessing layouts requires a little more thought. For example, small bedrooms in suburban or regional houses are a definite no-no but may be okay in inner suburban apartments.

The same applies to aspect. You always want a property to deliver a pleasant outlook and plenty of natural light inside but the necessity of this for a family home in a prestige suburb than a townhouse within walking distance of the CBD when it comes to assessing value.

Working Out If A Property Is A-Grade

Given the way the pricing for Australian real estate works, strong demand for not enough properties sees most of the value uplift accumulate in the land price.

That means A-grade properties are characterised by a property with a high land value as a proportion of the overall price.

For A-grade houses in major metro markets, that typically equates to land value of around 65 to 75 per cent of its overall price. That can be difficult to assess as land values and building costs shift and swing, so investors should seek expert advice.

Similarly, for A-grade units in the suburbs of major cities, the notional land value should make up around 45 to 60 per cent of the property’s price.

With B-grade properties, the test is whether you can economically fix a glaring compromise and turn your purchase into an A-grade property.

For C-grade properties, its compromises can’t be fixed. No matter what an owner does, they can’t change the volume of traffic going past the door or the train line over the road.

A similar impact is true for newly built units and house and land packages.

Because these developments need to provide a sufficient return for the builder and have been designed to maximise tax breaks, it can take up to a decade for the land value equation to add up; and that will only be in the best opportunities.

How Different Properties Move Through The Cycle

In classic theory, real estate prices move through what’s called the property cycle.

In this model, values fall, then dawdle for a period before accelerating, moving into a boom before being checked as too many buyers find themselves priced out.

The classic property cycle looks like this model below, although Australians should note, we haven’t seen a genuine property recession since the early 1990s, resulting in our S-shaped graph mostly moving upwards.

A-grade properties tend to do the best across the rest of the cycle, followed by B-grade.

Tend to do best, but not always. Even outstanding A-grade properties can get caught out in a downward or stagnant part of the cycle.

This is where the difference between A-grade and investment-grade comes to the fore. Because investment-grade assets are being sought by several types of homebuyers and investors, their prices are more immune to downturns and are the first to rise during a recovery.

Some A-grade properties – think expensive family homes, properties in coastal resorts and prestige apartments – need a buoyant market to return before their performance starts beating the market, due to their limited pool of buyers.

So, if you’re out hunting for an investment, limit your search to A or B-grade properties – then be ruthless in eliminating those that don’t make the investment-grade mark.

If you bought property anywhere in Australia other than Perth, then your home is not among the 10 fastest rising markets in the country.

All 10 suburbs where prices have risen the fastest in 2024 are in the West Australian capital, and one affordable part of the city has dominated within that list.

The working class City of Kwinana stands atop the national podium, with its suburbs of Medina, Parmelia and Orelia the three fastest growing property markets in the nation and Calista coming in sixth overall.

All of the suburbs in the PropTrack top 10 were relatively affordable places to buy.

South Australia came closest to competing with Perth for price growth in 2024 to date, with top ranked Elizabeth Park having house price growth of 17.1 per cent, still 6 per cent below Perth’s tenth placed Coolbellup.

With the exception of SA’s sixth placed West Lakes’ median house price of $1,074,000, eight of the other nine had even more affordable values than Perth’s top 10, being under $550,000.

Highlighting Melbourne’s stable but subdued property market throughout 2024, the top ten suburbs delivered capital growth between 6.7 per cent (Rutherglen) and 3.6 per cent (Kyabram).

CoreLogic’s daily home value index has seen a marked easing in the rolling four week change, with national values rising just 0.5 per cent over the four weeks to 18 July, down from a 0.7 per cent rise seen the same time last month.

The recent slowdown is notably stronger across more expensive markets and property types with house values and values in Sydney recording the most noticeable easing.

Melbourne and Hobart are the only capitals recording falling values, with high stock levels placing downside pressure on values.

Perth continues to lead the pack, with a rolling 28-day increase of 1.8 per cent, followed by Adelaide (1.7 per cent) and Brisbane (1.0 per cent). The trend for softer growth is less apparent in these cities.

Perth is the property story of 2024

But the real story of capital growth in Australia at the moment belongs to one boom city.

The median Perth house sale price set a new record month after month over the financial year, and is now $665,000 for the year to June 2024. This is 18.8 per cent higher than at the end of the 2022-23 financial year.

The median unit sale price increased 11.3 per cent year-on-year to reach $445,000, according to REIWA, just $5,000 below the previous record of $450,000 in 2014.

REIWA CEO Cath Hart said she expects this record to be broken in the next few months.

Viveash, which recorded the highest price growth for houses, had its median house sale price increase 40.9 per cent over 2023-24 to $620,000, highlighting the rush to mid and lower priced property.

Top 10 Suburbs for median price growth (houses)

“Affordability remains a focus for buyers and this is reflected in the makeup of the financial year’s top 10 suburbs for house price growth,” Ms Hart said.

“The majority have a median sale price below Perth’s median and only two have a median house sale price over $1million.

“It indicates strong demand for suburbs in more affordable price brackets.

“Demand is also reflected in their selling times, with the more affordable suburbs on the list having a median time on market that is nearly half that of the suburbs with a median over $1 million.”

In the unit market, Cottesloe was the top performer, with its median sale price rising 50.9 per cent to $1,200,000. Bayswater recorded growth of more than 40 per cent.

Like the top 10 list for house price growth, seven of the suburbs in the top 10 for units have a median sale price under Perth’s median unit price.

Top 10 suburbs for median price growth (units)

“While the unit market was slower to respond to market conditions over most of 2023, in 2024 we have seen demand and price growth accelerate,” Ms Hart said.

“The overall demand for property, and particularly the strong motivation to exit the challenging rental market, has seen demand for units increase. Units are generally more affordable than houses, which helps people put a foot on the property ladder in a rising market. This is helping drive price growth in the unit market.”

This financial year saw houses sell incredibly quickly, with a new monthly record of a median eight days on market set in October and November.

A renaissance taking place in the Perth CBD is expected to drive further demand for city and surrounds apartments.