Scratching the surface of the latest market trends

This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. We're back again for another episode on the Property Nerds podcast.

My name is Arjun Paliwal, co-host of the Property Nerds podcast, head of research at InvestorKit Buyers Agency, and I'm joined by Leigh Paliwal. Yes, I'm Leigh Paliwal, and I'm the director of Hills Finance. We're a mortgage brokerage based in northwest of Sydney. Well, we've got a jam-packed episode because a lot of today's episode is about timely stuff, isn't it, Lee? Because a lot of updates have been happening over the last month.

A lot of big updates. And I guess like where we always like to start is what leads housing is finance, as they say, right? So what's happening on the finance front? So the most major thing that's happened in the finance world over the last month is that on the May 3rd, the RBA announced an increase of 0. 25% on the cash rate.

Most of you may be aware of that. If you haven't, you're not aware of that. You've probably been under a rock somewhere. But yeah, that's happened. And this is actually the first cash rate increase since November 2010.

So pretty much 11 years since the last cash rate increase. Fun fact, I moved to Australia from Wellington, New Zealand on November 2010. There you go. So bam, anniversary for me. But, you know, I guess, did everyone pass it in full?

That was a question I had in my mind. Yeah. So since then, most lenders have passed on the full 0. 25%. And so what that means is the lenders will increase their variable rate by that much.

So most of them have implemented that already. If not, would have by mid-May. Well, the thing I always get interested by is that when the rates go up, it's like instantly everyone just passed it on. It's like, here we go, done, pass it on. That day, you get a lot of calls.

Everyone's like, should I fix? What do I do? And then on the opposite. I'm going to fix. I'm going to fix.

So it just, yeah. So then on the opposite end, you've got like the decreases. And then you've got someone who'd be like, hmm, you know what? I might give a 0. 1 out of that 0.

1. Or maybe I might do a 0. 12 out of that 0. 25. And they might take a week to decide.

And then they're all looking at each other going, do you want to go first? Do I want to go? You go first. And then Westpac's like, all right, I'll follow you. So it's such a strange, strange thing, right?

When we look at it that way. Exactly. And so obviously we're the property nerd. So obviously most of us, you know, what does that actually mean for investors holding an additional mortgage in terms of the weekly cash flow, right? With this rate increase.

So I wanted to go through a couple of, I guess, figures of how that may look like from a weekly or monthly point of view. And that gives, obviously sheds a bit of light in terms of what that may mean for you from a cash flow sense. And we were looking at it from like, what, different loan amounts? Yeah. A current repayment and then at a certain interest rate.

And then what if the rates go up by 0. 25? Yeah. So let's start with, I guess, an average investor loan size or I guess an average loan size of 400,000. So let's say if the interest rate was 2.

75% prior to any cash rate increase, right? Your weekly repayment on a $400,000 loan would be $376. 67, right? Now, if we've had a cash increase and the bank has now passed that on, that 4. 25%, your rate has now gone from 2.

75 up to 3%. And so your repayment would now be $12. 27 higher for that weekly repayment. So $388. 94 on a 400K debt.

Well, that's a coffee at Eastern Suburbs gone for you now, isn't it? Yeah. Yeah, exactly. A coffee and a half. Coffee and a bagel?

Probably not a bagel. But yeah, so $12. 27. And obviously, as your debts are higher, gets higher, then the increase per week will be slightly more. What's it like in a million bucks?

Because obviously, you know, we're calling in from, we're dialing in in Sydney and everything's a mil plus here. What's it like in Sydney? So I'm using the same rate. So pre-cash rate increase at 2. 75, you would have been paying $941.

56 on a million dollars loan. And now that's gone up by $30. 80 per week. Okay, so all these huge amounts of media articles, everything, oh my gosh, sky's falling down. And I guess this is just perspective at its finest, right?

Like $30 a week. I'm not saying this doesn't impact some households. It definitely will. But the most important point is that the banks assess us at rates that are what, 2% to 2. 5% higher than interest rates?

They're using a 3. 5% assessment rate in servicings. Right. So they're borrowing capacity. So that's a huge gap.

And we're talking 0. 25 here and we're talking $30 on a million dollar mortgage. So I guess it's really just putting that perspective to it that we don't need to get too stuck into, wow, it's the first time in 11 years or it's this huge shift. I'm very positive that many households feel comfortable with this change and be able to handle it. Look, it's one less lunch per week on a million dollars of debt.

For some that may be easy, but for me that's a bit harder than it sounds. And what's been happening on the lending front of lately? I know from a finance perspective, you love to keep the finger on the pulse there with regards to ABS data for lending changes. What's been happening on that front? So the most recent release for March 2020 has now come out.

And so the value of new loan commitments for total housing has rose by 1. 6% to $33. 3 billion. And that's following a fall of 3. 5% in February after reaching a record high of $33.

9 billion in January. For owner-occupier housing, this rose by 0. 9% to $21. 6 billion. And that was 2.

2% lower compared to a year ago. And for investor housing, this rose by 2. 9% to a record high of $11. 7 billion. So the investors are the driving force for the big rise in the recent March ending data.

Yes. I think they'll look a little different come April, May, but these are still huge numbers beyond the 2019 period. And I mean, this just shows an intense level of demand when it comes to how much finance is still going out there. There's obviously a lag in this data being March ending. However, even with that level, even if it came back a little bit, this is still quite strong when it comes to the finance.

So it's clear that the investors are here making a big difference and really the driving force for finance trends. So the hot topic this month, the elections. And the big question is, Arjun, Labor or Liberal? Well, see, this is where it gets interesting. And, you know, we thought it would be a great time to actually dig into some research from our end to see Labor or Liberal.

Does it really matter for property investing? That's the thing that everyone's really thinking of, right? Because people have their thoughts about what's going to happen and if it matters or not. And so obviously many investors are interested to know which party favors the housing market or property investment. Some have the perception that Liberal is more favorable for the investors.

But is that true? Well, this is where I actually don't think that's the case. And this is our research that we recently did. And if you're looking to check this out, you can jump on the investigate. com.

au website. And this is under our property market research tab where you'll find it on the news and insight section. It's actually our most recent blog post that we put out. And our research team and I came together to check out what's happened in the past. And this is where it is pretty interesting.

When we look at the 2003 to 2007 period, the Liberal Party in power. And during that time, there was an annual growth rate in the Australian house prices of about 11. 7% per annum, which is whopping. You then look at the Labor period, 2007 to 2013. That number drops right down to 3.

3% per annum. And then you go to 2013 to current 2021. And that number jumps up to 7. 2% per annum average, which is also massive, right? So looking at that alone from actual house price changes, it's definitely correct when it says price points under Liberal actually grow more.

However, I don't think it's that fair to just assume just because the price changes are there and that's happening. And all of a sudden, we've got to give credit to Liberal because we need to map out major property market events that happened on a timeline to really see what's happened across this time period. So when you look at it during 2007 to 2013, there was a lot more happening during that time when it comes to heading into the GFC during that time. We also had a sluggish economy around He said that it was strong for motion sickness as well, but I caught him in the back of the boat with a brown paper bag, so it wasn't so strong in the end. Yeah, that was an interesting one.

I remember the moment I was like, hey, you should take these pills for motion sickness. This boat's crazy. It's just going up and down. I was like, no, Lee, I'm fine. The Indian stomach, if I can handle all the spices, this boat's a piece of cake for me, right?

I got the tap on the shoulder from someone. They're like, excuse me, man, your husband's in the back. He's not feeling too well. It was literally 15 minutes later, so there you go. Oh, no, no, no.

Stories, stories. Yeah, that was an interesting one for sure. But Cairns is definitely an interesting market for the recovery in local tourism. So I guess hospitality and tourism contributed 13. 6% of the total value to the local economy for Cairns.

It's definitely much higher than the Australian average. To give you some context, the Australian average is around 5. 7% of total value. So when you think of that, Cairns is definitely a tourism and hospitality hotspot. Now, when the airport passenger movement gets tracked, we saw a big fall off naturally after 2019 started.

And what was interesting is between 2012 to 2019 or 18, during those six years, airport passenger movement amongst domestic travelers was definitely on the way up and it was getting more and more popular. Then all of a sudden, 2019, border closures, and then bang, you know, Cairns gets massively impacted. And interestingly enough, Cairns' unemployment rate was also on the mend. You know, around 2016, it was a pretty high number, around that 7% number, but it was crawling back down even pre-COVID. You could see the momentum start to come together.

Gold Coast was another area as well where the international airlines obviously impacted from a local economy. But what the local economies did is that they obviously had a lot less money flowing through from tourism and hospitality overseas. And, you know, Cairns' unemployment rate did peak back up to 6. 1% in March of 2021. But then from there, it really started, you know, coming back down.

In 2021, actually, which is the second year of border closure, the international passengers coming into Cairns was extremely low, I think 0. 4% of the pre-COVID number. And domestic passengers were only 56% of pre-COVID level. So there's a lot of recovery room left in an economy like Cairns. And I do feel that with its other projects and other strengths coming there, we should see a huge recovery in the local tourism economy.

So I guess our thinking here is that as the Australian borders really opened, international travel is coming back to normal around the globe. And Cairns' economy is going to benefit from this as one example. But when we deep dive into the top six countries, when it comes to the origin countries of Australian international tourists, China, New Zealand really led the pack. Then we had USA, UK, Japan and Singapore. Now, this is where it gets very interesting, though.

So this is why we say, yes, this will recover, but give it some time. Because China was massive, $12. 4 billion in total spending for that year when it comes to a huge... That's huge, right? What does that compare to the other countries?

Well, see, this is interesting. China and New Zealand both came in with some serious numbers, equaling each other for the level of tourism or tourists coming through. But New Zealand was ranked the third lowest or near the lowest when it comes to our top six countries, number of tourists. New Zealand ranked very, very low. It was one of the lowest, actually.

Do you reckon it's because, obviously, we're Kiwi. We've got many Kiwi mates here. You've got a friend you can stay with. You've got, you know, accommodation. Yeah, got my cousin, got my bros around.

And, you know, life's pretty chill in New Zealand. So you just chill when you come to Australia as well. So the wallets weren't flowing a lot for the Kiwis when they come to Australia. So I think whilst that's open, we won't see a huge amount of spending when we look at history. Really, what it's going to take is definitely that recovery in China.

But unfortunately, China's border is expected to be closed for longer. And we aren't on the greatest... When's that expecting to be? Well, at least until end of 2022. It's hard to say right now because they're really applying that COVID zero strategy over there in many cities.

But I guess the main thing is recovery is due to happen in the local tourism economies. Cairns is one example that we feel will pick right up. Chinese, New Zealand, USA, UK, Japan, Singapore, they're the big six countries from the, I guess, the origin countries of Aussie tourists. And right now, the big gap is definitely the Chinese tourist market. And a few of these other countries will take time to come back.

But this is going to be one thing that will help our economy as time goes on. And we predict it to rise. Okay, so what's trend number three? Well, this is an interesting one. One thing that's been a big saviour during the pandemic has been household savings.

If we look at border closures and then the trend line following border closures, we saw a huge uptick in household savings. Like when you look at March 2020 data up to June 2020 data, it more than doubled. So what clearly happened was like people like, holy crap, what's happening here? People just went into, what do you call it, survival mode and just didn't spend money really. Yeah, there was a few things.

So one was the refinance boom. Like that was huge. And I'm sure people just loaded up offsets, took out some equity, chucked it on the side and said, I'll be fine now with a few hundred K in the bank. Number two was definitely people saving more and not traveling. Not traveling, not even leaving the house potentially.

Exactly. Number three was all the cash handed out. Yes, there were a lot of jobs saved, but there was also a lot more money that went out than that needed to go out, if that makes sense. I know it's a hard one. It's very debatable.

But when you just look at some of the data of how much cash went out, it was just monstrous. Did it go into the right hands? That's also another point, right? So a lot of this cash, a lot of just curling up, saving away, putting it away, saving a lot of jobs. Whilst all of that is happening, uncertainty just absolutely spiked our savings rate.

Now, as we started to open up the country a little bit internally, we started to see that household savings rate normalized. And then again, we went into that huge lockdown, the double lockdown, they call it from last year. And that spiked it back up again. Now, it's come back down again when we look at December ending data. And I guess to some extent, we might feel that things like sentiment decreasing, which actually has a negative correlation with household savings, means that when sentiment decreases, there's a lag effect and a flow on to household savings increasing.

And then when sentiment increases, people are more confident, happy and feel good and spending starts to happen again. So right now, sentiment has been on a small slide from that March 2021 period, from that consumer sentiment index by Westpac. And we are seeing that dip down a little bit, not to huge lows, but it is to sort of that longer term trend line from last six years, actually trend line. And so what that means is that we will start to see some normalization in household spending, in our opinion, because that cash is running out from stimulus. Life is getting a little bit or as much as possible to normal.

But we just don't think it will be dragging down rapidly. We do see it normalizing, but why it won't drag down rapidly is because the sentiment's been decreasing. And with sentiment decreasing, it should respond to people keeping a little bit more cash in their bank at home. I guess the other thing that's really interesting, which will normalize the spending a little bit more or normalize savings rates a bit more, is this phase of revenge spending. So if you think about us, right, we just went to Thailand recently.

We're in New Zealand now recording this. So, you know, we got a scooter the other day when we got back from Thailand. As soon as I got back, I had the scooter riding in Thailand. I was like, I want me one of those. And that was cool.

But what that term is, revenge spending is simply just people going, hey, look, I've been locked down for two years. I've been restricted and I haven't spent a dime. And people will flow their money overseas. People will spend on goods. It's like catching up on lost time, pretty much.

That's what people are doing. Nailed it. Even from like, you know, just like getting your hair done, all that kind of stuff, like things that people have been putting off more than usual. They're taking advantage of that. So we're essentially saying that there is going to be a normalization of household savings.

We should see that trend come down to that longer term average. But we should also see that trend of slowing down the savings not be as dramatic simply because that sentiment coming down just means that people coop up a little bit. But there's still a lot of revenge spending to do. And that's what's going to normalize that cash.