RBA May 2022 rate decision

The RBA has finally pulled the trigger and put an end to all the noise around whether it wait until after the Federal election before hiking interest rates.

The central bank announced a rise of 0.25%, larger than what many anticipated, which means the official rate now sits at 0.35%.

Despite telling the media for a long time that there would be no rate rises until 2024 at least, the RBA found its hand was forced by soaring inflation, which hit 5.1% last week at a headline level.

The underlying inflation rate hit 3.7%, rising past the RBA’s long held target range of 2-3%.

The lift of 0.15% was the first official rise since 2010.

RBA Governor Philip Lowe said “now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”


Where to for inflation?

The RBA expects more inflation in the short term, but believes the resolution of supply side issues will see it decline back towards the target range of 2-3%. However, Lowe flagged more rate rises ahead.

“The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4.75 per cent; by mid-2024, headline and underlying inflation are forecast to have moderated to around 3 per cent. These forecasts are based on an assumption of further increases in interest rates,” Lowe said.


What rate rises can mean for property?

Banks always seem to pass rate rises on in full, so you’d have to expect mortgage payments to go up as soon as possible.

As people pay more on their mortgage, they are likely to spend less money on other things, which may mean some of the shortages that are driving cost of living prices up may ease.

Also, rate rises tend to take some heat out of the property market, but it will be a while yet, and a few more hikes, before any real difference flows through to property values.

The RBA has shown it is reluctant to move aggressively and a lot of people have also fixed rates in recent times, meaning it will be two or three years until they begin paying higher variable rates.

There have been predictions of property value declines of 10% or more, but these would likely be the result of the cash rate passing 2%, which may take years and may not happen at all.

Large scale forced sales or defaults are also very unlikely as banks factor in a 3% rate rise buffer when assessing loan applications. So anyone with a mortgage now, even those who bought during the price surge of the pandemic, should be able to handle further rate rises for some time.


What rate rises mean for investors?

Investors already pay higher rates than owner-occupiers and most investors pay interest only on their loans.

Rate increases may see some portfolios that are positively geared be threatened by the possibility of going negative. However, tightening vacancy rates and soaring rents around the country will likely offset any extra repayment pain, as investors will be able to pass the costs onto their tenants.

Apra’s demand for mortgages

As property markets soared and so did debt levels last year, it was the Australian Prudential Regulation Authority (APRA)- rather than the RBA- that stepped in with regulatory measures aimed at cooling the market and removing some of the risk exposure that had been taken on by households that may have been over leveraged.

APRA did this by raising the repayment buffer on mortgage applications from 2.5% to 3%…and also by sounding the warning bells on Debt-To-Income (DTR) ratios.

What was so concerning?

For many years there had been this unofficial messaging that a borrower could generally expect to be granted a loan of up to around five times that borrower’s annual income.

However, APRA was concerned to note that the level of debt exposure by Australian borrowers was starting to creep up.

Specifically, it estimated around 20 per cent of recent loans actually had a DTI of more than six… ie a household was borrowing more than six times its annual income.

It sounds like a marginal increase, but in some households, the difference between that amount and the old one/fifth yardstick was more than $150,000, which is considerable added exposure. And the concern was that if there was no agreed standard in place, this could keep slipping higher.

What did they do about it?

After the issue was flagged by APRA, a number of banks took action and now have caps on their DTI limits of six times the income. The fallout of this could mean that if you are a would-be borrower, you may no longer be eligible for a loan that you thought you were.

This affects owner occupiers especially, as they are more likely than investors to be borrowing at their full capacity in order to purchase a single property.

And combining that hurdle with the 3% repayment buffer that we mentioned earlier, owner occupiers receive somewhat of a double whammy.

That buffer is in place so that lenders can see if you would still be able to service a loan if interest repayments went up, which a lot of people are expecting them to do.

And if you are one of the borrowers that locked in a fixed rate for a certain period, you are also likely to get a nasty surprise when the fixed period ends and the loan rolls over into a much higher variable rate than you had originally expected.

How do these changes benefit investors?

The situation will be more prohibitive for investors than it used to be, but things are looking peachy when compared to owner occupiers.

This is because investors often use equity as a deposit and are able to borrow at a more favourable Loan to Value Ratio than owner occupiers (eg they may only need to borrow 50% of the property’s value). They also have the advantage of rental income to help service the loan; rental income which has been on the rise across the country as vacancy rates fall and will only increase further as inflation takes off in Australia.

Then there’s the fact investors usually borrow interest only (at least to begin with), which means they won’t be as stretched by the repayment buffers in place.

So what does it all mean for me?

If you have questions about your own situation, you can reach out to Zinger Finance and speak to our team of strategists, who can help you map out the best way to reach your goals by structuring your finances correctly, click here.


Please visit the following sites for more information:

APRA cracks down on DTI and buffers

Rule changes to strengthen debt situation: Fitch Ratings

Is Now A Good Time To Buy A Property?

If you’re thinking about setting out on a property investment journey, you’ll probably want to know whether the time is right.

What’s the market doing? What about the economy? Is it the right time to take the plunge or should I wait until the whole COVID thing has settled down and conditions are more favourable?

Well, think of it a bit like this. Have you ever been wondering if it’s too early in the day to have a drink and then one of your friends says “It’s 5 O’clock somewhere”?

We’ve all probably heard this at least once.

And while we’re by no means suggesting you take up drinking in the morning, the message is that there are many time zones in the world and at least one of them will suit your purpose.

It’s the same for property

We often hear the media talk about ‘the Australian property market’. Usually they talk about it booming or crashing, or being overheated or under-supplied… but the fact of the matter is that there’s no such thing as one big, Australian property market.

Rather, there are hundreds of thousands of micro-markets. Within Australia there are multiple states and territories. Within those there are many more cities, towns and regions. And within those there are so many suburbs, and even more neighbourhoods. And don’t get us started on the streets. And the properties within these micro-markets are completely different. Ask a farmer in remote central Queensland if they are in the same property market as the young professional in an apartment in inner Sydney or Melbourne… it’s like Mars and Venus.

So, what’s your point?

Well, with all those different markets, there are also infinite different characteristics. There are tightly held inner city suburbs in Sydney, Melbourne and Perth; there are speculative mining towns in the middle of nowhere; there are coastal growth hubs; rural wine regions; expansive suburbs on city fringes known for their acreages; government housing zones becoming gentrified; greenfield sites primed for shiny new suburbs packed with house and land packages; new development corridors surrounding airports and universities; the list goes on.

The many markets in Australia peak and trough at different times. So when one city is overheated, there will be another city, or town, or region, that is about to experience a growth spurt. It’s just a matter of doing your research and making the right decision.

The value proposition

The best time to buy is when you can get value. Just look at the man widely regarded as the world’s best share market investor. His name is Warren Buffett, he has a net worth of almost US$79 billion and he’s the seventh-richest person in the world. He puts his faith in his research and hard work, so that when he likes a particular company, he is able to swoop in and take advantage of a market fall and buy the stock that he wants for less than he thinks it’s worth. When the market bounces back, he makes money immediately.

His principles can be applied to property investing. Say you have your eye on a suburb in the middle ring of a city area, but the property there is out of your price range. Or it’s too hard to get it at a price that offers value and return on investment, because the area is in high demand and there’s too much competition. Then, along comes COVID and everyone gets spooked. People are guarding their money just that little bit more carefully and, in the immediate aftermath, there’s a market shock or correction and asking prices come down 10 per cent and into your price range. You know the suburb is a great location. All the numbers stack up. The vacancy rate is low, the rental yield is still solid and the demographics are all good.

So what do you do?

Well, if you have faith in your research and knowledge you dive right in and grab that investment. And in a year, or two, or three, when COVID fades from memory, the fundamental benefits of the property and the suburb still remain. It has likely regained its value, and maybe a little bit more, and you managed to buy in for below market value.

So, is it a good time to buy property? Well, it’s 5 O’clock somewhere.

Improve Your Serviceability

If you are considering applying for a home loan in today’s market, you should expect to find lenders more cautious than ever when assessing your serviceability. Your serviceability is the bank’s assessment of your capacity…