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Getting a Loan Away from Home

 

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Why government should encourage property investment

The Credit Suisse Global Wealth Databook 2013 contains some interesting reading about the wealth of Australia and Australian households.

Of all countries detailed in the report, Australia’s households have the highest median wealth of all countries; have the second highest average level of wealth of all countries, and enjoy the second least unequal distribution of wealth (wealth being a combination of asset values and income).

The composition of wealth in Australia has a particularly strong focus on real estate. It represents 59 per cent of all household asset value – the second highest in the world. The author credits property as being the great wealth equaliser in Australia.

Given the relatively high percentage of retirees in Australia who own their own homes, the most important sources of wealth inequality in Australia are employment levels and wage rates.

Clearly, past and present governments have done a good job in balancing their efforts to maximise employment and to encourage higher wages. Australia has the highest minimum wage in the world, and is ranked fourth highest using OECD purchasing power parity average wage statistics.

Young employed persons in Australia are in an enviable position.

They work in a country where the medium- to long-term growth in property values are indisputably consistent over the past 100 years. They enjoy some of the best wage and employment conditions in the world.

Because property is the asset in which the majority of Australia’s household wealth is created, encouraging a movement towards property ownership when people are younger and earning more (and thus property is the most affordable) would give Australians greater wealth in their later years.

Federal and state governments clearly encourage property ownership already through various programs, including the National Rental Affordability Scheme, first home owner grants, favourable tax policies and first home saver accounts.

The variables of supply and demand drive the market in all commodities, and property is no different. One thing that most people, including housing price forecasters, fail to understand is that the reason that prices remain so stable is because federal and state governments, both directly and indirectly, hold a controlling influence of both the supply and demand variables. That’s because our government system is designed in such a way that underpins this stability.

The first supply factor is labour and materials costs, which are set by the market. The second is access to finance for developers, builders and buyers. By far the biggest supply constraints are physical barriers (such as water, cliffs, freeways and so on). The adage ‘they are not making any more land’ is now irrelevant. Development guidelines enable the creation of more lots (albeit smaller), and higher densities create more living accommodation (albeit airspace). These planning restrictions are set and controlled through the local councils (through zoning ordinances), and state and federal governments.

Governments are the largest holder of residential land in Australia. In Victoria, Places Victoria (formerly VicUrban), has a 12 per cent market share in land sales. The second biggest landowner in Victoria is VicTrack – another Victorian state government enterprise. Other states are similar. The ACT and Northern Territory are virtually all government-owned.

So ‘government’ is the largest single entity that has the capacity to influence the supply of either land or building space, and by extension is the largest single entity that influences property pricing.

Demand on the other hand is driven by buyer numbers. Aside from Australia’s natural growth rate, state and federal governments further influence buyer numbers through their migration policies, foreign investment rulings, tax rulings, and superannuation borrowing rules.

Underpinned by a government structure that is invested in its success, the argument to encourage investment into property is a solid one. A greater level of wealth for households is not only good for the Australia, but good for Australians. Wealth created through self-responsibility by the individual is far more empowering than adopting an attitude of entitlement that seems to be creeping into our modern society, and one that is imposing an increasing burden on taxpayers and governments alike. A decreased need for a government to spend on support programs, and more spending on quality of life services means a better quality of life and more household wealth. Who doesn’t want that?

 

Coles could make a big success out of mortgages

In 2012, The New York Times reported a story about Target sending coupons for baby clothes and maternity wear to a teenage girl.

The father was furious, and approached the manager of the store, who apologised. Later, the manager felt so bad that he rang the father to apologise again, only for the father to tell him this time that his daughter had since told him that she actually was pregnant.

Target, after analysing the purchases of unscented wipes and magnesium supplements, already knew.

This is an extreme example, of course. But if you are a member of a rewards program, have a Facebook account, have location services enabled on your mobile phone or have ever set up an email account, then chances are that someone is collating and analysing your information as well.

Welcome to the world of big data.

Big data usually refers to the storage and management of large quantities of data. Through big data tools, marketers can gain insights and identify signals to transform customer engagements into more personalised and meaningful experiences that drive investment returns – exciting businesses, governments and entrepreneurs alike.

One such business that could leverage off the massive amount of data it has is Coles. And even if Coles does not have the same resources that Target has, even a modest increase in the accuracy of targeted offerings could be highly profitable.

As an indication of how serious Coles is in spreading its offering to consumers, Coles is believed to have an application with APRA for an Authorised Deposit-taking Institution (ADI) licence.

If successful, Coles, through its parent company Wesfarmers, would be in direct competition to Australia’s major banks; adding savings accounts and mortgages to its existing range of insurance products, and perhaps all consolidated under the Coles Money brand that it trademarked in 2012.

Far-fetched? Maybe not. UK supermarkets Tesco and Sainsbury have been playing in the financial services space for over 15 years. Last year, Tesco’s financial services division held 6.5 million customer accounts and employed over 3,000 staff. Trading profit was £191 million, a margin of 18 per cent of total revenue.

Richard Wormald, a former Tesco executive that was involved with Tesco’s transition into the mortgage space, is now the general manager of financial services at Coles. It is understood that Coles, under Mr Wormald’s direction, has recently engaged a third-party distribution specialist to evaluate plans for the supermarket to begin distributing residential mortgages.

The possible entry of Coles into the Australian mortgage industry should worry existing players. Customer service levels at Australia’s major banks have been sub-standard for too long, and product innovation has been lazy. A new entrant keen to attract new business through exceptional customer service and attractive products could have a significant influence.

Coles has a unique opportunity with the third-party distribution model. If the product offering is made available through third-party introducers, and the company adopts an attitude of embracing and working with this channel as a partner, Coles will have a clear advantage over the banks that have used the GFC as a convenient excuse to lower upfront commissions, eliminate or significantly reduce ongoing trail payments and staff broker service centres with poorly trained and inexperienced staff.

Encouraging people to make the switch from their current bank to Coles may not be easy. But it might not be as difficult as initially thought. The adoption of big data technology in the financial service industry is regarded as being behind other major industries, and customer loyalty to financial services providers is lower than ever.

Have you ever used a Coles coupon to save four cents per litre off your next petrol purchase? Now imagine the impact that paying your mortgage might have to your FlyBuy points. Or the interest rate discounts that might be offered by remaining brand loyal.

Wesfarmers has a track record of success, and if it continues to recruit quality executives to develop and manage the program, this track record will continue.

 

Exploding the myth of housing affordability

Almost every year, with monotonous regularity, I have read headlines declaring how unaffordable Australian housing is.

The only clear function the statement seems to serve is to capture readers’ attention in newspapers.

The first challenge lies in trying to work out what the statement even means.

The 2014 results of an international housing affordability survey have only recently been released.

The report ranks 360 metropolitan markets in nine countries in terms of affordability. It uses a formula known as the “median multiple”, where the median house price of a market is divided by the median household income for that market. According to the formula, any city that results in a score under 3.0 is considered to have housing that is affordable, while anything over 5.0 is severely unaffordable.

In the latest report, the median multiple for Melbourne was 8.4 for 2013 (an increase from 7.5 in 2012). This means that the median house price in Melbourne was 8.4 times the median household income of people that lived in Melbourne.

To consider Melbourne as one property market however is meaningless. The price and performance of a studio apartment in St Kilda is different to a riverfront property in South Yarra, which is different to a three-bedroom home in Ferntree Gully, or a two-bedroom unit in Essendon. Similarly, the demographics and economic profiles of residents in each of these locations varies considerably.

People often move to a city – and for larger population centres such as Melbourne, within the city – for greater opportunities, most usually economic or employment-related. As more people move to a specific location for work, household income increases as a result of increased wages, and the demand for housing also increases. Those who are in lower income levels get squeezed out of that market. This is nothing new.

Cities like Melbourne however are not isolated. They are truly global cities. Melbourne and Sydney should be compared with Hong Kong, New York, Paris, London, Vancouver and Los Angeles: all global cities as well. When property performance is compared between these cities, they all behave in the same way. As the world becomes more globalised, the result is greater access to local real estate market conditions around the world, resulting in metropolitan housing markets becoming more attractive to global buyers.

So the price of properties in global cities should be measured in relation to global incomes – not the household income of a resident of the suburb where the property is located. To measure affordability in these terms has no relevance, and reflects outdated 20th century thinking.

The second problem is the formula itself – the formula is basic to the point of being meaningless, and deserves to be challenged. Determining housing affordability is more complex than a simple income to price comparison.

What is the relevant connection between the two factors?

In a practical sense, given that most people do not pay cash for their houses, it is mortgage affordability that is the more pragmatic measure.

When a home buyer considers buying a home, they look at the price of the home. But that should be at best only one factor in determining whether the property is purchased.

In a very pragmatic sense, the buyer is just as focused on two important questions:

1) How much of a deposit do I need?

2) How much are the repayments on the mortgage each month, and can I meet these repayments comfortably given my ongoing commitments?

In many ways, the purchase price of the property becomes irrelevant.

So any formula should best reflect mortgage payments as a percentage of the buyer’s after-tax income.

Instead of theorising about why or even whether property is so unaffordable, perhaps a better question to ask is what can be done to help people buy their first home.

Governments and banks hold the answers to this question. Assistance with deposits is an obvious start, and the availability of the First Home Owners Grant and associated state-based grants gave first home buyers specifically the deposit help they needed. First Home Saver accounts were a meritorious initiative but the response from savers was poor. Downward pressure on interest rates is also obvious.

Innovations to lending policy such as high LVR loans, loans with a 40-year term and shared equity mortgages are all possible solutions that should be constantly under review.

When considering the “affordability problem”, by far the biggest problem is aspirational buyer beliefs regarding what they feel they are entitled to. We do not have an entitlement to own a home. It is not a right. The belief that we are all entitled to own a home is a dangerous assumption, and has not the slightest merit.

The fact that houses continue to sell at or above asking prices and demand remains strong is evidence enough to refute the claim of ‘unaffordable housing’.

 

Why property values will not bust in Australia

I have been hearing self-appointed experts say for a couple of years now that there is a housing bubble, and that property values are going to fall from the sky. We are all doomed, and everybody should sell their property now, or risk facing massive losses.

If you say something for long enough, eventually, that fact will become true. However over a period of a year or more, then these “experts” should admit they got it wrong, and the media should pay scant attention to them.

Of course that won’t happen. Headlines like “Housing prices to remains stable” won’t sell newspapers now will they?

The fact is that housing prices (let’s take Melbourne for example), will not drop appreciably. And there is a simple, basic reason underwriting that. Supply and demand.

So maybe let’s see who controls supply, and who controls demand.

Supply variables are:

(a) Physical barriers such as water, cliffs, freeways, etc (which we can do little about)

(b) Labor and materials cost (which are set by the market)

(c) Financiers – by way of access to funding for developers and builders

(d) By for the biggest controller of supply are zoning and planning restrictions. Daylight second.

These of course are controlled through the local councils (through zoning ordinances) and the State Government, through their Melbourne 2020 vision and their masterplan.

The adage “they are not making any more land” is irrelevant. Smaller lot sizes creates more lots, and higher densities creates more living accommodation, albeit airspace. And the sole controller of this is local and State governments.

And then of course, don’t forget that the Victorian government (via VicUrban) are by far the largest holder of residential land around Melbourne.

So they almost completely control the supply or vacant land, and by extension control land prices through controlled land releases. They are understandably, increasing lot prices with each stage to maximise their asset sales.

The State government also encourage interstate and international migration, thereby increasing demand for housing in a market where rental vacancies are still quite low. So they are the largest controller of demand as well.

I can’t see VicUrban decreasing land prices. Nor can I see the State government discouraging new investment or migration to the State. So there will be no change to this balance.

We are not in an asset bubble. There will be no bursting, as there is no bubble to burst. Unless the State Government goes bankrupt and has to liquidate its assets, at best there will be a stagnation of pricing.

If you still don’t believe me, consider what will happen if prices drop:

* If prices do drop by the 20% or more that doomsdayers are saying, people who are renting now will see that owning is now suddenly so affordable compared to the price of rent, that demand will spike and prices will rise again.

* If prices do drop by 20%, then the first home buyer in the suburbs who has just purchased their first house and land package for $400K (which cost $220K to purchase the land and $180K to build), will now own a property that is worth $320K. The land is still worth the same amount – the State government (nor privately owned developers for that matter), are not going to drop land prices.

The impact of this is that builders will need to build new houses now for $100K which was formerly being built for $180K. Let’s say the average builder margin is 18%, the raw cost of materials and labor alone is about $152K. Builders will be out of business in a hurry, as they would be losing $52K on the contract for the above example. The result – no new housing built.

So when we see an ever increasing population, in a market where rental vacancies are already low, and no new stock being built, what will happen to demand? It will increase rapidly, and again support housing value.

The only other single controller of property prices are banks. They can control a false market by creating demand from buyers by way of how easy it is to obtain credit, and how cheap it is. Which is exactly what happened in the US.

Getting credit in Australia is not easy for a buyer. It really never has been. It is hard. And it is certainly not cheap. The brakes have been applied in full for nearly 3 years. So there has been no false market lifting property prices over this period. Yet, prices still increased. And strongly. Which suggests that the banks carry little weight in determining current housing prices.

Over the past 6 months, it has loosening slightly which should further increase demand slightly.

Forget about statistics. Statistics are just numbers. They explain nothing. Anyone that claims that prices must decrease just because the numbers are unsustainable is not thinking.

It is ridiculous to compare the “affordability” of housing (an inappropriately named measure in and of itself in its current format) from one country to another. Not all countries have the same lending policy, the same interest rates, the same deposit requirements, the same loan term, the same control measures, the same population changes in percentage terms, or the same taxation (impacting on after tax income which can be contributed towards debt servicing; as well as attracting investors or not).

As a buyer, what would you rather buy?

A house for $300K with 20% deposit and 20% interest rate? (and repayments over $5,000.00 per month)

or

A house for $500K with 0% deposit and 0% interest rate? (and repayments at $1390.00 per month)

The former naturally. Because the actual property price is not how much you pay to purchase the property – the actual price is how much is costs to get into the property (the deposit) and how much it costs you on a regular basis (your mortgage payments).

And when mortgage payments are comparable to rent, people will be attracted to ownership almost every time.

 

How to finance a property in the USA

Financing property in the US is not impossible for “foreign nationals” (what the US call people who are not US citizens, and have no residency status in the US either), however it is very, very tough. 

By way of background, the lending market is very different in the US. In Australia, if you want a loan with the ANZ, you get a loan with the ANZ. They are a bank that operates nationally. As do Westpac, St George / BankSA, Commonwealth Bank, National Bank and so on. 

By contrast, in the US, each lender needs to be registered in the particular State that they want to offer loan products in. Consequently, there are very few lenders who are registered in all States. Some truly National lenders in the US are Bank of America, ING Direct, Wells Fargo and Ditech. And, that is about it.

Problem one – none of these lenders offer loans to foreign nationals.

The same rules apply to mortgage brokers – they are registered on a State by State basis also. In reality, it is no good talking to a broker from New York (or even worse, in Australia) if you want to buy a property in Texas. They will not be familiar with the lenders and lender policy in that location. You need to talk to a broker active in the market you want to purchase in. 

What that means is that if you wish to finance your property purchase, you need to select your property first. The lender selection will depend on the location of the property (which State it is in, but often also which county).

So that is step one – decide which State you want to buy in. 

Some States, like Florida for example, have a reasonable number of lenders who offer loans to foreign nationals; however they are restricted to the State of Florida for such loans. Other States have no lenders that will offer loans to foreign nationals. And then there are some States (such as NY for instance), where there are only 1, 2 or 3 funders who extend credit to foreign nationals to chose from. 

And that is step 2. Identify the lenders that will extend credit to foreign nationals in that location. 

Whether the lender will extend credit against the property depends on a number of variables, but the most important factors are: 

1. Purchase price

2. Property type (i.e. is it single family residential, or mutli-family, or apartment block)? 

If you are like most Australians, you are looking to take advantage of the price reductions as a result of the GFC, and purchase property at a low purchase price. Unfortunately, the lenders will probably have a minimum loan amount or minimum valuation of the purchase property, which will also vary from location to location. 

Step 3 – decide which property you wish to purchase, and see if you can then fund it.

I know what you are thinking…. That it seems counter-intuitive to do this. Perhaps your objective is to leverage as much as possible, and thus your property location will be selected upon where you can achieve greatest amount of leverage. Be prepared for a maximum of 70% (or even 60%) LVR.

There is one more problem I have not discussed. Australian banking legislation. Some lenders (like Lloyds TSB, and Barclays Bank (both in the UK) for example) offer international mortgages to residents of many countries. However Australian legislation precludes them from offering loans to Australians living and working in Australia.

So there is the dilemma.

And the reason why most Australians say they want to invest in US property, however do not. It is very, very difficult to do so. And I have not even touched on the complexity of real estate practices and purchasing yet (which also varies State to State). 

I talk to a lot of people, and observe the following: 

1. Many people seem to have a strong desire to invest in the USA

2. The desire seems to be to purchase lower priced dwellings that have decreased in value as a result of the GFC, as well as properties that will deliver a strong rental yield

3. Investors have some cash, but would like to leverage as much as possible to enhance the return

4. Investors knowledge is growing, but not at a level where they could invest with a degree of comfort yet (for reasons explained above)

5. Investors usually don’t know exactly where they wish to invest yet 

The obstacles and risks associated with this strategy are as follows:

(a) Investors will find it difficult to qualify for a loan due to the property prices they are seeking. Thus any purchases will need to be bought with all cash most likely

(b) Any properties bought will be exposed to potentially poor returns if there is even one poorly performing property in your portfolio, thus your investment is exposed to higher risk of loss

(c) Time and effort and financial cost to complete due diligence is high (especially if the investor is going to fly to the US to view properties)  

Investment in a pooled property / private equity fund would be a better solution for the majority of people. I say this because:

1. The upfront costs and time compared to doing it yourself are lower

2. The investment risk is spread over a few hundred properties instead of 2 or 3

3. You will be able to utilise leverage within the fund itself, and thus enhance your returns that you would not achieve
personally, and do so at historically low US interest rates

4. You will still be able to take advantage of decreases in property values

5. You will still be able to take advantage of favourable exchange rates  

Quite honestly, this is what I think the majority of people in Australia (including people on this website) who have an interest in investing in US property should be doing – 95%+ of people do not know enough about US property (and US property law, property financing, etc) to invest with a through understanding of the investment. Thus, poor knowledge equals higher risk. 

Have a look at an interview I did with Sky News a month or so ago – it might interest you

 http://www.switzerbroker.com.au/broker-video/troymcervale/  

Getting A Loan Away From Home

Getting A Loan Away From Home

My contact e-mail is troy@freedomhomeloans.com.au if you wish to contact me

Troy McErvale
Freedom Home Loans
Mortgage Broker – Australia / USA / Asia / UK

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