How much deposit do you need before approaching a bank

Post to SinFongChanRE.wix on 31/1/2018 at 11:26 PM
Commenting on “Hobart home prices grow 173 percent over the year to December”
https://www.domain.com.au/news/victorian-government-to-copurchase-houses-with-400-firsthome-buyers-20180124-h0no16/

The first statement in the Wikipedia in reference to Australian Dream is "... a belief that in Australia, home-ownership can lead to a better life and is an expression of success and security." This is not just an Australian Dream or the Great Australian Dream, but also a dream of many people in various countries, including the Americans and Asians.

In most cases, one needs plenty of money to fulfil the dream. The initial amount of money comes in the form of loan from a bank or a non-bank financial institution, known as the lender. A lender will only pay attention to a borrower if they have a reasonable reliable source of income as well as having certain amount of money that goes towards the purchase price of the house.

I have been advising my readers to "save, save and save" just like their parents or grandparents would have said thousands of times to them, "work hard and save up for a house". Not many people are born with a silver spoon, and therefore in order to raise the initial deposit for the first-home, many things have to set in motion.

During the time I purchased my first house, my wife and I had to raise 40% of the price of the house, and the bank lent me the rest of the 60%. For a house around $28,500, the required amount to raise was $11,400. It might seem very little by today's standard, but that amount was the value of that time, and my first permanent job after graduation was $5,200, just half of the deposit.

It must be noted that this deposit referred here is not the same 10% deposit paid to a vendor/seller of the house when a buyer signs on the dotted line of the contract of sale.

The percentage of the purchase price or valuation of the property that the bank lent is known as Loan to Value Ratio or LVR. New Zealand and Australia use the term LVR, while the US and UK use LTV which stands for Loan to Value.

In the past few years, property prices were so hot that they exceeded the fair valuation. If the purchase price is different to the valuation then the lender will use the lower of the two to determine the LTV ratio. For example, if a house is sold for $900,000, say at least $100,000 above the market expectation or official valuation, due to the buyers wanting to live close to their children and grandchildren, the LVR (or LTV) will be based on $800,000 instead of $900,000.

The larger the LVR or LTV, the greater the amount the lender will "contribute" towards the purchase of the property. In other words, the lender faces a higher risk that the borrower may default in tough times. The term default means failure to fulfil an obligation, namely, repay a loan. In short, it is better for the lender and borrower if the ratio is smaller in number.

To protect the lender against the risk of not recovering the full loan, lenders require the borrowers take up Lender Mortgage Insurance (LMI) if the LVR is more than 80%. LMI is imposed upon the borrowers, but does not protect the borrowers or repay anything to the lender in case of default.

LMI can go up to about 2% to 2.5% of the loan amount plus stamp duty. This is added to the loan, and interest payment is calculated based on the total amount.

So, what is the ballpark figure that you need to save up before approaching a lender? Most banks will not lend buyers with less than 20% of own contribution, also known as Equity. However, some banks and financial institutions are prepared to offer loans to buyers. It seems obvious from the above explanation that it is best to have 20% or more so as to avoid outlaying the LMI.

What if you can afford, say only 5% for the deposit but find it difficult to rise the rest of 15%? Should you just raise your hands in the air and call for help, hoping a miracle to descend upon you?

In a very hot real estate market, the properties in your price range increase in value by much more than the cost of the insurance. The property prices may have increased by more than 10% if you wait a few extra months to save additional money to avoid paying LMI, which costs an extra 2% to 2.5%.

Conversely, in a market situation like present when property prices are stable or on a downward slide, saving extra money to top up the initial deposit is a wiser choice.

Thank you for reading

Apartment glut could crash property market

Post to SinFongChanRE.wix on 18/1/2018 at 1:01 PM
Commenting on “Apartment glut could crash property market”
http://www.news.com.au/finance/real-estate/buying/apartment-glut-could-crash-property-market/news-story/a923b3da021e89fba988683ecc602d42

Property development is a very time consuming exercise, and one needs to predict the market demand at least for the next 12 months  before construction begins. The bigger the project, the longer it takes.

Besides the hypothetical guess work of future demand and competition, developers must also keep abreast with the laws of the land and countries where the potential buyers are coming from.

Recent two years spell the doom of many developers, or double whammy to say the least. Australian government has reverted back to 50% from 100% of a development could be sold to foreign buyers. Most local cannot support the high price tag chicken coups and those mega-million condos. It is true that some of the wealthy foreigners have found their way to get settled in Australia, and they probably have brought suitcases full of money, but the supply is far too great for these new settlers to absorb.

The assumption that the growing number of migrants settling in Australia demand housing is correct, but that it is nuts to assume that all these migrants are able to buy properties. Many do not have the financial capacity to do so. It must be remembered that some are asylum seekers or refugees from poor countries. They do not have enough to pay for food and utility, let alone raising enough money to pay for the deposit of a house.

Most economists are theoreticians. They work on very complex mathematics that I cannot understand. Well, it is partly due to my lack of the right brain juice, and partly I block off to accept that a general mathematical formula cannot be found to fit the dynamic environment we live in.

It is not just the glut of new apartment that leads the charge of property crash; those investors who want to get out of owning an apartment, realising now that apartments do not give them the sort of return and capital gain may dump the apartments and look into landed properties, can aggravate the market slump.

In the article, the caption of the photo stated the claim of real estate agent Mariecris Tagala that more than half of new apartments in Melbourne’s CBD, Docklands, and Southbank were sold at a loss since 2011.

My sentiment in investing in apartments has been very clear, especially in the new ones. However, there are exception to the rules which I shall discuss in some other time.

While the apartment markets my face the full fource of crash, the other property market may just experience a bad downturn.

Thank you for reading

Why interest rates are likely to rise in 2018

Post to SinFongChanRE.wix on 16/1/2018 at 12:15 AM
Commenting on “Why interest rates are likely to rise in 2018”
http://www.theage.com.au/business/the-economy/why-interest-rates-are-likely-to-rise-in-2018-20180112-h0han1.html

We often hear the term official cash rate (OCR). The Reserve Bank sets the cash rate at 2.30 pm (Sydney) on the first Tuesday of each month except January.

What is cash rate and how does it affects mortgage interest rate?

Cash rate is the interest rate banks charge each other on overnight loans. Banks lend money to other banks each day to manage daily cash needs.

Cash rate influences other interest rates, such as bonds, term deposits, credit card, loan and mortgage repayments. RBA's rationale of having lower cash is to boost economic activity by encouraging consumer spending and business investment.

Banks require to borrow money from someone, including other banks, and lend it to someone else at a higher rate, so that the incoming interest payments exceed the borrowing costs.

Money may be sourced locally as well as offshore. More than half of banks' funding these days comes from depositors. These are people who put money in the bank and expect, in return, to be paid interest. By offering higher interest, the banks are able to attract more depositors.

When interest rates increase in a particular country, foreign investors may be more attracted to invest there. This is because the potential returns available on deposits or investments that earn interest have increased.

Since the global financial crisis, offshore wholesale lending has become significantly more expensive. Lenders now demand a higher rate of return to reflect a higher perceived degree of risk in lending their money.

I blogged on 12 December 2017 that the RBA will increase the cash rate by 50 point or 0.5% in 2018, taking it to 2.0%. ANZ and NAB share the same view, while CBA reckons the rise will be 25 point to 1.75%. Westpac does not share the optimism either the other banks or the RBA about the economy.

Will this increase eventuate?

The US economy is growing again, and in December, the US Federal Reserve (The Fed) has raised cash rates by 0.25% to 1.25%-1.50%, the third rate rise in 2017. The Fed anticipates three further rate increases for each year 2018 and 2019 respectively. Most Fed's officials expect the interest rates will be above 2% to 2.8%.

If we are to believe that Australian economy is sound and growing, the RBA will follow US rates, otherwise if the economy slips RBA may be forced to keep the cash rate unchanged or even cut it again.

Housing finance expert Martin North of Digital Finance Analytics told The Australian Financial Review, "Borrowers should assume we are at the bottom of the interest rate cycle – in fact we are probably already past it"

Thank you for reading.

Foreign buyers are dropping out of the Australian property race

Post to SinFongChanRE.wix on 14/1/2018 at 3:46 PM
Commenting on “Foreign buyers are dropping out of the Australian property race”
https://www.domain.com.au/money-markets/foreign-buyers-are-dropping-out-of-the-australian-property-race-20180111-h0gxye/

When one talks about foreign property investor in Australia, they generally refer to the Chinese investors from mainland China. Knight Frank reported that Chinese companies spent $2.4 billion buying 38 per cent of all the residential property development sites sold in Australia in 2016.

Australia ranks second only after US in terms of property investment by the Chinese. The other leading places they invest in are Hong Kong and Canada.

The decline in Chinese investing in Australian property is caused by three reasons.

• Australian Federal Government made some drastic changes to the Foreign Ownership Laws
• Various state governments imposed tax hikes targeting at the foreign property investors
• Chinese government put the brakes on Chinese companies pouring big money into overseas property development, and further restricted how individuals transfer money abroad.

According to Morgan Stanley, in the first half of 2017, the Chinese pulled back 84% of their overseas property investments globally that were attracting Chinese cash. The decline does not only happen in Australia, but also in many cities around the world.

State or provincial (such as Canadaian) taxes have a great negative impact on property investment. Foreign investors shift their target from one place to another that will give more attractive  returns.

In Canada, Toronto and Montreal have surpassed Vancouver as the Canadian cities that Chinese homebuyers are most interested in. Vancouver — once the capital of Chinese property investment in Canada — is pushed to third place. The reason behind is due to British Columbia's introduction of a 15% foreign buyer's tax in Greater Vancouver in 2017. Before then, home prices in British Columbia rose almost 18% in 2016.

Back in February 2017, according to the Seattle Times, Seattle of Washington state was the No. 1 U.S. market for Chinese homebuyers. Not unlike Australia, the median home price in Seattle had surged to the extent that first time homebuyers, families, low income earners, and renters searching for a primary residence were quickly becoming priced out of the market.

Not long after, Washington state reported that foreign investment was down 24% compared with 2016, and fell out of the top 10 states attracting foreign homebuyers. This is in contrast with foreign home sales across the country which are up significantly in the past year.

When China began allowing citizens to take large amounts of money out of the country in 2010, Chinese investment in foreign real estate exploded with a bang. I predicted accurately that the real estate would peak at the end of 2009, but things just went haywire in 2010 after the Chinese money floodgate opened unexpectedly.

Even back in 2009, it used to take more than a week for Foreign Investment Review Board FIRB to approve an application, and for an urgent case like an auction, a three-day turnaround time was a treat. Things changed, and there were insufficient checking and monitoring by FIRB, and some estate agents and foreign investors were in breach of the laws, knowingly.

It is inexcusable for many real estate  practitioners to say that the new laws are the deterrent for foreign investment; what they do not want to know is that some of the so called new laws were in existence before.

In May 2015, Joe Hockey, the former treasurer, transferred all residential real estate functions from Treasury to the Australian Taxation Office (ATO). The ATO has the ability to cross reference its own data with third party sources, including FIRB, immigration, AUSTRAC and state and territory land title offices. The ATO has the capacity to cover more than 600 million transactions annually.

Those who break the laws could longer run away as easily as before. Third parties who knowingly assist a foreign investor to breach the rules will also be subject to civil and criminal penalties, including fines of $45,000 for individuals and $225,000 for companies.

The new laws also ensure foreign residents who unlawfully purchased established residential property would face increased criminal penalties up to $127,500 or three years imprisonment for individuals and up to $637,500 for companies.

Since over 85% of the foreign investment in property comes from the Chinese investors, any decline should not be taken lightly.

Foreign investment leads to injection of money to Australian economy, essential for creating jobs in the Australian construction sector and increasing the property supply; something that both Melbourne and Sydney need. The taxes from real estate transactions have increase the governments' coffers thus help to improve the budget bottom line, a welcome relieve to new infrastructure and other services.

There is a loophole about property investment by foreigners. Australian law allows foreigners who are on a temporary visa to buy established property. Since foreign students are classified as temporary residents, and there are 343,000 students visas issued in 2016-17, this potentially creates unnecessary competition by foreigners against local Australians for the established residential property market, thus making property less affordable for Australians.

In 2018, New Zealand bans all foreigners from buying established homes, joining a growing list of nations trying to make property more affordable for New Zalanders. Australia is yet to follow.

As for the higher end of the real estate market, the outlook may not optimistic, as it is directly proportionate to the decline in Chinese investment.

Thank you for reading

What to expect in 2018

Post to SinFongChanRE.wix on 10/1/2018 at 1:00 AM
Commenting on “What to expect in 2018”
https://reiv.com.au/news-resources/latest-news/what-to-expect-in-2018

When I hear about hot suburbs, especially those suburbs have been around since day dot but never grow in prices, and they are sandwiched between some established ones, you should ask the question, "why they never grow like others until now?"

We must not take all the gurus' and experts' advice at face value. The growth can be just a spike due to some gimmicky promotion, and hype generated for one reason or another. Without personal visit to those suburbs, DO NOT just bet your money on it, even the words come out from my mouth.

Looking at data alone is not sufficient, unless more details are supplied about the underlying reasons. Some suburbs do not grow, but hit a bonanza suddenly due to new land release resulting in more availability of home-and-packages. The new homes generally have varying prices; more at the lower price range than the higher one. Given a certain week, new and existing homes are sold concurrently. To the ignorant and unsuspecting buyers, they all think that the high "median price" means some of the old homes really worth that much.

Have some of the properties jumped by 20%, 30% or even more? Not necessarily so. It might only mean the new house prices are overpriced. If they are not, then the the increase may be due to the added cost of new appliances, landscaped garden, new furnishing and light fittings, etc being thrown in.

Some developers may give a rental guarantee of 6% for 2 years. If a new property is supposedly worth $400,000, the rental guarantee of $48,000 is likely to have costed in. If this amount is removed from the equation, the worth of the property is $352,000. Once all these new properties are sold, the price and therefore the median price will become stable again.

As usual, I do encourage you to take a drive in the suburbs mentioned in the linked article, and decide for yourself whether you would live or invest in those suburbs. Do keep your eyes open and see whether there are new land sites or home-and-packages on sale or just being sold recently.

Thank you for reading.

For most predicted downturn will be little more than a blip

Post to SinFongChanRE.wix on 3/1/2018 at 12:38 AM
Commenting on “For most predicted downturn will be little more than a blip”
http://www.theage.com.au/business/the-economy/for-most-predicted-downturn-will-be-little-more-than-a-blip-20180102-p4yy6s.html

If you can afford $895,342, you are definitely better than most first-home buyers, either you have a highly paid job / combined income with your spouse, substantial parents' handout, or dumb enough to overstretch your budget.

The cutoff point for the first home to get full stamp duty exemption is $600,000, and there are still many properties in the market below that price.

Statistics can be manipulated or misinterpreted unless you are given the full story or specifically the full set of data. Median price is a statistical term. What it means is that 50% of the properties are less than $895,342, and 50% are above $895,342. I cannot tell whether those properties below $895,342 are all around $890,000 or worth much less, or those above $895,342 are just around that figure or in the millions.

Assuming a property owner occupier is to borrow 80% of $895,342, or $716,274 for 25 years at 4% pa, the repayment on principal plus interest is $3,781/month or $45,369/year. This is a lot of money by many people standard, and I sincerely hope that they have a stable job, because it is not easy to raise $3,781 or $873 a week to repay.

What if the loan amount is 80% of $800,000, or 640,000 for 25 years at 4% pa? The repayment on principal plus interest is $3,379/month or $40,538/year or $780/week.

For owner occupiers who have no intention to sell, the downturn in price does not concern them, whether it is a blip or not. The unfortunately thing is that the Council may not revalue the property to reflect the down turn, and since Council rate and water rate are based on the property value directly on indirectly, the rates remain as high, if not higher.

If I have a property that its value has gone down by $90,000, I definitely will NOT call it a blip, because that is equivalent to about 600 days of cruising based on $150/day, or a Mercedes-Benz E200.

Thank you for reading.

Sydney and Melbourne home prices fall, more declines tipped for 2018

Post to SinFongChanRE.wix on 14/1/2018 at 3:46 PM
Commenting on “Sydney and Melbourne home prices fall, more declines tipped for 2018”
http://www.theage.com.au/business/the-economy/sydney-and-melbourne-home-prices-fall-more-declines-tipped-for-2018-20180101-p4yy6f.html

This is my first blog for 2018. Happy New Year, readers.

I wonder how many readers of The Age or ordinary people can have any trust in those real estate / economy experts who "are predicting declines for the harbour city of 3 to 10 per cent." The difference between 3% and 10% is humongous, and it is completely laughable and an insult to the intelligence of the public.

If the "price growth of more than 17 per cent in mid-2017" did happen, as pointed out by the head of research of CoreLogic Mr Lawless, why can't a fall of similar magnitude be plausible?

I also strongly disagree with Mr Lawless' reference that "There's going to be a negative growth rate, probably most similar to the 2000 to 2003 [time period] when prices fell by about 7 per cent." Mr Lawless holds a high and respectable position, and I am not, I believe he probably knows something that I don't. However, I believe he probably is not in the IT industry or it didn't dawn on him that 2000-2002 was in fact the period when the dot com bubble burst.

In order for a city or suburb to have a sustainable growth, there must be large scale employment opportunity. The growth of Melbourne radiated from the Melbourne CBD. Itself and the surrounding suburbs still have the remains of buildings of yesteryear. I do not mean just only the old style ordinary office blocks, but also the warehouses, factories and chimneys.

With closure of factories in Carlton, Richmond, Footscray, Cliffton Hill, etc., these suburbs died, but later resurrected (that's another story). Similar story can be told about Dandenong and Geelong.

The rise and fall in prices do not depend on just the wealthy Chinese investors or first home buyers. One of the major factors is employment, and availability of public transport to places where abundant employment opportunity is available.

The prediction of fall of 7% in price in Melbourne and Sydney is plausible. In fact, I take a dimmer view and boldly predict a double digit decline by the end of the 2018.

Do you know why? How about put on your thinking hat and then leave me a comment behind your reasoning.

Thank you for reading.