Mortgage arrears have been rising from their COVID lows of just 1.0% in Q3 2022, reaching 1.6% in the March quarter of 2024.

Although this was the highest reading on mortgage arrears since Q1 2021, the portion of loans falling behind on their repayment schedules was slightly higher at the onset of COVID at 1.8%.

The upward trends in arrears have been most influenced by non-performing loans, where the arrears rate has risen to 0.93%.

A non-performing loan is one that is at least 90 days past due or where the lender expects it won’t be able to collect the full amount due.

The non-performing arrears rate is now slightly higher than it was at the onset of COVID-19 (0.92%) and above the series average of 0.86%.

Borrowers who are 30-89 days overdue on their repayments comprise 0.68% of loans, up from just 0.35% in Q3 2022 but the highest level since Q2 2020.

This early measure of mortgage arrears is now above the series average (0.59%) but still slightly lower than levels recorded at the onset of COVID-19 (0.86%).

A key factor in higher mortgage arrears is of course the sharp rise in the cost of debt.

With the average variable interest rate on outstanding owner-occupier home loans rising from 2.86% in April 2022 to 6.39% in March 2024, a borrower with $750k of debt would be paying nearly $1,600 more each month on their scheduled repayments.

But there are other factors at play as well

Cost of living pressures are consuming a larger portion of household income, households are paying more tax than ever before and household savings are being drawn down, eroding the savings buffer accrued through the pandemic.

There is also the fact that households are more sensitive to sharp adjustments in interest rates, given historically high levels of debt, most of which is housing debt.

Loosening labour market conditions would also play a role.

Although each measure of mortgage arrears has risen to be above the series average, which is relatively short at only five years, despite the headwinds outlined above, most borrowers have kept on track with their home loan repayments.

They have done this by drawing down on their savings, working more hours or multiple jobs, and contributing less to mortgage offsets or redrawn facilities.

It is likely mortgage arrears will rise further as unemployment lifts, household savings deplete further and, more broadly, economic conditions navigate a period of weakness.

However, arrears are unlikely to experience a material ‘blowout’ unless labour markets weaken substantially more than forecast.

For homeowners that do fall behind in their repayments, there is a good chance most will be able to sell their assets and clear their debt.

The latest estimates on negative equity from the RBA estimate only around 1% of residential dwellings across Australia would have a debt level that is higher than the value of the home.

With housing values continuing to rise, the risk of negative equity is reducing.

Another factor in low mortgage arrears is likely to be a history of strong underwriting standards from Australian lenders and the prudential regulator, APRA

Borrower serviceability continues to be assessed at a mortgage rate 3.0 percentage points higher than the loan product rate, as has been the case since October 2021 when APRA lifted the serviceability buffer from 2.5 percentage points.

Most borrowers who took out a home loan between late 2019 and mid-2022 would have seen their mortgage rate rise more than three percentage points, reflecting a combination of very low interest rates leading into and during the pandemic, but also the 3.5 percentage point rise in outstanding variable mortgage rates since May 2022.

With mortgage rates rising more than the assessment buffer, alongside the cost of living pressures and a record level of household income being consumed by taxes, household balance sheets are being tested, especially for those who may have had more leverage or seen a change in their financial circumstances.

We’ve also seen a tightening of lending policies for what APRA might describe as riskier types of lending: interest-only loans, and loans with high debt-to-income ratios, high loan-to-income ratios or high loan-to-valuation ratios.

Interest-only lending is where the borrower takes out a loan without the immediate obligation to reduce the principal (i.e. they only pay the interest component of the debt).

This type of lending is generally skewed towards investors and would generally convert to a principal and interest repayment schedule after a period of time.

Interest-only loan originations have mostly held below 20% of mortgage originations since late 2017.

Prior to that, interest-only lending was as high as 45% of all loan originations, prompting APRA to introduce a temporary
macroprudential constraint limiting interest-only loans to 30% of originations.

That policy was removed in 2018, but lenders have kept originations well below the historical cap since that time.

The recent rise in interest-only lending activity aligns with a substantial pick-up in investor activity, where the value of new lending is up 36% over the past year.

High loan-to-income ratio lending has shown a subtle rise from the series low in mid-2023 but remains very low by historical standards.

APRA data shows only 3.1% of loans originated in the March quarter had a credit limit greater than or equal to six times the annual income of the borrower, down from 11.1% of originations in the final quarter of 2021.

High debt-to-income ratio lending was at a series low in the March quarter, comprising just 5.2% of home loan originations, down from the final quarter of 2021 when 24.3% of new lending was to borrowers with an overall debt level at least six times higher than their gross annual income.

The portion of home loans originating with a deposit of 10% or less has risen a little but still comprises less than 8% of originations for owner-occupiers and just 3.2% of originations for investors.

Analysis from the RBA shows high LVR loans have recorded higher mortgage arrears than other categories of lending.

Final thoughts…

Overall, lending policies across Australia remain relatively conservative, with close to 70% of borrowers obtaining housing credit with at least a 20% deposit and where their loan amount or overall debt profile is less than six times their gross annual income.

It’s likely lending policies will remain fairly cautious as the economy navigates a period of weakness punctuated by high interest rates and stubborn cost of living pressures.

About Tim Lawless
Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au

Home prices have surged in recent years, mortgage rates have climbed, and household incomes haven’t kept pace.

As a result, housing affordability has plummeted to its worst level in at least three decades.

Despite a dire shortage of homes, the delivery of much-needed new homes has faced significant obstacles.

Labour shortages, disrupted supply chains, and pandemic-related restrictions have all played a part.

Ms Eleanor Creagh, Senior Economist at PropTrack commented:

“Compounding these issues are pre-existing challenges like delays in planning, limited land availability, and excessive bureaucratic processes.

These delays not only slow down the building process but also contribute to higher construction costs, which are further inflated by rising building material prices and increased financing costs.

These challenges have led to a persistent housing supply deficit, pushing up prices for both existing homes and rentals.

While many hope that housing supply will eventually catch up with demand, per capita building completions and approvals are currently at historic lows.

Unless these challenges and cost pressures ease, delivering enough new houses or apartments will be difficult, and the housing and rental affordability crisis will worsen.”

According to PropTrack’s data, since the pandemic, building input prices have increased by 33.4%, while output prices have risen by 40.1% for houses and 23.2% for apartments.

Although price rises have stabilised in the past year, build costs remain high and continue to increase, albeit at a slower pace.

Ms Creagh explained:

“Higher labour, materials, and financing costs compress margins, resulting in potentially lower returns on investment, which has delayed many projects.

The surge in these costs has pushed up the prices of new builds, with established house and unit price growth in Sydney lagging behind new builds.

This greater price inflation for new builds has increased the premium of buying new housing over existing stock, presenting another challenge for new development.

While there is strong demand for new housing, construction costs have risen so much that in many parts of the country, replacement costs are more expensive than existing homes.

This means buying an existing home in lower-cost new build areas may be more attractive.”

PropTrack’s data highlight that in Sydney, most new house development is occurring in Western Sydney’s 11 local government areas.

Here, the median price of new houses is currently listed at a 21% premium to existing houses for sale.

Potential investors and owner-occupiers considering Western Sydney’s new house and land market may also look at the established market due to the current premium of buying new.

Ms Creagh further explained:

“Of course, buying new homes offers advantages such as maximum depreciation benefits and eligibility for the first homeowner grant scheme, which is not available for established homes.

This dynamic is evident in the unit market as well, creating a difficult environment for the pre-sales necessary for property development finance.

Development financing is a significant hurdle for apartment commencements, and the current environment makes it increasingly difficult to launch large apartment projects despite the need for more supply.

This trend is also prevalent in other parts of the country, though the situation looks slightly different in Perth’s new development regions.

Strong price rises for existing houses over the past year have narrowed the gap between buying new and existing homes.”

It was also noted that Perth has been the strongest-performing housing market in the country over the past year.

Many of the suburbs seeing the strongest growth in Perth, such as Rockingham, Armadale, Kwinana, Wanneroo, and Mandurah, are regions with lots of new development.

For example, median values for houses in Armadale have jumped almost 50% in the past year, potentially spurring better demand and pricing conditions for developers of new homes in Perth.

Early signs of a market recovery

Amid strong housing demand, the new homes market shows signs of accepting higher costs, though demand for new developments listed on realestate.com.au remains project-specific.

Glimmers of recovery are evident in new loan commitments, with a 6.0% month-on-month increase in lending for construction and a 10.8% month-on-month increase in lending to purchase newly built dwellings in April 2024, according to the Australian Bureau of Statistics (ABS).

This brings the value of new lending to purchase newly built dwellings up 22.4% over the year to April 2024.

Increasing housing supply

It’s clear the cost to build is too high relative to the cost of buying established housing, hindering activity and creating a difficult environment for pre-sales needed to finance large-scale projects.

Aside from developers reducing margins, shifting this dynamic requires a combination of moderating build costs (materials, wages, planning/approvals processes, land acquisition costs, productivity), lower financing costs, and/or continued house price growth.

Ms Creagh noted that:

“While construction cost increases are normalising, they are unlikely to decrease, meaning market participants will need to adjust to this higher input cost environment.

Industry productivity, innovation, and advanced manufacturing techniques have a role to play.”

Australia’s construction industry lags in productivity. Construction productivity today is lower than it was in 1990, and labour productivity growth in the sector has been low (0.3% per year) for over 20 years, a fraction of that in the transport and manufacturing sectors.

Ms Creagh said that in the near term, continued price increases in the established market are the most likely lever to close this gap.

This will allow developers better pricing conditions and increase the viability of capital flows into building new homes.

This is one reason we expect home prices to continue rising in the months ahead.

Efforts to ease development constraints, such as fast-tracking approval processes, reforming planning and zoning restrictions, unlocking land supply, and increasing densities around transport hubs, are both necessary and encouraging.

But until construction cost constraints improve and the gap between new and existing prices narrows, the significant uplift in residential construction activity required will be difficult to achieve.

She further explained:

“As this premium narrows, cost increases stabilise further, and interest rates begin to move lower, project feasibilities will improve, enabling new ventures.

As a result, a recovery in new housing supply should be underway, particularly given the current strong demand for housing.

However, all these factors will take time to materialise in new approvals and subsequent new supply coming online, meaning upward pressure on rents and existing home prices will remain until new supply becomes available.”

About Brett Warren
Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.

No one ever sets up a business with the intention to fail.

Rather, entrepreneurial types are motivated by a multitude of factors such as personal drive and ambition or a desire to work for themselves or to create a particular product or service.

Sometimes it’s as simple as wanting to be in charge of our personal financial destinies.

Whatever the reason, going into business is a big deal because it can go spectacularly well or spectacularly bad.

One of the issues that I have regularly come across, even with successful businesses, is a lack of understanding of the importance of ownership structures from the outset.

Let’s consider a real-life example to illustrate my point.

Taxing problem

Ben operates a successful construction company with his business partner Glenn.

The pair set up the business some 10 years ago when they were both single, which meant they were advised to own the company shares in their own names.

Regardless of their marital status, this was incorrect advice from the start, because what it has meant is that they have been paying the highest marginal tax rate on any dividends ever since.

Losing those funds to unnecessary tax has meant they have been unable to invest it elsewhere or fund their lifestyles, which now include their own families.

The business has been going great guns, which attracted a potential buyer who offered a very good price to buy it.

This was when Ben and Glenn came to see me, but the news I had for them wasn’t what they wanted to hear.

The purchaser only wanted the goodwill and plant and equipment – and not the shares in the company – as they did not want to be at risk on any company liabilities.

This meant the company would receive the cash, but it would not get the benefit of the 50 per cent General Capital Gains Tax (CGT) discount because only individuals and certain trusts get this benefit.

Likewise, some of the funds would be paid out via the Small Business Tax Concession but the remainder would need to be paid as a dividend, which again would attract a total 47 per cent tax rate with all the receipts going to Ben and Glenn.

The sale, while good in theory, would mean that Ben and Glenn would have paid about $150,000 each in avoidable tax – on top of having paid hundreds of thousands of additional taxes over the past 10 years because of the incorrect business structure.

A start over

Because of these tax liabilities, Ben and Glenn decided not to sell their business now as the taxes wiped out too much of the cash receipts.

Instead, they decided to start over, but this time to set up their business using a combination of companies and trusts as ownership structures.

Sure, this may cost a little bit more at the outset, but it saves significant amounts later on as they had unfortunately learned.

For Ben and Glenn, a more effective structure would have generated between 17 per cent and 22 per cent additional funds after tax to invest, plus would have allowed a distribution to other family members at lower tax rates.

If they had set up the original business in this proposed structure, there would have been no tax on the sale proceeds.

Given the type of business being set up, we recommended operating the business out of a Unit Trust with each partner owning their interests in a Family Trust.

We would then use the old company to operate as a corporate beneficiary and have the individual Family Trusts owning the shares.

We also assisted in the preparation of a Unit Holders Agreement and a Buy-Sell Agreement to protect each family’s rights and to give some certainty if either partner dies.

Lessons learned

The new structure would allow for any future sale to receive both the 50 per cent General CGT Discount and the Small Business Concessions or SBC.

However, given the expected business value on a future sale they may not be eligible for the SBC, so access to the 50 per cent general discount was critical.

The Buy Sell agreement would effectively use life insurance to buy out the deceased partner if Ben or Glenn passed away while the company was still active.

Having a correctly worded agreement would also not trigger income tax liabilities on the life insurance proceeds.

This would allow the family to get the full benefits of the business value and also ensure that neither spouse would come into the business, which neither partner ever wanted.

As you can see from Ben and Glenn’s situation, they could have saved themselves plenty of unnecessary taxes as well as, no doubt, hours of stress if they had sought out professional advisors a decade ago.

That way, they could have more financially benefited from company dividends over the years, as well as from its sale – which is what every business owner wants all along.

About Ken Raiss
Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles

The cash rate was held firm at 4.35% in June, having been at this level since the 25- basis point rise in November last year, and up 425 basis points since the record low of just 0.1% between November 2020 and April 2022.

For some longer-term context, the current cash rate setting is 1.8 percentage points higher than the pre-COVID decade average of 2.56%.

The RBA’s stance seems largely unchanged relative to the May meeting.

Although headline inflation remained well above the top end of the target range at 3.6% over the year to March, mostly due to the stubbornly high services sector, the RBA has been clear that household spending has pulled back, wages growth is easing as labour conditions gradually loosen and some signs of productivity improvements have emerged.

However, the RBA has noted some ‘upside’ inflationary risks remain, highlighting recent budget outcomes could influence demand despite a temporary reduction in inflationary pressures from federal and state energy rebates.

The RBA called out the need for further improvement in productivity growth if inflation is to continue to decline.

The consensus among economists is that rate hikes are finished and the next move from the RBA will be a cut, but the timing is highly uncertain.

Financial markets, based on the ASX cash rate futures, have brought forward the timing of a rate cut from around mid-year 2025 to a fully priced-in cut by March of next year.

Meanwhile, three of the big four banks’ economic units are forecasting a 25 basis point cut in November 2024.

Although the cash rate has risen by 425 basis points, variable mortgage rates haven’t seen quite the same lift.

The average variable mortgage rate for a new owner-occupier loan has risen to an estimated 6.27% in June, a rise of 386 basis points since April.

Similarly, the average variable mortgage rate on a new investor loan has risen by 382 basis points to an estimated 6.53%.

The smaller rise in variable mortgage rates relative to the cash rate reflects a heightened level of competition among lenders; no doubt borrowers are shopping around for the best rates.

Housing markets seem to be somewhat insulated from higher interest rates, with CoreLogic’s Home Value Index continuing to rise through June, and the combined capitals daily index already 0.4% higher over the first 18 days of the month.

The RBA made a point of calling out an increase in household wealth via higher housing prices which, together with a rise in disposable incomes, could support household spending.

Similarly, the volume of home sales is tracking higher than a year ago and above the five-year average, demonstrating consistently strong demand from purchasers despite an array of headwinds including high interest rates, cost of living pressures, low sentiment and stretched affordability.

Most borrowers are keeping their mortgage repayments on track, but the latest data from APRA for the March quarter shows mortgage arrears are trending higher, albeit from a low base and remaining lower than pre-COVID levels.

Mortgage arrears, including non-performing loans and borrowers that are 30-89 days overdue in their repayments, comprise 1.6% of home loans for all ADIs.

This is up from a recent low of just 1.0% in the September quarter of 2022 but below the 1.8% level recorded at the onset of COVID in March 2020.

With interest rates set to hold at their current levels until at least late this year, alongside a gradual loosening in labour market conditions and reduced saving buffers for most borrowers, it’s likely mortgage arrears will rise further.

About Tim Lawless
Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au

Governments are using private investors as scapegoats for a shocking underinvestment in social housing while raking in tens of billions of dollars in property taxes each year, according to the Property Investment Professionals of Australia (PIPA).

Right now, about 175,000 households are on waiting lists for public or community housing across Australia, up by 20,000 since 2014, data analysis by PIPA shows.

More than a third of people (35 per cent) seeking urgent assistance from governments are turned away, up sharply from 29 per cent in 2016.

Despite that, Australia’s total social housing stock of 430,000 dwellings has barely changed in the past 25 years.

“What has shifted is the number of people needing housing, with the country’s population surging by 33 per cent in the past two decades,” PIPA Chair Nicola McDougall said.

Declining social housing proportion

Data from the Australian Institute of Health and Welfare (AIHW) shows the number of social housing dwellings as a proportion of total housing stock “has seen a steady decline” over the past decade, slumping to 4.1 per cent in 2022.

However, State and Local Governments collectively raked in some $68 billion in property taxes, including stamp duty and land tax but not Capital Gains Tax, according to the ATO Taxation Revenue for the 2022/2023 financial year – a staggering increase of 73 per cent over the past decade.

During the same year, governments invested just 1.4 per cent of total revenue into housing and community amenities, according to the ATO.

The AIHW data shows the proportions of social housing compared to total housing stock fell to less than five per cent in the four biggest states:

• 4.7 per cent in New South Wales
• 2.9 per cent in Victoria
• 3.5 per cent in Queensland
• 3.9 per cent in Western Australia

Each of these states has recorded falls in the previous 10 years.

Victoria’s failed Big Housing build

In Victoria, where private investors have been the punching bag of a high-taxing state government, the multibillion-dollar Big Housing Build program has been a spectacular failure.

In the four years to mid-2022, the Victorian Government managed to boost its social housing stock by just 74 dwellings.

“During that same period, the bloated waiting list of desperate Victorians needing a roof over their heads has surged to 57,672 households,” Ms McDougall said.

The root of the crisis

“If you want to know why Australia is in such a mess and why so many can’t afford a home, you only need to look at how much the population has grown and the sharp rise in people in need of support and compare it to investment in social housing,” said Ms McDougall.

As the country’s housing crisis shows no signs of easing, Ms McDougall said politicians continue to focus on penalising and demonising property investors, who provide more than 80 per cent of the homes occupied by Aussie renters.

“Instead of offering meaningful solutions, getting desperately needed supply into the market, and supporting those in the community doing it toughest, governments are passing the buck,” she said.

Outlook

Things only look set to worsen, with research from the UNSW City Futures Research Centre showing 640,000 families across Australia have ‘unmet housing needs’ or are forced to live in unsuitable housing due to cost pressures.

Based on projected population growth, the study warns that the figure could explode to 940,000 households by 2041.

About Brett Warren
Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.

Victoria is set to undergo a housing revolution with an ambitious plan to add 2.5 million new homes by the middle of the century.

Premier Jacinta Allan unveiled proposed housing targets for all local government areas across the state to meet by 2051.

This comprehensive plan aims to accommodate the state’s rapidly growing population and address long-standing issues of housing affordability and availability.

A Vision for Massive Growth

Under this draft plan, two million homes will be built in metropolitan Melbourne, with nearly 500,000 more spread across regional areas.

The City of Greater Geelong will shoulder the highest target, with 139,800 new dwellings.

This significant increase is expected to support the city’s expansion and economic growth.

Ballarat and Greater Bendigo will also see substantial increases, with 46,900 and 37,500 new homes respectively.

Melbourne’s City of Melbourne will host an extra 134,000 homes, reflecting its central role in the state’s economy and infrastructure.

The “well-connected” area of Boroondara, which includes suburbs such as Balwyn, Camberwell, and Hawthorn, will add another 67,000 homes, enhancing its appeal as a prime residential area.

Expanding the Suburbs

The outer ring areas are also set to see substantial growth, aiming to alleviate pressure on Melbourne’s inner suburbs and provide more affordable housing options:

• Melton City Council: 132,000 new homes
• Wyndham City Council: 120,000 new homes
• Casey City Council: 104,000 new homes
• Hume City Council: 98,000 new homes
• Whittlesea City Council: 87,000 new homes

These areas have been identified by the Victorian government based on their potential for future growth and their current infrastructure capacities.

The idea is that targeted expansion should ensure that the growth is distributed evenly, allowing for better resource management and community development.

Meeting Population Demands

Victoria has the largest annual population growth of all Australian states, necessitating more than two million additional homes by the 2050s.

“There are parts of our city that have been locked up for too long,” Ms. Allan stated, emphasizing the need for long-term planning and development.

This growth strategy is designed to ensure that Victoria remains livable, affordable, and sustainable as its population increases.

Opposition Criticism

However, not everyone is on board with the plan.

Opposition Leader John Pesutto criticized the projections, arguing they would “tax the life out of investment in residential construction.”

He expressed doubts about the feasibility of these targets without substantial infrastructure investment, claiming the government had never met its targets before.

“The Allan Labor government is imposing these targets without any consultation and with no money for infrastructure to back it up,” Pesutto argued.

Infrastructure and Support

Addressing concerns about infrastructure, the premier assured that the government would support growth corridors by funding schools, hospitals, and roads to keep pace with demand.

Infrastructure development is critical to the success of this housing plan, ensuring that new communities are well-serviced and connected.

This includes not only physical infrastructure but also social infrastructure such as schools and healthcare facilities.

Boosting Regional Economies

Regional and rural areas will also benefit from the housing plan.

Allan hopes this will bolster regional economies and address worker accommodation shortages.

“We know we need to support young families to afford homes in our regional centres,” she said.

“For regional businesses, being able to find homes for their workers is an economic constraint.”

Greater Geelong will see the largest number of new homes in the proposal, with 139,800 additional dwellings by 2051, more than doubling its current stock.

This will not only provide housing but also create jobs and stimulate local economies.

Current Progress and Future Plans

Victoria’s metropolitan planning strategy, released in 2017, set a target for 70% of new homes to be built in established suburbs by 2051, with the remaining 30% in greenfield areas.

Since 2014, 56% of new homes delivered in Victoria have been in established areas, indicating a shift towards more sustainable urban growth patterns.

In one of his final acts as premier, Daniel Andrews set a target to build 800,000 homes across Victoria over the next decade, aligning with the government’s housing statement from September.

This aggressive target underscores the urgency and scale of the housing challenge facing Victoria.

According to the latest Australian Bureau of Statistics data, 11,071 homes were approved for construction in Victoria in the first three months of 2024, putting the state on track to approve fewer than 45,000 this year.

This clearly highlights the need for accelerated efforts to meet the ambitious housing targets set by the government.

Don’t chase these new potential growth areas.

The figures are not yet finalized, but they serve as a guide while the government consults with local councils.

The aim is to finalize the targets in the coming months.

The final council housing targets will be released by the end of 2024, following local government consultations.

This collaborative approach aims to ensure that the targets are realistic and achievable, with input from all stakeholders.

By working together, the Victorian government hopes to create a housing strategy that will support the state’s growth and prosperity well into the future.

About Joseph Ballota
Joseph is a Property Coach who put hundreds of people on the road towards wiping away their mortgage in under 5 years through expert Property Investment Plans.

Australian home values have risen 35.6% since the COVID-19 pandemic hit Australia in March 2020.

The market saw a strong cycle of growth through the pandemic, and a short-but-sharp drop in values following the commencement of the rate hiking cycle, and made a full recovery in value by November 2023, hitting fresh record highs each month since.

Below the headline figure, the market has been driven higher by multiple ‘speeds’ of growth across the capital cities and regional markets.

This diversity in housing trends has many asking why cities like Perth, Brisbane and Adelaide are continually in high demand, while at the other end of the spectrum, Melbourne and Hobart are in the doldrums.

The highest-performing markets have generally come off a low base, with housing conditions and demographic trends relatively weak over the years preceding the pandemic.

Differences in capital growth trends are marked by the varied supply/demand balances of each city, and in turn migration, affordability factors and dwelling completions influence that supply and demand dynamic.

What is the range of growth right now?

Figure 2 shows the ‘range’ of annual capital growth across greater capital city markets of Australia.

The ‘range’ of a dataset is calculated by subtracting the lowest growth rate from the highest growth rate.

In the year to May, growth ranged from a 22.05% uplift in Perth dwellings to a -0.12% fall across Hobart, taking the range to 22.17 percentage points (above the decade average of 16.3 percentage points).

The annual growth range tends to peak around the inflection point of annual gains for the combined capital city market.

In the past 15 years for example, the biggest range of growth was 23.7 percentage points in the year to September 2022, when the combined capital city market was just moving into an annual decline off the back of rate rises.

At this time, Adelaide home values were still surging, up 17.1%, compared with a 6.6% decline in Sydney home values.

It could be that when shifts in the market happen, such as a negative demand shock from rate rises, some cities are more responsive than others, creating a more dramatic range in capital growth outcomes in the short term.

In the case of interest rate rises, it is understandable that an expensive, highly indebted market like Sydney would see a quicker response in value changes.

Annual growth has also started to slow in recent months across the combined capital cities, as ongoing high interest rate settings, weakening economic conditions and affordability constraints gradually weigh on the pace of home value increases.

This could mean a slowdown in growth across Brisbane, Perth and Adelaide is on the horizon and could see the range of growth eventually narrow across the capital cities.

Supply and demand

Different market speeds can most easily be explained by the number of home purchases happening (demonstrated demand), versus the number of homes available for sale (available supply) – or, the old adage of ‘supply and demand’.

One way to show this relationship is the ‘sales to new listings ratio’, which is calculated by dividing the number of sales that have taken place over a given period by the number of new listings added to the market.

When the ratio is 1, it implies buyer demand and advertised supply is balanced: for every property listed for sale, there is one purchase.

A sales-to-new listings ratio greater than 1 suggests strong selling conditions, as there is more than one transaction taking place for every new unit of supply.

A sales-to-new listings ratio of less than 1 implies a weaker market, where there are more properties listed for sale in a period than purchased.

Figure 3 shows the sales to new listings ratio for the 12 months to May 2024 across the state capitals, as well as the number of sales and listings.

Sure enough, stronger market performers like Adelaide, Brisbane, Perth and Sydney have a sales-to-new listings ratio greater than 1.

Melbourne and Hobart, where price growth has been subdued in the past year, have a sales-to-new listings ratio of less than one.

The ratio is weakest in Melbourne, where there were 98,223 properties added to the market for sale in the past 12 months (the highest of any capital city), compared to 84,452 sales.

The additional supply of Melbourne dwellings is also reflected in total advertised stock levels at the start of June, which were trending 13% above the historic five-year average.

Pockets of the city have seen a build-up of listings, which may be related to more motivated selling on the periphery of the metropolitan.

Victoria has also seen a relatively high level of dwelling completions compared to other states and territories since the GFC, which may have helped to better absorb increases in housing demand without pushing prices as high as in other states and territories.

Figure 4 shows Victoria maintained the highest number of annual dwelling completions between June 2009 and June 2018, and again from March 2020 to December 2023.

Higher completion levels may reflect stronger take up in Victoria of the temporary boost to the first home buyer grant for new homes, the HomeBuilder scheme, as well as high levels of inner-city apartment completions from a property investment boom in the mid-to-late 2010s.

Interstate migration trends

Another area of drastic difference between states and territories that helps to explain the demand side for housing is interstate migration flows.

Figure 5 shows the rolling annual volume of net interstate migration (arrivals versus departures) across the states and territories.

The range between the largest and smallest net interstate migration results blew out enormously through the pandemic period, though it is starting to normalise.

Part of the reason housing purchase demand may be softer across markets like Sydney and Melbourne, relative to Brisbane, Perth and Adelaide, could be because net interstate migration plunged to deep losses through 2021 and 2022 in NSW and VIC.

QLD in particular attracted a lot of the outflow from the southern states, with additions to the QLD population from net interstate migration totalling a record 51,517 in the year to March 2022.

In QLD, WA and SA, net interstate migration eased from pandemic highs in 2023 (and has turned negative in SA) but is still well above historic averages.

While migration data is somewhat lagged, monthly labour force data also points to ongoing strength in employment growth across WA and QLD in particular, which may be a function of more people moving to the states for job opportunities (figure 6).

The latest demographic data from the ABS indicates that any shortfall in net interstate migration has been more than offset by high levels of net overseas migration, led by NSW and VIC.

However, purchasing intent among overseas migrants is usually low, with recent overseas arrivals more inclined to rent.

This may partly explain why a market like Melbourne is seeing relatively strong and persistent growth in rent values, while housing values have actually fallen over the year to date.

Room to grow

Another reason for different dwelling value gains across capital cities in the past few years could come back to a price point.

Perth has seen the largest increase in home values since the start of the pandemic in March 2020 (up 62.6%).

However, zooming out to a decade of growth (figure 7) shows value gains are still playing catch up with most other cities, following an extended downturn from 2014-2020.

Cities like Perth and Adelaide have grown rapidly, but they started at a low price point.

The median dwelling value in Perth is currently sitting at around $740,000, which is still only the 6th highest among the 8 capital cities by median dwelling value (figure 8), and relative to local incomes it is one of the more affordable cities.

Adelaide has become unaffordable relative to local income levels, with the latest affordability metrics implying a price-to-income ratio of 8.2 on the median dwelling.

For interstate buyers, however, Adelaide may still seem relatively affordable, with the median dwelling value ranked 5th across the capital city markets, sitting just above Perth at $757,000.

On the other end of the spectrum, Hobart, Canberra, Sydney and Melbourne experienced strong downturns around the time of rate hikes in 2022, but these capitals have come off a large run-up in value.

These markets were also generally more expensive heading into the rate-hiking cycle, with higher interest costs potentially taking more of a toll on market performance.

While Hobart home values are still -11.5% below the record high reached in March 2022, the city has seen the highest level of growth of any market over the past decade.

Adelaide and Brisbane are close contenders for the top spot however, and will likely take the top spot for 10-year capital growth in the coming months.

Investor interest

ABS housing finance data reports the amount of new lending secured for investment property purchases by state on a monthly basis, with the state referencing the location of the property purchased.

Figure 7 is another indicator of differences in demand across the states, which may feed through the varying rates of capital growth in each market.

QLD and WA in particular have made up a growing share of the investment property finance pool since the onset of COVID.

NSW has a slightly lower share of investment finance than at the onset of the pandemic, though this has been climbing in recent months.

Victoria has seen a more notable decline in the share of investor finance since October 2022.

While many have pointed to additional investment property levies reducing investor demand in Victoria, such as an expansion to the vacancy tax, lower land tax thresholds and increased rates of land tax, it is worth pointing out that these were all announced from May 2023, so the drop off in investment activity preceded those announcements and continued to decline further afterwards.

In any case, the decline in investment activity across the state has likely contributed to weaker market performance across Victoria, which has also been accompanied by a rise in first-home buyer participation.

Where to from here?

In the next few months, the range of capital growth performance is likely to hold at relatively high levels.

This is based on very strong fundamentals in the Perth market, and ongoing issues of over-supply in some pockets of Melbourne and Hobart putting downward pressure on values.

In the long term, however, affordability may once again become a drawcard in some of the cities where price growth has been more subdued in recent years, especially as the value gap closes between cities.

This would help to stabilise capital growth trends in the likes of Melbourne, Hobart and Canberra, and possibly draw down the capital growth rate across Perth, Adelaide and Brisbane.

Considering the annual growth trend in the combined capital city market has also started to slow down, historical data trends suggest that the range of annual capital growth should also start to narrow.

Weaker economic conditions may start to level growth across cities, alongside affordability constraints, interest rates holding ‘higher for longer’ and easing migration.

The labour market is unwinding very gradually.

A continuation of the loosening in the labour market could possibly add to listings supply at the margins as well, because of a small, but growing rate of mortgage arrears.

About Eliza Owen
Eliza is head Of Residential Research Australia for Corelogic and a respected property market commentator.
Eliza holds a first class honours degree in economics from the University of Sydney

When you start out as an investor, the idea of buying a property as you march towards financial freedom is full of excitement and promise.

Yet, the closer you get to making it a reality, the more stressful and confusing it can all become – often because you are trying to make sense of conflicting information and advice coming at you from all corners.

When I’m advising investors who are unsure of what action to take next, there are three simple but important questions I suggest they ask themselves to remain decisive and action-oriented:

1. Do I understand the full costs of buying an investment?
2. Am I getting the right advice?
3. Am I buying with my head or my heart?

If you can answer these questions in confidence, then you are well situated to avoid the most common homebuyer mistakes.

If you’re struggling to answer these questions confidently, then perhaps a little further investigation is in order.

1. Do you understand the full costs involved in buying an investment?

I’m not going to generalise by saying this applies to all new investors, but in my experience, I’ve found that a large majority of first-time property buyers aren’t very good at accurately estimating the costs involved in buying an investment property.

They may get an estimate of what amount they borrow from an online calculator, and they occasionally look into other property ownership costs, such as water and rates.

But there is so much more to it than that.

First of all, you need to consider the other costs of purchasing a property, over and above the deposit.

The mortgage repayment you will pay is not the end of the story, by any means.

There will be a number of upfront costs and fees including stamp duty – depending on the purchase price, this can range from $3,000 through to $30,000-plus – along with loan application fees, settlement costs and mortgage insurance if you do not have a 20% deposit.

Some loans will allow you to include mortgage insurance into the loan, which means you will ultimately pay interest on your LMI fees, but it gives the benefit of not having to find that lump sum of cash upfront.

All of these costs can add up to a number of unexpected, up-front, out-of-pocket expenses – and we’ve not even discussed the costs of property ownership yet.

After your upfront costs and mortgage repayments have been accounted for, you will have other financial responsibilities to take into account.

These will be ongoing costs like council rates, water charges, insurance, and maintenance expenses.

Finally, you need to build a financial buffer. This will help to protect you against rising interest rates and unexpected financial hardships, such as losing your job.

2. Are you getting the right advice?

Just like it doesn’t make sense for your hairdresser to make your business decisions, you shouldn’t rely on your real estate agent to provide advice when you’re making substantial financial decisions.

They are acting on behalf of the seller and they do not have your best interests in mind, regardless of how helpful they appear.

They might sound very convincing when trying to sell you a property outside your price range but remember, they don’t know your financial situation and they are being paid a commission.

To gain personalised advice from someone with a vested interest in your financial success, you could consider working with a buyer’s agent so you have your own professional advocate.

Furthermore, it pays to remember that a real estate agent is not a lawyer and their advice on clauses and conditions to add to contracts should be taken with a grain of salt.

For example, many real estate agents advise buyers to add a building and pest inspection clause to contracts.

Buyers then assume they can back out of a contract if, for instance, asbestos is found – only to find that this could constitute a breach of contract because it is not a major structural defect.

Getting professional legal advice might suggest changes to your contract in order to give you more protection, flexibility, and ownership over your decision to proceed with the purchase.

3. Are you buying with your head or heart?

We’ve all heard the advice to stay objective when making investment decisions, but it can be difficult to remember this when you walk into a property that could just be your ideal investment.

Instead of remaining objective, you may find yourself immediately daydreaming about wall colours and furniture choices – even though you know that it won’t be you residing in the property.

This can be dangerous and make you blind to a property you really should avoid.

First of all, the stars in your eyes will be obvious to the real estate agent and won’t do you any favours in negotiating a better price.

Secondly, this kind of emotionally-led thinking can prompt you to go beyond your budget, leaving you open to all sorts of financial risks.

Your longed-for investment property can quickly become your biggest regret if you have to skimp on your favourite hobby or work three jobs just to afford it.

Finally, if you find a fantastic investment property that seems to fit the fill, you’ll do almost anything to justify making it fit your budget and criteria.

But remember this: all the fancy renovations and fixtures in the world can’t make up for the good location, major noise pollution, or resale potential, so, be careful.

At the end of the day, the road to success is paved with many investors who have gone before you – but without clear intentions, they’ve never quite accomplished lasting success.

Go into your next property purchase with your eyes wide open and an expert team of professionals on your side, and you’ll be in the best possible position for long-term wealth and success.

About Leanne Spring
Leanne is a highly experienced Buyers Agent in the Brisbane Real Estate market. Leanne became a passionate lover of property in 2001. Since then, both professionally and personally, she has been involved in all aspects of property including purchasing, negotiating, renovating, and selling.

The Australian Taxation Office (ATO) is putting rental property owners on notice this tax season.

ATO Assistant Commissioner Rob Thomson has highlighted that many rental property owners are making mistakes on their tax returns, despite 86% using a registered tax agent.

One major issue is misunderstanding what expenses can be claimed and when particularly distinguishing between repairs and maintenance versus capital expenses.

Other errors include overclaimed deductions and insufficient documentation to back up the expenses claimed.

Mr Thompson said:

“We understand rental property owners may already have long lists of things to fix in their properties.

But by getting your tax return right the first time, you’ll avoid having to add ‘fix up tax return’ to your to-do list down the track.”

The ATO cross-checks data from banks, land title offices, insurance companies, property managers, and sharing economy providers to verify the accuracy of tax returns lodged by rental property owners.

Mr Thompson advised:

“If you use a tax agent, make sure you provide them with all records of your expenses.

If you have a nagging question or something that doesn’t make sense, ask your agent when you’re working with them.

Rental property investments and taxation can get tricky, so it pays to get the right advice from the beginning.

Don’t rely on things you hear at a Sunday afternoon barbecue.”

Dodgy deductions

Deductions can only be claimed to the extent they are incurred in producing income.

For instance, costs incurred in generating rental income each year can be claimed for that period, with some exceptions.

Mr Thompson explained:

“It’s normal for landlords to have to fix or replace damaged items in a rental property.

But there is a myth that all expenses can be claimed immediately.

Repairs can usually be claimed straight away, but capital items, such as dishwashers, curtains, or heaters, can only be claimed immediately if they cost $300 or less.

Otherwise, they need to be claimed over time.”

A common issue is the ‘double-dipping’ on expenses that the property manager has already arranged and included on the property’s income and expenses report.

Rental property owners can only claim for amounts they incur, even if there are two records for the same expense.

Interest on mortgages is one of the most commonly claimed deductions.

However, incorrectly reporting interest expenses accounts for 42% of the $1.2 billion Individuals Not in Business tax gap associated with rental properties.

Problems arise when taxpayers redraw or refinance a loan for their rental property and use the money for private expenses, then claim the whole amount of interest charged on the investment loan as a deduction.

Mr Thompson clarified:

“For example, if you have an $800,000 mortgage for a rental property and then add $50,000 to the loan to upgrade your family car, you can only claim the interest on the initial $800,000, not the interest on $850,000.”

Payments must be apportioned between the private and investment components for the life of the loan.

Additionally, while levy payments to body corporate administration funds and general-purpose sinking funds are deductible, special-purpose fund payments for capital expenditure are not deductible until the capital works are complete and the expense has been billed to the body corporate.

Risky records

A lack of documentation to substantiate claims of expenses and deductions is another leading cause of errors.

Mr Thompson advised:

“You need to keep detailed and complete records, including receipts, invoices, and bank statements for interest expenses.

You should also detail how you calculate your deductions and any apportionments.

This will allow you or your tax agent to correctly complete your tax return.”

Records can be paper or electronic but must include:

• The name, ABN, or business name of the supplier
• The amount of the expense
• The nature of the goods or services purchased
• The date of purchase
• The date the document was produced

Claims for capital works aren’t based on the purchase price of your property but on the construction cost when it was built.

A quantity surveyor or suitably qualified professional can help prepare a capital works deduction schedule, but this is not mandatory.

Mr. Thomson emphasized:

“Taxpayers are responsible for what they include in their tax return, even when using a registered tax agent.

If you don’t have sufficient records, you can’t claim it.”

Careless capital expense claims

The ATO is also cautioning against incorrect claims for capital expenses.

Repairs, like fixing a dishwasher, can generally be claimed immediately, but buying a new dishwasher cannot.

Some expenses, including improvements and capital works, must be claimed over time.

For example, remodelling a bathroom in your rental property is typically claimed at 2.5% over 40 years.

Mr Thompson said:

“Spending money to fix something could be a repair, initial repair, capital works, or a depreciating asset.

Our Investor toolkit can help you understand the difference, as the amount you can claim as a deduction this tax time will depend on which category it falls into.”

Case study: claiming cooktops

The ATO cited a case study about a Melbourne taxpayer who was selected for review shortly after listing a rental property.

The taxpayer’s registered tax agent provided a list of deductions, including new blinds, a cooktop, and air conditioners as immediate deductions.

These items should have been categorized as depreciating assets and claimed over time.

The taxpayer also purchased a new cooktop for their personal home in the same transaction and tried to claim both cooktops in their tax return.

The ATO queried this as the rental property only had one kitchen.

The taxpayer didn’t provide proper records to their agent, resulting in avoidable mistakes.

The taxpayer’s return was adjusted by the ATO, and penalties and interest were applied.

About Sam Alaaeddin
With well over a decade’s experience in asset and wealth management, Sam is an Elite Wealth Planner at Metropole and leverages his expertise to help clients achieve their wealth management goals. He holds a bachelor’s degree in law and commerce (Finance) and a Diploma in Financial Planning.

The total amount of money stashed in offset accounts has hit another record high of $271.72 billion, as borrowers continue to stash cash in their mortgages despite the rate hikes, according to the latest APRA Quarterly ADI Property Exposure statistics data

This amount is $43.67 billion higher than it was before the rate hikes began.

RateCity.com.au research director, Sally Tindall, said:

“Money in offset accounts continue to hit record highs as many borrowers remain laser-focused on mitigating the financial pain of rising rates.”

While some households now have record levels of money stashed in their offset accounts, others are falling into arrears.”

Offset balances now account for 12.2 per cent of the total credit owing across the mortgage books of authorised deposit-taking institutions, the highest share since this particular record began in 2019.

Total amount in residential offset accounts

Source: APRA Quarterly ADI Property Exposure statistics. Based on all authorised deposit-taking institutions, excluding payment facilities and specialist credit card providers.

Overdue mortgages continue to rise

The value of home loans 30-89 days past due as a share of the total owing on all mortgages has risen for the sixth consecutive quarter from its low of 0.34 per cent in the September 2022 quarter.

While it now stands at 0.66 per cent of all credit outstanding, this is still, on average, below what it was in the year before COVID (2019) at 0.73 per cent.

Ms Tindall commented:

“The value of mortgages falling into arrears ticked up to 0.95 per cent of all mortgages.

While this is still relatively low, particularly considering the dramatic rise in mortgage rates over the last two years, it is now above what it was in the year before COVID, with little sign of turning around.

The stage three tax cuts will be critical in helping some families keep up with their mortgage and other bills but for others, it’s not even going to touch the sides.

“If that’s you, and you haven’t already reached out for help, pick up the phone today. Banks don’t want to see you lose your home, any more than you want to hand over the keys. It’s in their interest to help you find a way through, where possible.

If you are still managing to balance the budget, consider tipping the extra money you’ll soon get from the stage three tax cuts into your mortgage to build up your buffer and help reduce your monthly interest bill.

While it may seem like a drop in the ocean for those with whopping great debts, when it comes to paying interest on the mortgage, every single dollar counts.

Non-performing loans, where the borrower has missed a mortgage repayment by 90 days or more, or the loan is impaired, are now higher than it was in the year before COVID.

In 2019, the share of non-performing loans was, on average 0.91 per cent.

Today it stands at 0.95 per cent, after steadily increasing across the last five quarters.

Owner-occupiers continue to be overrepresented in the arrears data

The APRA data for March 2024 shows that 0.97 per cent of owner-occupier loans are in arrears, while just 0.83 per cent of investor loans are in arrears.

Investors paying interest-only are least likely to be represented in the arrears data, with just 0.40 per cent of investor interest-only loans in arrears.

Non-performing loans as a proportion of credit outstanding according to loan type

Source: APRA Quarterly Property Exposure statistics. Based on the value of term loans for each borrowing type.

Interest-only loans holding steady

The value of mortgages on interest-only terms rose by a modest $916 million, compared to the previous quarter.

However, looking at the data as a share of all term loans, the proportion of interest-only loans is declining.

In the March 22 quarter, they accounted for 11.3 per cent of term loans.

In the March 24 quarter, they now account for just 10.8 per cent.

This suggests borrowers are not flocking to interest-only terms to navigate the impact of the rate hikes.

Value of loans on interest-only terms

	Mar-24	Dec-23	Mar-23	March 22
Value	$238.62 billion	$237.71 billion	$234.32 billion	$225.04 billion
Share of all loans	10.8%	10.9%	11.1%	11.3%

Source: APRA Quarterly Property Exposure statistics. Share is based on the value of all term loans outstanding.

Exceptions to serviceability drop

A total of $6.18 billion in new home loans written by ADIs in the March 2024 quarter were approved outside the banks’ serviceability policies.

This was a drop of $1.12 billion from the previous quarter (15%) but a hefty 64 per cent increase compared to the same period a year ago.

New mortgages approved as exceptions to serviceability began to rise after a range of banks, including CBA, Westpac and NAB, announced they would process refinance applications under a reduced stress test of around 1 percentage point if existing borrowers could not meet the standard 3 percentage point serviceability test, provided they met other criteria.

The drop from the previous quarter suggests that the number of people who are able and willing to break free of mortgage prison using this lower test is reducing.

As a share of all new mortgages funded in the quarter, it represents 4.7 per cent.

Value of new loans processed as exceptions to serviceability

Amount	Quarterly change	Year-on-year change
$6.18 billion	-$1.12 billion -15%	+$2.41 billion +64%

Source: APRA Quarterly Property Exposure statistics

High debt-to-income loans hit a new record low

The total value of new loans with a debt-to-income ratio of six times or more as a proportion of all owner-occupier and investor loans dropped for the ninth quarter in a row.

At the peak, in December 2021, 24.3 per cent of all new loans had a debt-to-income ratio of 6 times or more.

In the March 2024 quarter, it is at a new record low of 5.2 per cent.

The steep reduction in the proportion of new loans with a debt-to-income ratio of six times or more comes on the back of 13 RBA rates hikes – four of which were double hikes.

As a result, borrowers have found their total borrowing capacity has shrunk considerably.

Average new loan stress test rises to 9.31%

The average variable rate of loans funded in the March 24 quarter was 6.34 per cent – an increase of around 3.79 percentage points since the start of the hikes.

The average rate at which banks are now stress-testing new mortgage applications is an eye-watering 9.31 per cent.

This is because APRA banks stress test a new borrower’s finances to make sure they can still afford the mortgage if rates were to rise 3 percentage points from the rate they are applying for, although exceptions can be made.

Prior to November 2021, this buffer was 2.5 percentage points.

Weighted average rates for new loans funded in the quarter

Quarter	Av. variable rate	Av. assessment rate for serviceability
Mar 2021	2.82%	5.44%
Mar 2022	2.55%	5.69%
Mar 2023	5.47%	8.31%
Mar 2024	6.34%	9.31%

Source: APRA Quarterly ADI Property Exposure statistics

About Adam Hubbard
Adam Hubbard is a senior Wealth Strategist at Metropole and his many years of real estate and wealth creation experience gives him a holistic perspective with which he helps his clients safely grow their wealth through property.