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Opinion

How the house price boom could threaten business start-ups

house price

Whenever the topic of rapidly rising house prices is raised, there are always concerns about what the future will look like for younger generations when it is time for them to try and buy the roof over their head.

There are fears of financial insecurity, rising wealth inequality and, eventually, a group of people retiring with a rental bill hanging over their head or a mortgage yet to be paid off. For those unable to get onto the property ladder early enough, the outlook is bleak.

But during the federal government-introduced inquiry into housing affordability and supply in Australia this month another concerning outcome of rapidly rising prices was raised that doesn’t get talked about enough.

Independent economist Saul Eslake recently told a public hearing for the inquiry price booms and a market unfairly weighted towards property investors could soon affect the number of start-ups launched across the country.

“It’s very common for someone who starts a small business to have their house on the line in order to get the finance they require,” Eslake said.

“Indeed, among the longer term adverse consequences of the decline in homeownership rates in Australia is that it may be more difficult for people to start and operate small businesses because fewer of them will have homes that they can use as security for business loans.”

Could this be yet another unexpected and adverse outcome of the latest property market boom? Time will tell.

But there is some research suggesting that Eslake’s concerns that the dynamism of the small business sector is uniquely at risk from changing levels of homeownership is a fair analysis. A Reserve Bank research paper from 2015 by Ellis Connolly, Gianni La Cava and Matthew Read found households who own small businesses are more likely than employee households to owe residential-secured debt. This was typically second mortgages or property investor loans.

And for newer small businesses this was even more evident, with these households owning a young start-up less likely to owe business debt but just as likely to owe home debt or credit card debt.

“This could be consistent with these households finding it harder to raise business debt and instead relying on personal lending products to fund their young business,” the researchers said. In other words, it’s tricky to get lenders to put up the money at reasonable interest rates to launch a risky new venture.

And when founders look for other ways to fund their small business start up, the value built up in their home is often one of the more common sources they tap into. If you don’t have a home, this is not an option available to you. If you have taken on a bigger mortgage than you can afford to get onto the property ladder, this might also no longer be an option.

On the other hand, rising home values could actually spur on small business creation for those who own property already.

A 2013 European Central Bank paper from Stefano Corradin and Alexander Popov examined the relationship between entrepreneurialism, home prices and home equity in the United States where homeownership rates are relatively high. It’s arguable how much this would apply to Australia, but it’s possible these trends are similar here.

The research noted that those who might otherwise launch a business could be discouraged from becoming a founder if they have low levels of wealth or other borrowing constraints, but owning a property in a rising market was found to help provide the funds to become an entrepreneur.

“A 10 per cent increase in home equity increases the probability that a non-business owning household will switch to entrepreneurship in the future by up to 14 per cent,” the research says. Conversely, a fall in home values and a drop in equity could have the opposite effect.

As homeowners and home buyers know, the housing boom in Australia is still underway, but there is evidence of a slowdown on the horizon.

The Commonwealth Bank is forecasting national property prices to increase 7 per cent in 2022, followed by a 10 per cent decline in 2023 should interest rates rise.

But determining whether the double-digit property price rises seen this year have been good for the small business sector now and into the future is tricky.

While there is a risk those who have failed to get onto the property ladder will be unable to launch new start-ups, the price rises have helped some existing small businesses weather through the coronavirus-driven economic storm. The outlook was grim when the pandemic initially hit the world and economists were steeling for sky-high unemployment rates alongside a tidal wave of insolvencies that would leave the nation in a mess not seen since the Great Depression. Instead, there has been record levels of government support, the relatively rapid development of vaccines and a spending and hiring spree post-lockdowns.

We might need to thank house prices for some of that. The RBA’s October Financial Stability Review says small and medium businesses were provided significant amounts of government support to keep them afloat during the pandemic-induced recession, but it wasn’t the only source of protection.

“One potential mitigating factor from a financial stability perspective is that around 30 per cent of bank lending for small and medium enterprises (those with an annual turnover of less than $50 million) is secured by residential property, meaning that the recent increases in housing prices will likely help some businesses avoid insolvency,” the review says.

This benefit, at least, should not be understated.

 

Article Source: www.brisbanetimes.com.au

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Gold Coast

“2021 saw an insatiable appetite for off the plan projects in premium locations.” Five Minutes with Paul Geduon from S&S Projects

SS Projects

It was a stellar 2021 for the Gold Coast apartment developer, S&S Projects.

They sold out Awaken, their Rainbow Bay project of just nine apartments, with a top sale of $8.15 million secured for the penthouse, which was bought by a US couple.

Their nearby project, Esprit, is over 80 per cent sold, and there are plans already on the desk of the Gold Coast City Council for their next project, a rare mixed-use apartment and hotel development in Palm Beach.

Urban recently caught up with S&S Projects director Paul Geddoun to discuss the Gold Coast apartment market.

JC: How did you view the performance of the off the plan market in 2021, and what are the strongest positive and negative factors that will influence outcomes in 2022 and 2023?

PG: 2021 saw an insatiable appetite for off the plan projects in premium locations.

Although the less premium project markets has been strong, the price growth has not been at the same level as premium projects. Sales volumes at record pricing in premium projects is unlike anything we have seen previously.

Esprit

Esprit 217-227 Boundary Street, Coolangatta QLD 4225 

We expect the market to remain strong in 2022 and 2023 however the growth will not be at the same level as there was a little bit of catch up along with more limited stock which has driven these markets at these levels where there is no more projects available and increased competition which will slow the growth.

The negatives are that there has been a shortage in materials and labour due to border restrictions along with globally driven stimulus which has put excess funding into the market with international infrastructure upgrades for job creation to stem any recession fears as a result of Covid which has forced up the cost of construction which may cause some project issues.

JC: What trend (short term or long term) has prompted your greatest enthusiasm for the apartment market, and what is the issue of most concern to you and or your clients?

PG: In general, real estate has seen great growth which has provided many with increased equity which has driven decisions for holiday homes and downsizing into apartments. The greatest concern in the near future is interest rates and people being overextended.

JC: Has urbanisation stalled amid the rush to the regions and what will it look like over the decade ahead? 

PG: I think urbanisation is strong with price growth and competition allowing developers to create better built form outcomes and develop sites in areas where the feasibilities once didn’t allow it.

I think the future looks strong for many new areas that have been the recipients of this higher-grade development creating better urban areas.

JC: How important do you view the push for sustainability practices in the apartment market, and what initiative has seized your interest or focus? 

PG: There is a strong focus on sustainability, and this is being most represented in the fixtures and fittings being installed which are more efficient and it is also common practice to place as much solar on the roof of project to assist in the ongoing sustainability and costs of the operating buildings.

 

Article Source: www.urban.com.au

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Opinion

How home loan mortgages rose in 2021 to record levels

home loan

Lender records were broken in every state and territory except WA, according to the ABS data

Purchases by NSW owner occupiers came with mortgages sat at around $770,000, according to the latest lending data.

The national average mortgage size for owner-occupiers has reached a record high of $595,568 according to ABS data.

Records were broken in every state and territory except WA.

The national mortgage was up $92,404, an 18% hike over the year.

The November ABS Lending Indicators, released 14 January, advised the loans were for the purchase of new and existing dwellings.

The national average mortgage size for owner-occupiers has reached a record high of $595,568 according to new ABS data out today.

Records were broken in every state and territory except WA, according to the ABS data in original terms.

Victorian home buyers saw the biggest jump in their mortgages, up 24% or $120,000 to $618,602.

Average new owner-occupier mortgage size, November 2021

Amount Year-on-year change
National
$595,568 $92,404 18.4%
NSW
$769,459 $125,112 19.4%
Vic
$618,602 $120,032 24.1%
Qld
$513,649 $73,604 16.7%
WA
$439,578 $22,868 5.5%
SA
$421,801 $38,016 9.9%
ACT
$585,859 $58,434 11.1%
TAS
$445,915 $73,175 19.6%
NT
$433,333 $53,271 14%

“Demand for Aussie housing remains firm, but affordability has decreased because home prices have surged more than wages,” Ryan Felsman, senior economist at CommSec noted.

“In November housing stock was high and the country’s two largest states were freshly out of lockdown, so it’s no surprise to see a rise in new lending,” RateCity.com.au research director, Sally Tindall, said.

“Growth in property prices is starting to slow on the back of fixed rate rises and a crackdown by the regulator, but the opening up of borders this year will increase demand, keeping prices moving north,” she forecast.

The data did not include refinancing, nor renovation loans.

Renovation loans surged by 18 per cent in November to a record $569 million. The value of lending for renovations is up by a massive 115 per cent on a year ago.

Canstar analysis showed Australian mortgage holders refinanced $15.72 billion worth of loans to a new lender in November 2021, down 2.3% from October.

 

Article Source: www.urban.com.au

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Opinion

Should you buy that investment property this year?

investment property 1

Property investors are set to snap up homes and apartments across Australia in 2022, as interest rates remain low and rental vacancy rates continue to tighten.

But experts are forecasting it won’t all be smooth sailing, as future landlords face the uncertainty of both federal and state elections, with housing policies that are yet to be defined. They also face possible interest rate hikes, which are looming on the back of inflationary pressures.

While interest rates may not rise immediately, tighter lending rules introduced in 2021 have already made it tougher for investors to get a mortgage, Loan Market Mortgage Broker Daniel Koutsamanis said. But that hadn’t yet had a major impact on the number of people looking to invest.

Changes to loan rules, including the calculation of debt to income ratios, (the amount someone can borrow depending on their earnings), and of interest rate buffers that determine if a borrower can afford a mortgage if interest rates rise by 3 per cent, had seen the amount that could be borrowed fall by between 5 and 10 per cent.

“Budgets are coming down a little bit, but there hasn’t been a drastic change,” Mr Koutsamanis said. “There’s still a fairly decent amount of confidence, with clients wanting to invest. The sentiment is still pretty decent, pretty strong.”

That confidence follows a stellar year for investors, with the number of new loan commitments jumping by 89.6 per cent across the year to October 2021, Australian Bureau of Statistics figures showed.

There was $9.73 billion of new loan commitments for investment properties in October alone, the data showed, despite the hit to rental markets in both Sydney and Melbourne over the year.

Rents in Melbourne dropped significantly over 2021, making it one of the cheapest capital cities to find a rental property. Apartment rents dropped by 7.5 per cent across the year to September and house rents fell by 2.3 per cent, Domain figures show.

Sydney apartment rents fell by 2 per cent over the same period, while house rents rose as people looked for bigger properties during lockdown.

investment property

Tenants have flocked to Queensland to escape lockdowns. Photo: Domain 

Both markets rely on overseas migration to help fill rentals, including international students who were kept out of the market because of the COVID-19 pandemic.

Unlike Sydney and Melbourne, Queensland saw an influx of new tenants and new buyers, moving away from lockdowns in both cities.

Mr Koutsamanis said some investors were still looking at buying in Queensland, where the vacancy rate has dropped below 1 per cent and is just 0.5 per cent on the Sunshine Coast, according to SQM Research.

A rise in tenant numbers is now predicted in Sydney and Melbourne as international borders reopen to overseas students, workers and tourists, providing opportunities for investors across the country, Sydney-based Aus Property managing director Lloyd Edge said.

“With the international borders reopening, there is opportunity for more growth, with students returning at the moment. I think the properties in the city might start to come back,” Mr Edge said.

Demand for Airbnbs could also return, offering investors a way back into the short-stay rental market, Mr Edge added.

While rents may improve slightly with borders reopening, they would stay lower until migration returns to normal levels and investors would need to think about the long term, keeping properties for at least 10 years, said Melbourne-based buyers agent Wendy Chamberlain.

“Over time, real estate is a forgiving investment, so investors do need to look to the long term. They need to buy assets that can weather the storm rather than be hard hit, like student accommodation.”

Ms Chamberlain said looking further out of the city, and in regional areas, where investors could buy a bigger property with their money would help attract tenants looking for more space.

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