Get your house in order now

Things could start to get ugly in the property market in the next six months, so it’s wise to start preparing

THE latest figures show the residential property market is falling or at best stagnant in the better-performing capital cities.

With the spring selling season under way, it is a vastly different environment than a year ago. It has become a buyers’ market, while recent homeowners need to be careful these falling market values don’t put them on their financier’s watchlist.

Not only has the property market changed substantially but so has the lending market.

The last thing anyone needs is to be caught in a credit crush coupled with a falling market.

The latest data from research group CoreLogic shows residential property values fell over the past 12 months in Sydney (-5.6 per cent), Melbourne (-1.7 per cent), Perth (-2.1 per cent) and Darwin (-4 per cent), while prices rose in Brisbane (+0.9 per cent), Adelaide (+1 per cent), Hobart (+10.7 per cent) and Canberra (+2.3 per cent).

While the 12-month results capture all the headlines, we tend to focus on the latest month or quarterly result.

Hobart is a great case in point. A healthy 10.7 per cent annual rise is impressive but values have risen just 0.1 per cent in the last quarter, and actually fell 0.1 per cent last month. That says the market has turned and is following the rest of the country down.

Last month every capital city (except Canberra, Adelaide and Darwin) suffered a fall in property values. Those that went up were by just 0.1-0.5 per cent.

Remember, property is all about supply and demand so this softening market looks as though it is going to intensify, with a flood of new listings coming on for spring.

SQM Research data shows national residential listings rose 5.9 per cent in August, to 332,678, with rises in all capitals.

Listings rose 10.9 per cent in Sydney, to be a whopping 30.4 per cent higher than a year ago. They are now at the highest level recorded since February 2009, surpassing the peak in listings recorded during the last housing downturn in 2010-12.

So values are generally falling and the supply of property coming on the market is rising significantly. Yes, it could start to look ugly over the next six months.

Now add the financing layer to the equation. Regulators are forcing financiers to tighten their lending criteria and they are, in turn, putting up their home loan rates to cover rising interest costs from money sourced from overseas.

At most risk are property owners who stretched themselves to make a purchase in the past two years.

Say you were a buyer who took advantage of the various state government-funded First Homeowners Grants, and bought a property worth $400,000 with a 5 per cent deposit when the banks were aggressively chasing home loan customers. If the value of that place falls by 10 per cent, your deposit has effectively been snuffed out. Instead of having $20,000 equity in the house, you now have none.

In fact, you’re in “negative equity”, where the value of the loan is higher than the value of the property. Your lender then starts to get very nervous. You are at risk of them demanding you pay down a big chunk of the loan to get back into positive equity, forcing a sale or getting you to arrange finance with another lender. Trust us: it will be much harder to refinance now than a year or two ago.

That’s not to say there aren’t ways to secure a new mortgage if you don’t hold the rule of thumb 20 per cent equity.

Offering other security can enable you to lock in a loan with less equity in your property, while getting a family member to stump up a guarantee, or taking out loan mortgage insurance, can also help.

Mortgage Choice CEO Susan Mitchell has warned that banks have drastically changed their approach to lending, saying “our data reveals that home loans are taking longer to progress from application through to settlement, as lenders’ qualification criteria becomes more onerous in order to comply with responsible lending standards”.

“We have found that lenders are conducting a more thorough analysis of home loan applicants’ monthly living expenses, requesting forensic detail on as many as 15 expense categories, including clothing, entertainment, medical, transport, education, childcare and more. Lenders will ask to see a minimum of three months’ worth of spending which allows them to determine an applicant’s ability to service a loan. Some home loan applicants are having to justify their expenses in certain categories and being told they need to change their spending behaviour to increase their chances of getting a home loan.”

The takeaway point? Don’t ditch your lender before securing alternative financing, because if you’re low on equity, there may not be an alternative. In fact, you could be in negative equity and not even realise it.

For some people there may be no option but to sell. That has to be a last resort because it will involve a lot of emotional and financial pain. So prepare now if that is a possibility.