The lending landscape has been a rugged terrain for the past decade. As a result, so many investors have found themselves stuck and unable to move forward. If that’s you, there’s hope on the horizon! Last week, the government announced the most significant reforms to credit rules in a decade, when they dumped the responsible lending laws imposed by the Rudd government back in 2009.
What does this mean for you? And could the removal of red tape speed up lending approval processes and see credit flow once more?
WATCH MY WEBINAR BELOW as we look at the lending landscape, the change from lender responsibility to borrower responsibility, and what this change will mean for the property market (HINT: I’ve got good news!)
MATTER OF FACT EPISODE 17: Responsible Lending Laws – What You Need To Know!
Awesome. So now you know how to do everything when it comes to Zoom. And welcome, probably the first time for a few of you that have seen our new recording studio, and people noticing my haircut. So I’ve gone back to my pre-COVID haircut. To me, COVID is over, let’s just move on with what we need to do. And I’m now looking a little it different.
Now, there’s two movie stars that people continue to say, “You look like someone.” The other day I actually got held up in Bunnings and someone seriously asked me, “Are you…” So let’s say if anyone can get it. Who thinks I look like two possible actors? There’s one in particular, but let’s see if anyone can guess through the chat box.
Who someone at [inaudible 00:00:54] Robert de Niro. Shrek. Maybe, maybe. George Clooney is one of them and Lorraine got it too, Robert Downey Jr. So I’m a mixture between the ethnic version of Robert Downey Jr. and George Clooney. No one put up… What was the name of the twin in… Is that too loud? What was the name of the twin in the movie Twins. It was Sylvester… Oh, Arnold Schwarzenegger and Danny DeVito. That’s it. Pretty awesome.
Let’s today talk about the lending history. Now I’m going to be pretty quick. My second daughter turned 18 today, so I’ve got to go and say hello to her, but I thought it was important to be able to get people to a point where you understand where we’re at and what that means moving forward for us, for Australia. And what it looks like in the housing market moving forward.
Firstly, let’s do this. Let me go into my PowerPoint slide first. So as always, and with respect, we want to acknowledge the country we’re meeting on. I’m meeting on the home of the Gubbi Gubbi people. So I want to acknowledge the traditional owners of the land that I’m on. I want to pay my respects to elders past and present. I also want to welcome anyone from any indigenous nature, anywhere in the world that’s with us today. I think that we’ve got a change in what’s happening around the world when it comes to the ability of who we are and where we’ve come from.
Let’s talk about how Mr. Frieburg is looking at freeing up the economy. Now, I also want to acknowledge more than just the land on where we’re meeting. I also want to acknowledge someone who’s listening in right now and watching from a distance and her name is Rebecca Radoff. She’s my EA, my PA, my gatekeeper, our Mary Poppins, and the most amazing woman that you will ever meet. So I know you’re watching Rebecca and I just want to acknowledge you. You’re an amazing woman. You’re an amazing part of my life. And it’s just emotional talking about how you assist me and help me out every day. And so thank you. It’s really awesome to have you as part of our life. And I look forward to growing old and being old with you. So thank you.
Let’s talk about the history of where we’ve got to with the banking history. So if we just go to my slides there, we can see that all the way back in 1881, was the establishment of the Federal Bank of Australia. Now that was what we would call the RBA equivalent back then, and then brought in, in 1886 was the Real Property Act. Now we had a point in time where in 1889, there was a massive issue because there was an oversupply of housing.
Now you might regard that oversupply of housing, we could never get an over supply in housing and 1889. Well, there we go. The First Association Bank basically collapsed at that point in time. And then in 1890, followed the first banking crisis that we ever had. So one year later, 16 small banks and building societies shut down completely because there was a issue around the funding, the point of funding, how it works and how we all pull together. Now the backing bankers always like the RBA was the federal bank. And in the 1893, the Federal Bank failed and 11 major banks basically suspended trading and said, “No more, we’ve got to pull up stumps here and make sure that we don’t get ourselves in any trouble.”
In 1911, the CBA, the Commonwealth Bank of Australia was founded. And that essentially meant that they were given the authority to print notes and put notes out there. Now, when we talk about banking, we talk about the point in time where we say, okay, what does a bank do? Well, banks up until the establishment of the RBA, ensured that whatever money that they put out in notes out into circulation was backed by some other security, like gold or like silver. So if we had a million dollars worth of gold, then we could print a million dollars of note, knowing that it was backed by something else. And that’s what would happen back then. And even still, there was a collapse in the marketplace.
In 1920, we got to a point where the market for agriculture in Australia should have been very strong when it came in large talking about exports, but the export component of what was happening meant that we weren’t getting stuff and produce out there. And so over the ’20s, there looked like there was a few banks trying to establish some more funding into the marketplace so that farmers and agriculture and manufacturing could take off and start exporting more. But of course, we then in a position where 1930, ’31, ’32 here, and we got ourselves into a lot of problems. Because essentially the war stopped a whole bunch of stuff happening and stopped a lot of exporting going out to the rest of the world.
So then we got ourselves into a point where the recession in Australia in 1932 was the worst recession that Australia had had to that point in time where essentially a lot of issues were going on. Come 1960, between 32 and 60 was establishment of a number of different aspects that were going on and get to the point where… well, the Spanish Flu actually didn’t end the world war. The Spanish Flu was actually an outcome of the world war ending, because the flu that was contagious in the different hotspots of the war then broke out and when they all went back home is when it all fell to pieces.
So, it’s a really interesting scenario when we’re talking about Spanish Flu and COVID, and what’s going on. So, the Reserve Bank of Australia is put together and it takes over the central banking part of what the CBA does. Now, interestingly enough, although the majority of people in Australia believe that the RBA is a government owned public authority, it’s actually a privately owned entity.
There are only now I think two reserve banks in countries around the world that are owned by their own government. The rest of them are independently owned and registered in different outlets. So, it’s an interesting fact that the money and the rules that get put upon the country, for all the countries bar two, for financial… Democracies, I should say. To navigate the landscape of the economies is actually decisions being made independently by a RBA, but the outlet is that they are actually not owned by the government.
1965, the rise of the unregulated intermediary. So, we’ve got the non-banks, so let’s call them what we called them wholesale investor market. So, that is people that came in that weren’t banks. And you could start looking at things like the… Let me pull my card out and I’ll give you an example of that. We had the Teachers Federation, right? The Teachers Federation got together and they started to create the equivalent of a co-op and so the members basically owned the bank. That was one part of a wholesale bank.
Then the other non-banks that came into the markets were people that pooled money together and said, “Okay, well, we’ll start lending out and we’ll be competitive against the bank.” So, in 1973, banks were then set to be able to create their own interest rates and put it out to the marketplace regardless of what the Reserve Bank said. They used to be tied to the RBA, but then they started to a point where they got to there and they started to be able to charge whatever they wanted.
1980, the Mortgage Finance Association of Australia is established. And in 1983, foreign banks knew something that we didn’t know in Australia, clearly that there was going to be a move in the marketplace. Now, if you followed the different moves in the marketplace, 1960 was a peak in the market, 1972 was another peak in the property market, and then the next peak after that was 1989. So, non-Australian banks started to come into the marketplace to take up this massive ability for loans to be given out to people that were looking at buying.
And in 83, I think interest rates were about 6%, 7%. By 89 and 90, we had interest rates at 17.5%, sometimes 18%, sometimes 19%, depending on which lender you went to. So, we then ended up with a distinction between trading banks and savings banks. So, we had basically investment banking or corporations and then savings corporations into different parts of what was made out of there. The unemployment rate in 1992 for the recession that we had to have hit 11%.
And we were then in a place where with the interest rates at 17%, with unemployment at 11%, a whole bunch of stuff was going down. Now, interestingly about that time, it was not the housing market that created the downturn in banks and lenders. It was actually the business market. So, business had suffered immensely and part of that was the fringe benefits tax coming in that affected a whole bunch of things. And businesses started to go broke and all the lending attached to that started to create a knock on effect in the lending market.
But the residential market actually held up really, really well. They managed to start bringing in at that point in time, a number of other different lenders into the market. So, the market share of residential lending increased from 30% of… So, out of a 100% of loans that lending was out there in Australia, there was only 30% in 1995, but look a couple years later and it had gone from 30% to 46%, whilst business lending was the majority of the lending at 63% and dropped out to 48%.
So, basically by that period in time, we had 46% of lending was in residential, 48% was in business, and then there’s 6%, 7% that was other type of lending, whether it be car lending for automobiles, or planting equipment, or stuff like that. So, there was definitely a movement in the lending market for housing that shifted from business into residential lending, especially with what had happened in the late eighties and early nineties with property prices.
The property prices from 1986 to 88, basically over a three year period, doubled. So, in the major areas, the major metros, you would have doubled your money in three years. The same as what happened in 2012 to 2015 in Sydney happened earlier. And they say that history doesn’t repeat itself when it comes to property, because you can’t really tell the… Bullshit. You can go back and watch the property cycle, and I’ll talk about it at the end of this, where the outcomes for this is really great outcome if you can follow cycles.
And what I’ve seen happening with the announcement that Mr. Frieburg had put in last week is that we are in the same cycle where we can do well if you know what’s coming. And for most of you who know me, you know I haven’t got a big ego. I’ve got a massive ego. And so I’m going to say that the things that I’ve said earlier when the start of COVID hit and with all these matter of facts, I challenge anyone to go back to any matter of fact that’s listed on our website, listen to it and come back to me and say, “You were wrong, Ian.”
Now I might be off-mark, but I haven’t been wrong. The amount of people that have suggested that all hell was going to break loose and that everything’s going to fall down, and when the JobSeeker finishes and JobKeeper then comes out and it’s not going to be able to… We don’t know what’s going to happen, but I am still standing strong on the fact that I believe that there will be some movement in the marketplace in an upward direction, both business and with property, for quite a few years to come and I’ll let you know, at the end of this webinar when I think you should be selling.
Now, again, you can’t take what I say taking advice because all of this is full disclaimer that you can’t take anything that I say as advice and shouldn’t be taken as advice because you should be making decisions for yourself with qualified people around you. Now if qualified people around me say that I’m a knob jockey that has got no idea what’s going on, I’m okay with that. But at least make decisions that are informed by what you want to do, rather than what I’m saying.
Then we go to 2000 and then we’ve got our banks begin increasing the discounts in standard interest rates. We then started to see… You know, this was the year of the Olympics and the year of the Olympics, what happened in Sydney was it was an overshoot in the marketplace to 2004. So we had banks saying, “We want to give you as much discount as we possibly can.” In ’98, APRA, the Australian Prudential Regulatory Authority, who looks after the finance areas and make sure banks keep to their standards, remember? By this point in time, the RBA is starting to print money without the gold in the background, so we’ve got to remember that. There’s no gold in the background, but they’re printing more money. And they started to work out fiscal policy that would allow up and down in the marketplace according to how much pieces of paper with dollar notes on it they put into the market or bought back out of the market to be able to control the Australian dollar and also lending out to wholesale banks and other lenders that would give it out.
ASIC was formed in 2001 and that was to look after the financial markets. So if you wanted to look at it from a perspective of what does APRA do and what does ASIC do, APRA looks after the lenders, keeps the lenders in check. ASIC looks after the people underneath the lenders that are giving the money out, making sure that they’re approved to be able to do this in a way that makes sense to the lender without taking advantage of the lender. But we knew that that failed when we did the last banking inquiry and there’s people being charged stuff when they did as an example.
In 2004, and this was an interesting figure for me, 10% of home loans approved in Australia are low doc loan products. I actually thought that would have been much more than 10%.
Now, when I say low doc, I’m not talking about low doc like nowadays. I’m literally talking about low doc where you went to your mortgage broker and your mortgage broker said, “How much do you want to take out?” You say, “Oh, look, I want to buy that property over there for $500,000.” The mortgage broker would say, “Well, you don’t have enough income for that.” You say, “Well, how much income would I need?” The mortgage broker would say, “You’d need at least another a hundred thousand dollars.” “Yeah. Well, at a hundred thousand dollars, how can I do that?”
The mortgage broker would say, “It’s not my responsibility here. Here’s a piece of paper that says [inaudible 00:17:16] at the top of it, you write the number that you want to write on there, knowing what I’ve told you and you sign it. And as a statutory declaration, if you say to me that that’s how much money you earn, I will put that on the application. Then I will give that to the bank and the bank will lend you that money based on your statutory declaration that you’re not lying.” You’re right, Liz. They were the good old days.
Now there was a number of people that were putting themselves in a place that was dangerous. So APRA then started to close down the banks and saying, “Hey, you know what? We need to start looking at this in a different perspective.” Now they already knew ahead of the GFC that in Australia at least, not overseas, but in Australia at least, they knew that if they didn’t start controlling the low doc market, that people were going to get themselves in a lot of trouble.
Now I remember in 2006, I think it was, we were doing a pretty decent-sized subdivision and we were sweating balls, I can tell you, to be able to get finance because they started to put pressure on the low doc areas. Now we knew what we were doing, we knew we could do the subdivision, we knew that the lending wasn’t going to affect us. However, they started to look at income and with all the properties that we had, it started to take an impact on the fact that we had this nine-month contract on a subdivision.
We did most of the subdivision before the settlement happened. But when we then went to go and settle, even though we had an increased equity, the banks were basically saying no and I thank God. Christine came to me in tears saying, “I can’t believe it. St. George just gave us a loan after all the work that were just done.” We thankfully got out of that situation and we’re able to finish that subdivision. Those were the days where we were really scared of what was going on.
2007, we have the GFC hits and America coughs and we end up with some long-term disease, when it really shouldn’t have done that to us. If we look at it here, the low doc loan market falls to 7% of the market in 2009 and basically low doc loans don’t exist anymore currently. Banks stopped writing bad credit and basically the market share drops for loans. In 2014, the bank stops writing bad credit loans at market share at 7%.
Let’s look at what happened. APRA stepped into the market in about probably 2014 and said, “We’re going to have to start regulating here.” They started doing stuff in 2011 of saying, “You got to be careful here.” They wound back all the banks.
Now, the reason they did it was because of their ratio. When it comes to a ratio for a bank, let’s take… I won’t tell you which bank, had a ratio of about 14 to one. The worst was a bank that had a ratio of 22 to one. Now, how does that ratio work? Essentially, let’s say that a bank took on a million dollars worth of savings from people in a savings account. Right? So someone went up, put a hundred dollars down, it went into a savings account. And then someone else came in and put a thousand and then 10,000 someone else. And eventually they put a million dollars in.
What had happened was that the banks said, “I’ve got that million dollars sitting in the vault. I’ll go out, take some wholesale money from overseas or from bank bonds or from wherever and I will lend out money, pay a little bit of interest on that, I’ll charge extra interest to the people that are lending the money,” you and I, “And we’ll make money out of that. And we’ll all be good.”
Now the problem was that the worst bank was 1 million sitting in the vault, $22 million that was lent into the bank to lend out to everyone out there. Now, the biggest problem with this is that if all of this money that’s in the vault is actually not in the vault and being lent out 22 times its actual value, when something happens and the consumer then says, “Oh, actually I want to go back into the bank. I’m scared about my money being taken or going somewhere. I want to go and take the cash out and put it in my mattress.” If that happens and there’s a roll on effect, and we’ve seen this a few times in Australia history, everyone would go to the bank tellers, pull out all their cash and there wouldn’t be enough cash for all the savings that were held in there. And that can create some enormous issues.
So APRA basically said, we’ve got to get you back to 10 to one at the very least 10 to one. So if you’re lending out, you now have to start to put these back into context and I made you to reign it in limit. So lending got harder. And then the housing market started to continue to move. So APRA said, “Well, Sydney and Melbourne are going absolutely crazy, so what we need to do is put some pressure on them. So what we’re going to do is we’re going to say to all banks, it’s your responsibility to make sure that the people that you’re lending to can afford it and you will need to get evidence. And if you lend out money and you shouldn’t of as a bank, we’re going to come down on you hard.”
So if you’ve got that put over the top of you, what do you do? You then go to the lenders like Christine and I, and you say, APRA has just said that we have to look at you at a minimum of 7%. And most of them look at 8%. Let me explain that. So previous to this, I could go to multiple different banks and they would say to me, “What’s your loan with,” let’s say, “George?” And I’d say, “That loan over there is a million dollars.”
And they’d say, “Okay, no worries. We’ll understand that that’s over there. What interest rate do you pay?” “I pay 4% over there.” “Okay. No worries.”
“What about the other loan? I’ve got another loan with ANZ.” “How much is that?” “$500,000.” “What do you pay for that?” “2%.” And then we’d go through all the loans, they’d calculate what the interest rates were. On most of them on interest only, and they’d say, “Okay, we can calculate how much you need to pay all these other loans. So to pay for our loan, you need 4% as well. Let’s look at your income. How much comes out each week? Let’s take some stuff out in case you have to buy food and pay for accommodation. And so as an outcome, yes, you can afford some money from us.” But what APRA did was they said to all the lenders, “You know how he’s paying 4% over here for that loan, we can’t get you to calculate a 4%. We want you across the board to calculate everything at seven or 8%.”
Now think about this, right? Christine and I, sophisticated investors that know what we’re doing. We know what to do in property deals. We’ve done our feesos, we’ve got our track record. We know what markets are doing. We’re watching things happen in an all different directions. All of a sudden our serviceability went from absolutely awesome, cracking it to, “No, we can’t give you any more money. Actually, we might have to call in a loan if you’ve got another loan with us, because we’re scared that you’re not going to be able to pay now.” Christine and I are sophisticated people that were then drawn out of the standard lending marketplace and those people that aren’t sophisticated investors, mom and dad investors that own their own home, that have good income would go to the bank and say, “I want to buy an investment property because I heard investments really good in property. I think I want to be a property investor. Can I have a loan?”
The bank would say, “Okay, you own your home loan. We’ll calculate that one at 7% and you’ve still got extra income. So absolutely, what we’ll do is we’ll actually extract equity out of your own property, go off and buy an investment property.” How much can I afford?” “You could probably afford $2 million.” Why? Because they don’t have all these extra loans.
So Christine and I would turn up at auctions, we’d stand at the back of the room. And we watched two mum and dad investors, they’ve got no effing idea about property, how to do anything, how to do a deal, how to do a subdivision, whatever. And they started at auctions in Sydney, in Melbourne, started bidding against each other and would throw the price up on emotion of three, four, $500,000 above what Christine and I would pay. And then all of a sudden the actual stuff that was supposed to slow down the Sydney and Melbourne market actually picked the market up and increased it even more because unsophisticated investors went into a place. And then you hear them on 60 minutes and A Current Affair crying, “I’m poor because I shouldn’t have got a loan.” Well, you dickhead, you shouldn’t have gone into the marketplace.
Now, what APRA should’ve done was they should have said, “Guess what? Ian and Christine, sophisticated investors, we can see the runs on the board. And we’re really happy with what you’re doing. We’re actually going to put you in a place where we’re actually giving you the opportunity to lend out more money to you, so you can go and do investment deals. So you can do well for yourself. And those mum and dad investors never bought a property. It’s their first property. We’re going to make it harder for them to go and buy property instead of pushing the market in an upward direction.”
Christine and I and other friends alongside of us would have kept the market steady at a point where affordability would have been okay. And the three-year deal that happened in 2012 to 2015 would not have happened if it wasn’t for APRA making these stupid decisions to control the market. Then even further, they transferred even more and then the market started to drop and then holy crap, let’s pull away, let’s start giving banks the ability to start lending out more money. And here’s more money. Let’s do more. Make sure you put it out. And banks went, “Well, actually we’re quite comfortable now. We’re doing okay. So the history is done in one hit.
Now that we’re on, let’s go to some polls. Let’s put the poll up, so we can have a breather. Because I get a little bit excited about this sort of stuff. Yeah. Throw it up there. Start it, launch the poll. Have you seen me before? Is question one. A yes or no? I’d like to know how many people are new. It should be, the majority should be older people. There’s a few people that are seeing me for the first time new. For those of you who have not seen me before, this is just about giving you information and getting you into a place where you can start making your own decision making processes around that. So, 94% of you have seen me before, 6% haven’t.
Let’s put into the next one, the next poll is coming up soon. And that poll, just launch the next one, let’s go to the next poll. Are you part of the High Income Real Estate System course? If you don’t know what that is, you’re not a member. So, good to see a whole bunch of you, and let’s see if we can hit that magic number. Dammit. So, we’re dropping out, not too far off. We’ve got 55% of you are part of the High Income Real Estate System and 45% of you are not.
Let’s then stop showing those results, let’s go into the next poll. The next poll is where are you joining me from? Let’s see if we can hit the magic place, I always just love to see at least one person from this place and I’m not sure we’ll hit them tonight, but let’s see how we go from there. So close, but no. New South Wales is topping us out at 36% of all participants today, Victoria at 33%, Queensland’s 20%, WA 4%, South Australia, WA you’re two hours behind us, WA is 4%, SA 3%. Tasmania, 2% of you.
I mean if you’re in Tasmania, investing there’s great, don’t be taking your money into Tasmania, it’s done its thing. ACT, we’ve got 1% of you that are in, how awesome. We do have someone from the Northern Territories, that someone pushing my buttons because I really, really like to see people that are from the Northern Territory. And outside of Australia, we have 2% of you. That’s absolutely awesome.
Have we got one more poll? I think we’ve got one more poll. Let’s have a look at this. What buying strategy have you been using? I stopped buying, I’m waiting for the fall, I’ll buy the right property when it comes up. I’m buying now? I’m not in a position to buy, I’m so scared to make a decision I need a nappy, and whatever, capitalists are ruining the world. There’s a few of you on here, a few of the people that don’t like capitalists already. Oh no.
Awesome to see. Now, remember what I said at the beginning of COVID. For those of you that are in a position where you’re waiting for this massive opportunity to be able to buy, you’re going to miss out. You’re going to miss out. It’s what I predicted and I said, it will act like a extended, what do they call it? Election campaign, where people were just waiting to see what was going to happen. There’s not enough supply in the market and demand’s still there.
So, let’s just finish that up, don’t share it, just let me read it out. I stopped buying, 11% of you. I’m waiting for the fall, I’ll buy the right property when it comes up, 15% of you. So, be interesting to know how it pans out. And I was talking to someone yesterday, it’s the things that we regret most of not doing, not the things that we did do that we regret the most on our deathbed. I’m buying now, the majority of you are buying now, 33%. Not in a position to buy right now, 32% of you. And that’s understandable with COVID and what’s going on. I’m so scared to make decisions I need a nappy, 4% of you. And whatever, capitalists are ruining the world.
So, isn’t it nice to know I’m a socialist capitalist? It’s like mixing a cat and a dog together. But that’s who I am and what I do. I did have a question, what was the poll before? Ah yeah, from overseas, the 2% that are from overseas, where are you from? Just knock it into the chat box, I’d like to see exactly where you’re from. How is a new lender going to make it hard for unsophisticated investors? It won’t. And I’ll talk about that as we get out there.
So, that’s why we now have a shortage looming, it shut down the developers. Yeah, absolutely. And not only did it shut down the developers, it also stopped a lot of the building industry and construction industry because whilst I’m not putting projects out there for builders to build, they can’t build them. And it’s not that we stopped, we just had to get more creative of what we already were. We’re already really creative, but … Michael Fong, of course, you’re from Hong Kong. Mr. Fong from Hong Kong.
Who else was there? There was someone else that was from overseas as well, someone from Victoria. I also just want to acknowledge those Victorians that are online today. Monica Parker from Spain, give me more information Monica. Can you speak Spanish? I just want to acknowledge the Victorians that have been through a really tough time. And I’ve got some of our team that lives down there and you can see how down they were. I appreciate the fact that it was tough for you and hard for you and it looks like you’re coming out.
So, Monica Parker, what are you doing in Spain? Do you live there? Are you on holiday? Are you just spending COVID over there? Are you going to Ibiza and having lots of dance parties and chewing on some paper cardboard or some tablets that have got shapes stamped into the top of them? I don’t know. [Spanish 00:33:42].
Okay, is it worth waiting for January and hope the government will release another round of the FHLDS? No. As far as I’m concerned if you could do something right now, don’t ever make a decision on the basis that you might get funding from a government is the way that I work. If it comes, great. And if it does come, use it, right? But don’t base your investment decisions based on it. It’s why I’m not a fan of NDIS. And for a number of different reasons, I’m not a fan of NDIS. But effectively, when the government is in control of funding and they can move the goalpost overnight from same government in one fiscal year to another government that comes in, it’s a bit scary. Chris is saying that Tasmania is overseas. I do agree that Tasmania is over a sea, but it is still part of Australia.
Okay. I want to work through this quickly and then get to a point where we talk about the actual announcement that was made by Frieburg. So 2008 to 2010, mortgage loan defaults increased. We had pre-GFC jitters and people started to default on their loans. July 2010, they brought in the Credit Act, which basically put the obligation on the banks instead of the consumer. And falling interest rates and other measures saw of surge in mortgage lending. So that 2010 hit through to 2011, then the Great Financial Crisis hit, which slowed down a little bit. But then, it picked up straight after that as well.
December 2014, APRA introduced a 10% benchmark on the annual growth of housing lending to investors. And that was part of the ratio that we were talking about as well. APRA introduced a minimum interest rate buffer for loan servicing, and ended up with that 7%. And which, remember I said that they locked in all our loans at 8%, when we weren’t paying 8%. And the growth in lending to investors fell below the 10% benchmark in August 2015. So it did have an effect. 2017, APRA introduced a 30% benchmark. So they basically lifted the benchmark and said, “Go for it.”
So then aggregate growth was around 3% when the removal of the benchmark happened. 21st of May, 2019, APRA proposed that the 7% serviceability buffer on home loans be removed so that banks could actually start looking at us again and APRA gave two ways for lender to assess home lines, guidelines to use the higher of the two against a floor of 7% or assess the loan at 2% above the actual rate. So if I had 4% over here, they would say, “Add 2% to that.” So 6%, or if it was a 6% loan, add 2%, that would be 8%. They could use the 7%, all right? So did it affect the market in a positive way? Well, we’re getting to a point where the ADIs, which are authorized deposit taking institutions, so call those the banks, they had two essentially. There was one place that says that there’s the CBAs, the big four, they’re deposit taking lenders.
And then you had the wholesale market. So call that [Rams 00:37:24], Aussie Home Loans, Yellow Brick Road, or all of those sorts of wholesale-style. Latrobe would fit into that. That’d be Macquarie would fit into that. There’s a whole bunch of lenders over there, and they basically could set their own interest rates and start talking about what they wanted to do and how they wanted to do it. Now let’s look at a couple of these slides here and you’ve got these loans funded. So interest-only loans funded, and the share of the new lending. So we can see that there was a decline in the amount of loans that were being put out from December ’14 to ’18. So effectively we’re saying, “Yeah, what APRA did was get us to a place where they were affecting us.” Quarterly residential mortgage loans funded from December ’14 to September ’18, you can see the interest-only died out completely. Basically investor interest-only loans in ’17, almost disappeared off the marketplace.
Very few lenders out there doing interest-only for investment loans. Principal and interest, well, there was a decline in lending, but not to the extent of what we see there. New loan commitments, now this excludes any loans that were refinanced. So these are new loans only. We can see July ’04, we were going along, new loans were coming in. So let’s look at this. This is the total of all loans. This is owner/occupier is the blue line, and investor. Now, there was actually a crossover, so I don’t know why it’s not showing a crossover. But effectively, you could see that the investor market always sat as a percentage below the rest of the marketplace, but you can see how tight it got in July ’14.
And that’s what APRA was concerned about, that there was too many loans being written for investment properties, and not enough for principal place of residence or homeowner loans. That’s when they started implementing some strategies, and you can see with the investment loan strategy that they really knocked off and homeowners then started to take a big market share. And that was probably something that also pushed the market in an upward direction. So new loan commitments for owner occupied housing by purpose. And you can see again, July ’10 through to July ’20, we had this up-ramp decline over ’18, when there was some… a little bit of pressure put onto the APRA lending, even though it didn’t affect first home buyers too much, it still affected them. And then we had a kick in that direction.
New loan commitments, monthly growth from July ’19. Now remember, by July ’19, the massive downturn where Sydney was supposed to have a 40% reduction in pricing, it was starting to go, “Actually, we’re ready to move again.” And so from July ’19, you saw an upward move towards December wherein in January of ’20, so it’s always a slow month in January. There’s not many properties that are purchased or settled on in January, but you could see this upward direction by investors. Look at that.
Then we see it in November where we had a big increase. And then all of a sudden come COVID, so this is always a crappy time of the year anyway, but come COVID from an investor point of view, you can see that not as many loans were written. So we had 15% less loans being written, and that’s for everyone. Everyone around those three months after March were saying, “What’s going to be happening here?” Then all of a sudden, and I said, “You watch, go back, have a look at all the webinars that I’ve done.” And I can’t remember, what number of webinar is this, in matter of fact? Are we up at the 13 or 14 or something? Aaron will check it out.
This is the 14th webinar, since the beginning of COVID when I started doing these. And this is exactly what I said was going to happen. People were going to wait and hold on for three months. And then there was going to be some uptake. We had a couple people pull out of contracts here, which I wish they wouldn’t have. Not my choice though.
Aaron: Yeah, my bad, it’s 17. 17 Okay. I wished they wouldn’t have, but that was okay. But you go out there, you ask any real estate agent, “How’s the market. Are you selling many?” I don’t have enough stock. There’s so many people that need to buy, but I don’t have enough stock. Now, Southeast Queensland, is going crazy. Why? Well it’s a great spot to live. I know, I live here. But more importantly, I can tell you Victorians aren’t very happy with Victoria. And there’s a whole bunch of people that have started purchasing investment properties up here knowing that they don’t want to stay down there for too much longer. And they’re starting to move up the chain to the promised land.
In July, 2020, the number of owner occupier first home buyer commitments increased 14.4%. And first home buyer loan commitments for investment purposes, 4.9%. Then owner occupier loans commitments accounted for basically a third of the market.
The ABS head of finance and wealth, Amanda Seneviratne said, “July owner occupier home loan commitments rebounded with the largest month-on-month rise in the history of the series, as social distancing restrictions eased in most states and territories.” I’ll say that again, commitments rebounded with the largest month-on-month rise in the history of the series, of any numbers that have ever been taken.
From the lender responsibility to borrower responsibility, Mr. Frieburg, last week announced that there’ll be an overhaul to the bank lending rules to make it simpler to decide mortgages and credit lending. The proposed lending reforms intended to improve access to credit for everyone, owner occupiers and investors. And so the laws governing mortgages, personal loans, credit cards, and payday lending will be changed to streamline decisions on whether customers can afford to repay the loans. And if Parliament approve these changes, the Credit Act will come in in March next year.
Now listen to this, right? I’m a little bit scared about part of this and the scared that I’m part of… The scared that I’m part of, I sound like Yoda. Scared of the part of he is.
Aaron:Wise, like him too.
Ian: Wise man say… Say may, wise man, I should say. Is that this also includes Harvey Norman and cash converter loans. And, what’s that thing you talk about?
Aaron: After pay.
Ian: What is it?
Aaron: After pay.
Ian: After pay. All of that sort of stuff, bit scary that they may also be included in that.
Ian: So when we look at this, as Australia continues to recover from the COVID-19 pandemic, it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses. So we’ve got greater emphasis on self-responsibility, means lenders won’t be penalized if the borrowers give misleading information on their loan application. So right now, if the banks are found to be taking on borrowers that can’t afford it and they can’t prove that they checked on it, the banks get hammered. And they’re saying basically, let’s just back off, right?
Responsible lending laws affected many sole traders and self-employed because they [inaudible 00:45:04] their mortgages or personal homelands loans as collateral to secure loans. So those people that are self-employed are essentially not able to lend money. And I’ve got a basic rule when it comes to this. And the basic rule is that, if you earn $100,000 in a PAYG job, you essentially need $200,000, a self-employed person before the bank can currently look at you the same as a PAYG person. And I actually think it’s ridiculous because anyone who owns their own business, especially one that’s been established for a while, is much more secure nowadays then that person that actually works in a government job. Because government jobs are a thing of the past. They’re closing them down, putting them under contracts, and then making them putting on year contracts. Which is less viable as a security position than someone who’s been running their own business for a long time.
What’s not in Victoria at the moment? Chris, I missed the bit that I would have said.
Banks will be able to rely on income and expense information provided by buyers. So, this leads me to the point of the things that I think about at night, the things I was thinking about at 3:00 o’clock this morning when I was looking at a few other things around some of this stuff. And it is, what’s going to happen more secure than a government job? I’m saying that no government job is actually secure. And it’s a very, very scary time, I believe, to be employed by anyone that is big business of some sort because your life can change overnight. At least with your own business, you have the ability to pivot and make changes, change tact, move in different directions, change your business model, advertise in different ways, seek revenues in other ways, look at being able to cost cut wherever you can. And all of that-
Chris I missed the bit that I would have said.
… would come… Pilots thought they had a secure job, absolutely would. And look at them now. How many of them don’t have a job? Like I said, it’s really, really interesting what’s going on in the economy and in our community right now. And it’s never a good thing. So, okay.
Let’s look at this. Jane Allen, are you a student already? Can you just let me know that because that’s going to change the way I answer your question. So, all right, let’s look at this. We’re now in a point where JobKeeper was extended to March next year I think it is, maybe May, but it’s been extended. If you qualify… oh by the way, $30 million of what they know has essentially been stolen by businesses faking the JobKeeper, so that’s a really interesting start. Maybe Les has got some input into that as well. So effectively they made it harder to be able to get the JobKeeper extended, and depending on the extension that you were getting, is dependent on your business.
There are two levels of JobKeeper that say that, if you’re on the upper level, you get more money to keep your people in a job. And a little bit less, if your business has started to perform a little bit better compared to the same periods of time, how they put it together. By March next year, the banks and lenders will have a very decent understanding of what’s being proposed and legislation, ’cause it’s got to be written up. So someone in the bank and lending, other areas, will be looking at it and going, okay, well, now that we know that these changes could be coming, we know that they’re coming in March, we already know what the policy and legislation is. Let’s start putting our policies into action, as far as ready to pull the trigger, and then you’ll have wholesale lenders starting to put stuff together.
You’ll probably have a couple of funds that have some money. I spoke to a person today that’s got a $600 million fund just about to be started up. And there’ll be a whole bunch of cash in there, that could be lent out at a decent interest rate. Remember, developers haven’t been able to get to decent big four banks for probably six, seven, eight years now.
And we will then have a run of investors that will now be able to get money when they couldn’t previously, that run of investors will mean that they’ll take all the stock that’s available on the marketplace. So when you’re an investor and you’re taking stock off the marketplace, there’s more demand than there is supply, and in the lore of supply and demand, if there’s not enough supply, prices go in an upward direction. So what will happen is you’ll see an upward direction and movement of pricing. And then there’ll be a point in time where someone will, that we’ll then have enough housing because we’re going to stimulate for the next three, four, five possible years. And there’s going to be a supply increase, demand will then decrease, and we will then be in a position where people will either start to find it difficult to pay for their loans.
And with all of that, we then have consumer confidence moving in a direction, which means interest rates can start to go higher. And people are basing their numbers based on today’s interest rates, as low as 2.4% for some loans. And when they start hitting three, four, five, six, or 7%, there’s going to be a lot of pressure on the marketplace to be able to pay for those loans that they could afford previously, but now can no longer afford.
Now people say, yes, that’ll be an instant drop in the marketplace because what will happen is the banks will close in on them. Remember that when banks close in on people because they cannot pay, that whole process is not a process that takes two weeks. It’s a process that can take somewhere between 18 months and five years to finally put you into a position of bankruptcy. So let’s think about this. We’ve got an emphasis of money coming in. Currently, people are able to be able to pay their loans. There’s going to be a short term stimulus of those people that can then get access to money again.
Those people that are currently being able to survive on the basis that the bank has given them a holiday on interest. And secondly, they’ve been getting JobKeeper or job secret at increased rate, who’ve been able to keep up with their home loans, will then be in a position where they’re going to go, holy crap, I’ve been able to go through this point in time. §Now we’ve got investors that are willing to buy my property and will get me out of trouble. I will sell those properties, and that will save a whole bunch of investors from a downfall, that could happen in a years time from now.
But these investors are now in a place where three or four years down the track, and if you look at the history of interest rates, it doesn’t take very long for interest rates to go down or in an upward direction. Like you could get three months in a row where interest rates could go up. And those interest rates will affect the standard average borrower by possibly three to $400 a month, depending on the increase and how many loans they’ve got.
We will then have a position where the supply will meet demand. And we’re now looking at the property clock, and we’re currently in a mid cycle, we’re coming out of a mid cycle dip. We will get ridiculous growth for the next two to three, possibly four years. And I’ll tell you what I’ll be doing, I believe that at this point in the game, watching the property clock and what’s going on, that I will probably be selling the majority of my portfolio in late 2024, or somewhere in 2025. I’m not sure what the decision will be. I’ll be looking at some key indicators going on and I’ll be selling to put cash in my bank account, knowing that there’s going to be a decimation of the majority of, not every market in Australia, but the majority of markets are not going to survive and handle well.
And that being the case, it means that at the end of all of that, what position will I be in? By that stage, I’ll probably have had enough. Enough aggravation of owning properties and doing my bits and pieces of what I’m doing, and moving forward to a different era of my life. And that’s probably going to be sitting on the side of a hill, meditating 20 out of 24 hours of the day and the other four hours of the day, I don’t know, I’ll play hopscotch or something.
And from that point in time, again, I don’t know what I’m going to be doing at that point in time. But essentially we’re in a place where we think, well, what can we do to make ourselves better today? And today, right now, you’ve got to start thinking about what has happened over the last six or seven months, where are we at today? And have the decisions you’ve made over the last six to seven months, put you in a place of more security or less security? And you’re unsure of which way you’re going to go.
Jane is saying, “I’m a 50 year old female looking to buy my first property after a settlement.” Yes. Thank you, Jane. “I want to buy a house to eventually convert to renting HMO in that city and live in the property. Do you suggest buying in my name for a principal place of residence purpose?” So Jane, you’re a member of HI-RES and I’m happy to answer this in greater, more detail. Oh, okay. I remember you now Jane. Yes. I see. I see. I see. Ah, great. I do remember you.
A principal place of residence purchased in your own name is always going to be an awesome outcome, because of the capital gains exemption you’ve got on your own home. Now, I would suggest that in your situation, you probably get yourself into a really great situation by doing… You could go through, I’d do it for you, model or you probably would need to do that, because you didn’t need to do the conversion. But I certainly would look at creating a larger micro apartment for yourself, where the other people in the house won’t ever get to see you, you’d be able to go through your own different door. You will have a connected door, but that will never be open. And you’ll be able to live quite comfortably and possibly just keep the yard to yourself and not let anyone else use the yard.
I know a lot of people say, “If I buy my PPR and I go and do micro apartments, and then I rent out all these other rooms, I’m going to get hit with capital gains tax.” Yes, you will. However, it’s only on that portion, that is their areas. And so you can just count their bedroom areas of the entire place. So let’s say it’s a 200 square meter house and 60 square meters of that is what you would rent out. Now, that’s not including the kitchen space, because the kitchen space you use, that’s your space as well. So it’s only really where their beds are, that would be included as their space. So that would mean that 60 divided by 200 is 30, so 30% of any gain that you make would be then a capital gains hit.
Let me see if I can make this work. Oh, it’s stuck. It’s stuck again. Fine. There we go, ooh come back. All right, let’s go to the PC. So look at it this way. So here’s Jane, she goes off and buys a principal place of residence. Let’s just say for you Jane, to set up that principal place of residence in micro apartments, you would have a large chunk of it as Jane’s area. And then you would have people sharing a small area and that there, would equate to 30% of the entire house, okay? Let’s say that it costs you $600,000 for purchase cost and doing the conversion of the micro-apartments, you then at the point in time, when you buy it that’s your starting base, essentially $600,000, including stamp duty and all those costs.
Let’s say that over the period of time that this property grew, and in the area that you’re looking at Jane, I am predicting a 40% growth in the next two years. You will have a position where, that will now be worth $1 million, okay? That’s enough zeros. So that property has now made a gain of $400,000. So let’s look at how this would be taxed if you sold it the property. Thanks, Brian. So if you sold the property, you made $400,000 gain. Now this is your principal place of residence, which is a hundred percent, I just put it up 60% just to use round numbers, Doug. You can get me on it if you want to, but I just used round numbers. I actually didn’t calculate the 40%, because it was just easier for me to do.
So let’s say that you made a gain of $400,000. Now, that $400,000, let me take you first to the income part of it. So we go, okay, the income part of it is, that each one of these would be renting for, I’ll just use round numbers. There’s four of them, 250. So that’s a thousand dollars a week. And I know I’m not including vacancies here and I’m not taking costs off, so that they would come into the equation too. But at a $1,000 a week coming in, that’s roughly 50K a year. And let’s say that to get from there, to there, to get that 400K gain took you five years. Okay, so you’re earning 50K out of that 50K times that by five, means that over five years you made 250K in five years.
Now, out of that 250K, you would have to pay tax. Now, Jane, I don’t know if you’ve got a job, but the first $30,000… But let’s just say that out of that 250K, that you got taxed a third of that, so that is 30, 60, $75,000, which means that you cleared 175K is what your income over five years would be if you did this strategy, okay? So let’s stay with that first, that you’ve earned $175,000 out of income, while you’re living in your home, basically for free, if not, you’re being paid to live in your own home.
So then we go down the track and we start looking at that five-year mark. And so let’s go back to the green. You’ve made a gain of $400,000. Now that gain, they would look at it and go, “Well, part of it was exempt.” 50% of it will now be exempt. You will get 200K put into your bank account with no issue whatsoever, as far as the capital gains tax exemption.
And then what we’ve got is we’re then going to go and take the other $200,000, and because 30% of it is taxable, 200 times 30 is $60,000. So that means another $140,000 would go in over here, tax-free. And then you would have to pay on 60,000. So a third of that would be 20,000 in tax, which means you have $40,000 over here. So you paid $20,000 in tax here, you earned 175 tax-paid money in that time. And to me, I look at that and go, “That’s a no-brainer.”
People that say, “Oh, I don’t want to rent out anything in my house because I’ll get hit with capital gains tax,” they’ve got rocks in their head, because that for you, Jane, will be such an awesome outcome. And I really appreciate that you bring this question to the market because I love showing that, I love showing how people can get themselves into a better place for the fact of what can go on, as a PPR micro-apartment setup.
Does bank lending ease in a few months? Well, they’re talking about March. Government freeze for full-time employment for the next 12 months. In some states, yes. But it’s only for 12 months. And the scary part of that, Jane, is that I believe there’ll be some wholesale cuts to the market, and that will be a scary thing.
Yes, that’s what we are thinking, is Nicholas saying. And Phil is spot on. I follow his clock religiously. So affordable accommodation will survive. Okay? Affordable accommodation will survive. The thing with downturns in marketplace… Affordable accommodation right now generally is good. Right now, is even stronger. And when markets drop, like they will, when people are being pushed out of their own homes because I can’t afford loans anymore, and I need to save money, where are they going to go to? Going to go off, and they’re going to find rentals like we’ve got.
Now, when I say I’m going to be selling my property, I’m going to be selling the ones that I don’t want to die with. Okay? I’ll still keep property in my portfolio. I’m not going to sell everything. But I’m going to look at the ones, and I’m going to go, aggravation, aggravation, aggravation, aggravation, return, return, not good, not good, not good, they can go. I can keep all of the ones that return me really well, all the ones that would do really well, and I’ll put them in there. You only lose money in real estate if you have to sell, exactly. As long as you hold them long enough.
So, yes, Christine, affordable accommodation will survive. We have some people willing to do a… Sorry, mate. Can you scroll up and tell me who that is? Tony, good try mate, but you’re not here to freaking drum up business. Seriously. Honestly, I don’t understand people’s business ethics sometimes. Jane, the property is… Okay.
Jane, go through the do-it-for-you tab if you’ve already got the property. Go through the do-it-for-you tab, put it up, and we will be able to let you know what it’s going to look like as far as a outcome. “Can we do a micro-apartment on a community title?” Depends, Maria, where you are in the country. Is that Moxham or Morkham? Morkham. “As soon as you’re finished doing the conversion, you can get a very high valuation from a property agent.” Absolutely, you can.
Awesome, Jane, I’m just reading you. Seriously, banks are such assholes sometimes, Jane, just saying that. They’ll only lend her money for 12 years because she’s older. Jesus, honestly, they’re assholes. So, Maria, if you were in high-res, you would be able to answer your own question in there. The answer is no, basically. Where will property prices rise by 40%? Well, only if you learn how to look at the markets. I’m not one to announce where you should be buying. Okay? So I already know that that person bought in that area. And so, Catherine, this is what I do. I teach people how to do that.
All right. We’re an hour, 10 minutes in. I might answer a couple more questions if you’ve got them. If not, I will go down and see my daughter, and wish her a happy birthday. She wants a watermelon cake because she doesn’t want a proper cake. She’ll put on weight apparently, and she’s a very simple person. I think that she just likes to be simple. For her 18th birthday party, she just wants to stay home, which is good.
So, awesome, everyone. It looks like it’s just 8:00. Thank you from a few of you, and I will wish my daughter happy birthday from everyone. Thank you, again. I haven’t done a Matter of Fact for a long time, so it’s great to see a whole bunch of you on. Know that, what I’ve said today is really my opinion. So far, I’ve been pretty spot on what’s been happening over the last seven or eight months. I do have a one dollar bet with someone that we’re going to go into a massive downfall recession, but I probably should’ve put some metrics around that.
So, Steve, I’m not sure if you’re online and listening, but let’s see how we go. Hopefully I’ll be able to get spending some time with him very soon, go down that way, as soon as we get some border releases. Anyway, everyone, thank you for being part of tonight. I hope you have… When is the next [inaudible 01:06:57]? So that’s a high-res question, Steven. And thanks, Shane. The studio is looking great because you came and put insulation in for me. I did a hit the other day of the stuff that you gave me and got fuck nothing out of it.
Have a good night, everyone. Check you next time, and stay safe, and support all those people around you, and make sure you tell them you love them. Cheers, see you.