Tuesday, September 12, 2017

House of cards (no, not the show)

Imagine this...you are at a BBQ at a mate's place. You are sitting in your camping chair sipping your sav blanc from your plastic glass (or standing around the BBQ, drinking a cold tinnie in a semi-witty, slightly obscene stubbie cooler, if you're a bloke). The kids are splashing around in the pool, with the occasional growl from the token responsible adult, and the scent of insect repellent is heavy in the air. The conversation started out light, with everyone being friendly over the cob loaf dip (which is divine by the way...look it up if you've never had it), but as the esky starts to empty, the conversation becomes a bit more predictable.

In much the same way that Financial Planners are guaranteed to ask each other "How's business?" at conference (answer: "busy...so, so busy. You?"), there is that individual that attends BBQs and redirects the conversation to investing. Once tall poppy has the undivided attention of the group, he starts (or perhaps a she?) to pat himself on the back about how clever he is to have built himself a multi-million dollar property portfolio. Then he unloads the kicker...he pays no tax! "No tax?!?" you ask in wonderment..."but how?"

Welcome to the world of the heavily negatively geared. Negative gearing is where you pay out more in tax deductible interest and expenses on an asset than you earn in income. Once the calling card of property investing spruikers, it is becoming increasingly dangerous territory. It has been flagged by both sides of Government as an issue, and coupled with Capital Gains Tax discounts, has not been helping housing affordability, or the Government coffers. This can all be overlooked when the share market is booming, Government debt is low, and upward social mobility is strong...like in 2008. Fast forward through the GFC, higher Government debt, and a housing crisis, and all of a sudden, there is a problem.

The real problem is that there are many Mums and Dads out there that have been sucked into the vortex of negative gearing through the conversation with either tall poppy's at BBQs, or property spruikers, that should not be in this space. They are on either average, or sometimes below average, incomes. They live off their credit cards because all of their cash flow is taken up by paying interest on their interest only loans, and then pay out their credit card when they receive their bumper tax return. This means that the Government cannot change it's negative gearing policy without having significant impact on the many of these "House of Cards" empires around Australia, which will not make for happy opinion polls or focus groups.

What has happened is that APRA (the Australian Prudential Regulation Authority) has changed it's stance on investment lending. APRA now requires the banks to limit their interest only lending to 30% of all of their lending. They also require that the banks "manage" lending to investors so they remain below a previously advised benchmark of 10% growth.

What does this mean? At a base level, the banks are now limited to how much lending they can have on their books for investment lending, so they only want the cream of the crop. To get this they have increased their Loan to Value Ratio (LVR), in one case to 50%, which will mean that new entrants will need a deposit of 50% to purchase an investment property.

The real concern is that in order to maximise their 10% growth, the Banks will also need to shift some of their interest only book to principal and interest. This will free up their 30% limit to attract new business. Transitioning the current lending book from interest only to principal and interest will force those with a House of Cards to either sell their properties as their repayments become more onerous, or increase the rent, which is a risky strategy at the best of times.

So, if you are unsure of how all of these changes will impact your property empire, please pick up the phone and check with your lender. And if you didn't like their answer, then make an appointment with a financial planner (cough, cough) so that you can plan your exit strategy, and how to continue building your wealth, before you are forced to fire sale with all the other Mums and Dads out there.

Further information regarding the APRA changes can be found here.

Find Erin* at Achieveit Financial Planning, or call for an appointment on 07 4638 5011.
*Authorised Representative of Securitor Financial Group Ltd ABN 48 009 189 495 AFSL 240687

This is general information only and does not consider your personal circumstances. You should not act on any recommendation without obtaining professional advice specific to your circumstances. We recommend you speak to a financial adviser before acting on any of the information you read on this website.


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