How Australian Property Can Buck the Trend

There’s been a lot of talk recently, about the prospect of Australia and many other countries around the world falling into a recession.

These days, the word ‘recession’ isn’t as scary as it used to be as most people understand that this is a technical definition, that just means two consecutive periods of negative economic growth.

With the severe limitations placed on the economy, through lockdown measures, used to combat the spread of COVID-19, it’s no surprise that the economy might slow down. But as we’ve also seen, things are improving rapidly and business is getting back to normal relatively quickly.

That said, it is interesting to look at just how resilient Australian property has been in the past and why we should be optimistic about what that means for the coming months and years.

‘The Recession We Had to Have’

The last time Australia fell into a recession, it was the residential property market that really did buck the trend.

The ‘recession we had to have’ happened in the early 1990s after a period of strong growth in the ‘roaring ’80s’ and the ensuing property boom. At the time, growth fell by 1.7 percent and the unemployment rate jumped to 10.1 percent.

While the numbers looked bad on the surface, they didn’t impact property prices like many thought it might. In fact, it was quite the opposite.

In the 12 months after the recession began, property prices in Sydney fell by only 0.7 percent, Melbourne by 2.4 percent, and Perth by 1 percent. On the flip side, house prices grew in value in Brisbane by 6.8 percent and Hobart by 4.2 percent.

Not exactly what many might have expected.

In the three years after 1991, property prices showed a cumulative growth of more than 20 percent in 5 of Australia’s 8 major capital cities.

Source: Propertyology

During that same period of time, unemployment was sitting around 10 percent, with some areas even higher than that.

As we can see, property prices grew significantly in Perth and Darwin between 1991 and 1994, while our major two cities of Melbourne and Sydney both saw growth of between 5 and 18 percent.

Again, a long way from the calls being made recently of 30 percent falls.

Interestingly, there were also a number of regional areas that performed very strongly through that period as well.

House prices in Townsville grew by over 30 percent, Griffith by around 25 percent, Cairns by nearly 40 percent, and Busselton in Western Australia by around 50 percent.

This data really highlights the fact that not only does Australian property have a history of performing strongly during tough times, but there really isn’t just one single house market in Australia.

The most recent data from CoreLogic has indicted that the combined capital cities fell in value by just 0.5 percent in May, which they labeled a sign of just how ‘resilient’ the property market has been.

As lockdown measures across the country ease and the real estate industry gets back to business, the chances of a ‘V-Shaped’ recovery continue to increase. And once again it looks like property could play an important role in Australia’s economic recovery.

 

The licensing statement Credit Representative Number 524027 is authorised under Australian Credit License Number 384324 | Disclaimer – Your full financial situation will need to be reviewed prior to acceptance of any offer or product

Accessing Your Money: Offset Account or Redraw?

Over the course of the last few months, the COVID situation has shown us just how important it is to have some money in the bank. During the lockdown, many Aussies experienced job losses and lowered income, and as the weeks in isolation rolled by, even generous government payments couldn’t stretch to cover the bills and many savings accounts were depleted.

According to research from the Gratten Institute, only 20 per cent of Australians have more than $50,300 in savings. A whopping 50 per cent of Australians have less than $7,000 in the bank.

Source: Gratten Institute

Unfortunately, these numbers are certainly telling us that the average Australian isn’t prepared for that rainy day when it finally arrives.

Given the long-term strength of the housing market in Australia, it’s understandable that most Australians have a large portion of their wealth tied up in the family home. Perhaps they put any spare cash into paying down their loans, which is a prudent thing to do. However, that doesn’t always make it easy when you need to access some spare cash.

Fortunately, there are a few money management options for homeowners who want to get their hands on some cash – just in case.

Redraw Facilities

In years gone by, most borrowers have looked to a simple principal and interest loan with the goal of paying it over the lifetime of the loan – normally 25 to 30 years.

Some of these loans afford you the ability to redraw any extra money you’ve put into the loan, over and above the contracted principal loan and interest repayments. Basically, if you’re ahead on your payments, some lenders will let you access that money, a little bit like a savings account.

While this is good in theory, and certainly some Australians will have accessed this type of facility in recent months, the big issue is that the offer to redraw is still at the discretion of the lender. So theoretically, a lender can refuse a request to access these extra funds.

With that being the case, while a redraw facility is still a positive step toward having cash on hand when you need it, there might just be better options for borrowers to consider.

Offset Account

These days there is a wide array of loan products that can significantly increase a borrower’s flexibility and reduce the amount of interest paid over the lifetime of the loan.

For most borrowers, the best feature is often having a 100 per cent offset account. An offset account is basically a transaction account, that is linked to your loan.

Money in the offset account reduces the overall loan balance which in effect, cuts down your interest payments.

It’s a way of having your cake and eating it too.

By parking some spare cash, or your savings in your offset account, you are going to be saving a significant amount of interest.

This is because mortgage rates are virtually always higher than the interest you pay on your mortgage than on savings accounts, or even term deposits. And you can be sure they are far higher than any type of transactional account.

You’ll be saving a significant amount of interest and that will put you ahead of just trying to save.

Refinancing

Depending on your personal circumstances, you could consider refinancing and accessing equity that has been built up in your home.

You can then take advantage of your offset account by parking that equity in there and accessing it as you need it, while not paying interest on it.

This money could be used in an emergency or even for something like the purchase of an investment property. Not all offset accounts are created equal, but that’s something you can talk to your mortgage broker about.

What’s important is that you have control of your finances and you’re able to use that extra money or equity should you need it.

As we’ve already seen, $7,000 in savings is not a lot, when something unforeseen comes along.

 

The licensing statement Credit Representative Number 524027 is authorised under Australian Credit License Number 384324 | Disclaimer – Your full financial situation will need to be reviewed prior to acceptance of any offer or product