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Top 5 Factors That Will Impact Your Property Investing in 2016

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commercial_property.jpgIn Scott Morrison’s updated budget report delivered this month, Treasury is stating that the housing construction boom ends this year.

The boom has carried much of the economy since the resources investment sector declined. However, it is still expected that there will be some growth in new home building and renovation.

twoGovernment statistics predict a modest two per cent next financial year compared with 8.5 per cent this year - note there has been a downward trend for dwelling approvals for seven months in a row, but how does this latest news impact the property market in 2016?

Here are the top five ranked events that will impact your property investing in 2016.

5. Changing banking policies on lending

Banks have recently changed lending policy and rates and this has a direct impact on what you can borrow and how much you can borrow and at what cost.  

Why did the banks raise interest rates to investment and commercial lenders recently when the Reserve Bank held the interest rates?

The major banks blamed their increases on new policies requiring banks to hold larger equity capital buffers; this makes them more resilient to shocks.

The lenders argue that they are passing on this cost to customers, saying shareholders should not wear all the costs of a safer banking system.

Why have the banks increased the requirement for security deposit from 10% to 20% in most cases?  Reducing their exposure, the banks want more of a buffer in the event of a downturn in the property market, and they see the extra 10% as security and an additional buffer.

4. Increase in GST and other tax reforms

Treasurer Scott Morrison and the government are reviewing our current taxation system with a white paper due for release early this year.

They have already noted that Australia has one of the lowest GST rates in the western world, and raising the GST would be a solution to reducing the budget deficit. As mentioned in a previous article, raising the GST will have an impact on the property prices of both new and existing homes.

If you understand how GST works, the additional GST normally would be simply passed on to the final consumer or claimed back from the government, but in the case of property development the additional cost is borne by the party before the final consumer, the developer.

The developer does not have another consumer in the supply chain. This seems like good news for homebuyers as they do not have to pay GST when purchasing a home, however it is no stretch of the imagination to think that developers would try to build in the additional tax into the final sale price.

Once again this will depend on supply and demand of the market, the developer may not be able to simply raise the property sale price by 5% to recoup the GST if the market does not accept that price, and hence they will have to wear this cost.

Remember also, that GST does not impact old housing stock so it could be also conceivable that the developer is competing with the house next door that is for sale that has no GST. 
 

3. Government policy on negative gearing

We all know that the government has discussed the possibility of changing the legislation around negative gearing and changes are firmly on the table.

Given the overall magnitude of negative gearing – in 2010/11 there were 1.2 million individuals with negatively geared properties – a shift in tax incentives towards new construction has the potential to have a material impact on housing supply.

What the changes will look like is yet to be determined but whatever happens in this area it will have a short-term impact on investor’s psychic.
 

2. General consumer confidence

Many things may impact someone’s confidence in making an investment decision or acquiring property, including security of employment, general economic outlook and world affairs.

With the current uncertainty around the Middle East, any further escalation in conflict will understandably affect general consumer confidence; this in turn will impact the property market. With both Internet and social media, the world is a small place and although Australia is geographically thousands of miles away from areas of strife, as we have seen we are not sheltered from the world issues.

1. Movement in interest rates

My top ranked impact in 2016 on property investors is interest rates, which also affects affordability. This will most likely have the biggest influence on the property market over the coming year.

Although we are currently experiencing the lowest rates in our history, recently the US Federal reserve raised interest rates for the first time since 2006 by 0.25%, a move that will affect almost every financial market in the world.

Australians tend to be motivated or demotivated by interest rates with recent statistics showing that the gap between incomes and property prices in larger cities are growing further and further apart.

Any upward interest rate movement makes it that much tougher to enter the market. When the bank recently increased their investment rates it had an immediate impact on the property market even though rates in general were still at historic lows. 

Auction clearance rates dropped almost overnight which is an indication of how interest rates influence the market. In the UK, rates are predicted to rise in 2016 albeit at a slow rate, and financial markets have for months speculated about when the

US Federal Reserve will start to raise interest rates from record-low levels. It is predicted that 2016 will see slow incremental increases.

What about Australia?

In the Reserve Banks Minutes 3rd November, 2015 it states, “Overall, the forecast for the Australian economy remained for growth to strengthen gradually over the next two years as the drag on GDP growth from falling mining investment waned and activity progressively shifted to non-mining sectors of the economy.

Inflation was forecast to be consistent with the target over the next one to two years, but somewhat lower than earlier expected. 

While the recent changes to some lending rates for housing would reduce the support to demand from low interest rates slightly, overall conditions were still accommodative.

Credit growth had increased a little over recent months and housing prices had risen further in Melbourne and Sydney, though the pace of growth had moderated and housing prices were steady in other cities”. Taking the above information into consideration, the Reserve Bank decided that leaving the cash rate unchanged at this meeting was appropriate.

They judged that the inflation outlook might afford some scope for further easing of monetary policy, should that be appropriate to lend support to demand.

The Reserve Bank would continue to assess the outlook, and whether the current stance of policy would most effectively foster sustainable growth and inflation consistent with their target. 

Therefore, if interest rates remain on hold during 2016 which looks likely, the property market in most major cities will remain steady however, if there is upward movement then this will have a domino effect to slow the market and we will see a further cooling of property prices.

This article is provided by David Naylor at Chan and Naylor.  

Learn more at www.chan-naylor.com.au

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