There is a lot of nerviceness in the property market in Australia at the minute. Every newspaper or TV news broadcast seems to reference how the Sydney property market is reaching bubble proportions and that APRA need to continue putting obstacles in place so lenders don’t experience a mortgage debacle like what hit the USA in 2008, which we refer to as the Great Financial Crisis or GFC. Just last week APRA announced that lenders we to limit their interest only loans to 30% of their overall book. This comes in the wake of their book being limited to 10% growth per month of investment loans versus owner occupied loans.
With all the nervousness, what was interesting is how the government is thinking of allowing Superannuation to assist first home buyers with their deposit. Is this really going to help or is this a trap where young savers may lose their hard earned retirement funds if or when this bubble does burst. Since we can assume this will be for owner occupied purchases and we are looking at the long term, little pain should be felt and the upside would most likely be greater than the downside of being shut out of the housing market altogether. What is interesting is that APRA is putting roadblocks on the banks making investment lending more difficult while assisting first home buyers to get into the property market as soon as possible. I commend them for their diligence in wanting to help the first home buyer. I hope this turns out to be a winner.
Don’t get me wrong, I’m not writing this to promote Aussie properties for first homebuyers but to point out that there is an issue with leverage in the Australian property market and it’s making its way into the Superannuation space for first home buyers. We’ve had financing in Super for about a decade now so this isn’t new. What’s new is that we are constantly looking towards Super as the silver bullet.
Tandem Uehling Financing is happy to assist with anyone’s mortgage and financing needs but I think the real winner here is the US property market. What shines there is the disconnect with Australia where the US can command rental income of over 10% and not have to pay more than a couple of hundred thousand for a great property in a great neighborhood that attracts growth as well. At prices like this from a property market that was rebooted in 2008, and the ability to command yields superior to Australia, why include the painstaking task to try to leverage?
What interested me about this philosophy of tapping into Super is that it plays into my belief that heavy leverage can hurt someone’s investment exponentially to the downside as much as assist to the upside. This is why we prefer to build our US property portfolios, and Fund, without leverage. Since we are striving for maximum cash flow, the less we take away from our monthly income generation the more we keep for ourselves. This is the basis to why we believe in cash purchasing. Even though Australians are able to borrow in their Super to purchase property, we believe there is greater peace of mind knowing we won’t have interest rate sensitive obstacles affecting our investment style.
If growth was our primary objective then leverage can be valuable. Since income is our primary objective and we want to tame risk so Superannuation funds can feel comfortable investing with us, we limit leverage. We may add a small amount of leverage one of these days. Enough to help with growth but not enough to affect our investment decisions. Until then, let’s be happy that we can earn 10% cash flow with a growing asset pool.