December 7, 2023 • 23 mins
Thanks for joining us for another great episode of Current Market Insights. In this episode we break down the RBA rates decision in December, and the factors that led to their rates call. We get into the nitty-gritty of the two-speed economy that the pandemic has birthed, the widening wealth gap, and the mounting insurance costs in strata schemes. We also dissect how these dynamics are reshaping various Australian cities and regions, offering a captivating insider's perspective.
Have you heard about the dangerous trend of "liar loans" creeping into the housing market? In this episode, we also pull back the curtain on this unsettling reality. This episode doesn't just deliver a cautionary tale, but insists on a vital lesson - the importance of living within your means and considering the potential fallout from financial dishonesty.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
All down, all silent, going, going, going.
Go on, stop the black noise.
Speaker 2 (00:07):
Welcome to the Current Market Insights podcast
brought to you by HarrisPartners Real Estate.
Each episode we chat with realestate author and industry
leader, peter O'Malley, todiscuss the current property
market conditions and provideinsights to assist you on your
property journey.
Speaker 3 (00:30):
Hello and welcome to another episode of Current
Market Insights.
I'm your host, kieran O'Brien,and, as always, with me is my
good friend and the principal ofHarris Partners Real Estate, mr
Peter O'Malley.
Good afternoon, good to see you, kieran, peter, always good to
see you.
Not much really I want to talkto you about today.
We're getting so close toChristmas that it's time to kind
of wind down these reports andwind down the episodes, but it
(00:52):
is obviously early December.
The RBA have made their finaldecision for the year and
they've released a report.
I thought we might start theepisode just by getting a bit of
a recap for our listeners andtry to understand a little bit
about what the messaging isthat's coming out of the Reserve
Bank.
Speaker 1 (01:07):
Interesting messaging , kieran, and again the same as
what we've seen in the last fewmeetings, where the media get
hold of it and all draw slightlydifferent conclusions from the
RBA statement, if you like.
So the key takeouts that I tookfrom the statement is that they
were at pains to justify theirdecision to increase interest
(01:29):
rates in November, which almostsuggests that there's a little
bit of regret that they may haveoverdone it with that November
hike.
Only time will tell, but theysaid the decision to increase
interest rates last monthreflected the board's view that
progress in bringing inflationback to the target ban of 2 to 3
percent was looking slower thanearlier forecast.
(01:50):
And then, further on, they wenton to add housing prices were
continuing to rise across thecountry, as was the number of
new mortgages.
Given this, the board judgedthat the risk of inflation
remaining higher for longer hadrisen and an increase in
interest rates in November wastherefore warranted to be more
(02:13):
assured that inflation wouldreturn to target in a reasonable
time frame.
So that's the statement thatthe RBA have made when
announcing their no movement inDecember.
So it almost sounds like a bitof regret there, or
justification after the factdoesn't it.
Speaker 3 (02:30):
I was just about to say.
It sounds like they're tryingto justify you know.
Hey guys, this is what we did.
Yeah, honestly, this is why wedid it.
We're not so sure now, butwe're not going to do anything
because actually, the outlooksmay be looking a little more
positive than we thought.
Speaker 1 (02:43):
Indeed.
Well, the outlook for bringinginflation down, yeah, look, I
think what we can take out ofthat last line that I read from
the statement was that if houseprices continue to go up across
the country and it's such anuanced point across the country
, not in your suburb, not inyour street, not in the inner
west, not in your state, butacross the country they will
(03:03):
increase interest rates again.
So people next year may see thatproperty prices in their market
segment or in the next suburbover are falling, but across the
country property prices arestill rising.
And the RBA in this statementin December, point blank, have
said the reason for increasinginterest rates in November was
(03:24):
because property prices acrossthe country are increasing.
And they go on later on intheir statement.
If I can say that the outlookfor household consumption
remains certain, with manyhouseholds experiencing a
painful squeeze on theirfinances, while some are
benefiting from rising houseprices, substantial saving
(03:44):
buffers and higher interestincome from higher interest
income.
So what they're talking tothere is it's nearly a two speed
economy, where some people areactually doing quite well in
this environment and others aregetting crunched by it.
So the RBA are acutely aware ofthe challenges out there, but
they're dealing with a bluntinstrument.
Speaker 3 (04:02):
Do you think we're starting to see a bit of
delineation and I guess youmentioned a two-speed economy
but are we starting to see agenuine two-tier system here,
where some people really youknow the haves and the have-nots
, to use an old adage, I guess?
Speaker 1 (04:21):
I think that's been happening all year.
Actually, I think that's beenhappening since the beginning of
COVID, where some people aredoing really well out of the
current situation and others aregetting crunched by it.
So the wealth gap is wideningsadly in this country and it's
becoming clearer by the day to alot more people.
Speaker 3 (04:37):
Would it be safe to say that, given a large
percentage of the propertystrength has come from the top
end of town, that that's furtherexacerbating the problem.
And then the people at theother end of the spectrum who
are facing the financial crunchat home are having to do with
the fallout from, as youmentioned, the RBA's obvious
statement here that propertyprices nationally are on their
(04:57):
radar in terms of their policy.
Speaker 1 (04:59):
I wouldn't quite say that, and that's why I drew the
nuanced point that they aretalking about property prices
across the country, becausewhat's happened in cities like
Adelaide and Perth that have hadvery, very depressed property
markets is rents have shot up.
So therefore it's now cheaperto go and get a mortgage on
these cheap properties than itis to pay the rent that the
(05:22):
landlord's asking.
So you'll probably continue tosee increasing property markets
in cities like Adelaide, likePerth, possibly a little bit
more to run in Brisbane, andthen some of your regional
cities like Bunbury in Perth andmaybe Townsville in Queensland.
You might continue to seeproperty prices continue to rise
(05:44):
there because they're comingoff such a low base.
So, whilst the very top end, orthe prestige end of the market
is certainly stronger than mostother markets at the moment,
some of these lesser lightcities, if you like, cities that
don't end up in the media asdiscussion points, have got a
lot of room to move.
Speaker 3 (06:03):
And obviously some of these factors are influenced by
things well outside the RBA'scontrol.
They're not inflationaryfactors, necessarily, but
property prices and the impactof rents on these, as you're
mentioning, are driven by, aswe've mentioned many, many times
, some factors that the RBAreally have absolutely no
control over.
Speaker 1 (06:20):
They've got three options each month increase,
hold or decrease interest rates.
That's all the RBA can workwith, and they've got this whole
contradictory board of data andsituations in front of them.
In their statement they talkabout the global conflict on top
of all of that.
And, as I say, each month theycan only make three decisions.
So it very convoluted, a messypicture for them.
(06:43):
But they've said it plain andsimple If national property
prices continue to go up, sowill interest rates, and that is
probably why many of theseasoned analysts in society are
saying to us that they don'texpect next year to be as strong
for property properties as itwas this year, because if it's
anywhere near as strong, rbawill just keep increasing rates.
Speaker 3 (07:05):
Before we wrap up this section, is there any
indication or any hints in thestatement as to what they think
may happen at the start of nextyear with the rate setting?
Speaker 1 (07:15):
Look.
There were very light onavailable data between the
November meeting and theDecember meeting, so they didn't
have a great deal of data inwhich to make a decision on and
the safest decision this weekwas to keep it on hold.
They don't meet in January.
That's the only month of theyear that the RBA don't meet
under the current structure.
They'll be back at it on thefirst Tuesday in February and I
(07:38):
think it's January 31.
I saw There'll be a massivedata dump from the existing
quarter will come out on January31, 2024, and that will give
the RBA all the information theyneed to decide upon at their
February meeting whether toincrease rates, hold rates or
cut rates.
I see that there are somepeople based on the latest
(08:01):
economic numbers today, whichwere pretty grim, to be honest.
There's some really softnumbers today.
There are some people that areactually bringing forward their
rate cut scenario.
Speaker 3 (08:11):
Yeah, I think we'll just have to wait and see.
On that one there's still somuch up in the air.
I want to pivot, if we can,Peter.
I was talking to some clientsthis week who were looking to
purchase a property under astrata scheme and one of the
things they raised as a concernwas insurance and strata
insurance, and they had raisedthe issue, or raised the point.
I should say that they'd heardthat there's been massive
(08:32):
increase in strata insurancecosts across the country and I
thought we should have a bit ofa look at that and try and get a
sense of what's involved instrata insurance and why, if
anything, is causing these rises.
Speaker 1 (08:45):
Yeah, look, we did speak to a strata manager about
this, Kieran, and he said infairly blunt terms that
insurance premiums have gone up20% year on year for the last
two years.
There's a lot of insurers thathave backed out of this place,
out of this place and space ofensuring strata schemes.
We were involved this year inhelping establish a strata
(09:07):
scheme and we were absolutelyall bowled over by the amount
that we were charged by thestrata company.
Strata companies, in bluntterms, have been severely burnt
by this type of insurance,whether it be poorly managed
strata schemes, poorly builtstrata schemes.
They're particularly wary ofnew buildings.
(09:29):
They're particularly wary ofthe strata not overseeing
repairs being done properly andcoming back for a second bite of
the cherry as far as tappingthe insurance company for more
money, and what I'm told is thatthe payout ratio in the last
couple of years for insurancecompanies has been going up
while the premiums have beengoing down, and the strata
(09:53):
companies have had enough ofthat.
They are really coming down.
Tough on strata schemes.
Speaker 3 (09:58):
So you've mentioned a couple of factors there that do
play a role.
So obviously, the management bythe strata agency and the
building quality are big factors.
I read an article inpreparation for this talk about
the floods that we've had in NewSouth Wales and Queensland and
the impact that they've had onthe costs as well, and in fact I
think I read somewhere thatalmost $5 billion was paid out
in insurance premiums as aresult of those floods and that
(10:20):
that cost has been directlypassed on across the board.
Given that that's a naturaldisaster you know we're in a La
Niña period or La El Niña I'mnot sure which one it is at the
moment but the risk of ongoingnatural elements playing a role,
is it likely that we can seeany kind of reduction in these
premiums moving forward, or arewe just likely to see increases?
(10:40):
Do you think?
Speaker 1 (10:42):
I'm not seeing any reason why they'll go back down.
I think this is a reallyunwanted development in the
property market.
Given how many people now livein strata and how much property
has been built in the lastdecade, that's probably below
quality.
To be fair, the strata schemesthinking they can just tap the
insurance manager for a payout.
(11:03):
They look like they're over.
Insurance companies are gettingreally tough with strata schemes
.
Some insurance companies haveactually just completely backed
out of this space and sector andothers have just jacked their
prices up.
So what you'll see here isyou'll see landlords will look
to pass the increased stratarates because of the insurance
costs onto the tenant.
(11:24):
Owner, occupies, at a time ofcost of living, will be forced
to basically swallow these extracosts, and all of it's going to
not dominate the inflationaryreading, but it's going to put
pressure on the inflationaryreading because so much of our
society at the moment now livesin strata and whether you're a
tenant or an owner or occupy ora landlord, you're going to be
(11:47):
impacted by what's going on here.
It's a really big issue and Ithink it's something you're
going to see play out a lot morenext year.
Speaker 3 (11:53):
I'm glad you mentioned that we see more and
more strata living now,particularly given we are and we
have talked at length about thehousing supply issues in this
country.
One of the solutions is goingto be more high density housing,
which is most likely going tobe under strata management and
therefore it is meant to be anaffordable option for people to
get into the market.
But what you're saying withincreasing premiums some of them
(12:13):
, you know I've read somearticles suggesting up to 60%
over two year periods increasesin these premiums that's just
going to make these effectivelyunaffordable, is it not for many
, many people trying to get intothe market.
Speaker 1 (12:24):
Well, it depends how much amenity comes with the
respective strata, and I hope ifthey're talking about building
affordable housing here and thatwe're not talking gyms, list
pools, concierges, whatever itelse that goes with a high cost
strata plan.
You want one wants to see thembuilt as economically and not
(12:45):
built cheaply, but built them aseconomically and, you know,
sustainably managed as possible.
Speaker 3 (12:51):
Not to hate on insurance companies here a
little bit, but do you thinkthat insurance companies
mathematics to insurancecompanies, so there's no motion
from them.
Speaker 1 (12:58):
Yeah, the mathematics are out of whack at the moment
and they're just correcting it?
Speaker 3 (13:03):
Yeah, of course, of course.
I read a really interestingarticle on this regarding
insurance brokers and stratacompanies, and one of the little
known or relatively unknownfacts is that brokers do receive
commissions for providingstrata insurance.
I mean, they do in every otherinsurance.
We know that.
But one of the things discussedwas that insurance brokers in
(13:25):
this space quite often then paythe commission to the strata
company and then the stratacompanies pay it back, but
rolled out in increased stratalevies.
Now, as someone who owns in astrata environment, that seems
like an incredibly unfair way todo business and for us to have
to foot that bill.
Do you have any sense of howwidespread this might be, and is
this something that any youknow respective buyers might
(13:47):
want to try and look into orconsider when they're looking to
buy a place?
Speaker 1 (13:52):
Look, no, I don't, but that's a broker that's going
and sourcing the best availableinsurance for the strata scheme
that they can.
And because insurance insurancecompanies are backing out of
the space, I think you'll findthe brokers fees go up as well.
So commission is a success feeand success in this space is
(14:13):
getting harder, so you canexpect the success fee to
therefore go up next year.
Speaker 3 (14:19):
It's just unfortunate .
It's unfortunate for everyonewho has to pay it, though, peter
.
Speaker 1 (14:22):
Oh, that's why I say it's a really horrible issue and
it's not an issue that we'retalking about today with any
glee, but it is something thatis brewing in the background and
the news flow and the cost ofliving and Christmas and all the
rest of it is happening soquickly that there's so much to
take our attention away fromthis.
But, as I say, I think there'llbe many strata meetings in 2024
(14:44):
where people will be shocked tosee the increase that they're
being hit with for insurance.
Speaker 3 (14:52):
Yeah, absolutely.
25% or 20%, as you mentionedearlier, is a huge amount of
money for a lot of people,particularly at the moment.
Speaker 1 (14:59):
Well, we're up in arms earlier in the year about
inflation running at 8% in thiscountry and we're happy that
we've got it down to 4.9% as perthe last reading.
But we're talking insurance.
Inflation is up 20% year onyear.
So a horrible issue.
And the thing about insuranceis that it's not a product or
service that you respect or haveany great joy for until it is
(15:21):
that you need it.
Now there may be some strata'sout there that have been
systemically managed poorly andthey can't get insurance, or
there's no insurance companythat wants to take it up for
them other than at a draconianprice, and one does wonder
whether the government's goingto have to step in and support
such strata schemes at themoment, because we can't have
(15:42):
people living in apartmentblocks uninsured.
Speaker 3 (15:45):
Yeah, and potentially unsafe if they can't receive
insurance.
Perhaps this is a goodopportunity for the Mins
government to raise some moneythrough a green slip for strata
buildings, who knows?
Now I want to change again whatwe're talking about, peter.
We've obviously just talkedabout the RBA.
We've talked about increasingcosts in strata, which is a
really great segue, I think,into a topic that has just
popped up this week, which isthe prevalence of so-called liar
(16:07):
loans.
Now, this is something I'dheard a little bit about before,
but wasn't overly familiar with, but I wonder if you could take
our list as through what is aliar loan?
Why is it making use at themoment and, I guess, what are
the implications of liar loansfor us down the line?
Speaker 1 (16:22):
Well, a liar loan is simply where you lie on your
loan application by making yourincome appear higher than it
actually is or your outgoingsappear lower than it actually is
, in order to help you get ahome loan and because you're
making that home loanapplication to a financial
institution a little bit likeinsurance companies.
A lot of people don't have agreat deal of sympathy for a
(16:45):
financial institution and I'mnot saying everyone operates on
this space, but there is a senseof they can afford it.
Who cares?
They're only a bank, it won'tmatter.
I can tell a little furphy here.
Speaker 3 (16:56):
You're not alone in that view, Peter.
Speaker 1 (16:58):
Yeah now, my first experience with liar loans was
about 10 years ago, beforeinvestor mortgage rates were
higher than home loan oroccupier rates and they were
essentially at the same level.
So what a lot of people weredoing is going to the bank and
saying I want to buy this houseat Smith Street, and when I buy
(17:18):
this house at Smith Street I'mgoing to rent it out, so please
use the $800 a week rental valueas part of the overall equation
in assessing my viability andability to pay this property
back.
And then they'd ask us for arental letter saying the
property at Smith Street willrent out for $800 a week for the
(17:38):
bank.
And then on settlement day, thebuyer would come in with a
removalist truck out the frontof the office and say, great to
be settled, can I have the keys?
And I'd say you're moving in,are you?
And he'd say, yeah, we aremoving in.
It's like alright, but Ithought you said you're going to
rent it out.
I know that was just for thebank.
Yeah, wow, and that's soinnocent and that was so common
at that time, kieran, that thebuyer would run out with their
(18:00):
keys and it's like this person'sactually just committed a form
of fraud to get the home loan.
Yeah, that's financial fraudpretty clear and the whole
system was running on this andeveryone just thought it was
okay.
Even mortgage brokers weresaying just tell the bank you're
going to rent it out.
Once you've settled, who cares?
Just move in.
And that was my firstexperience with lialones, where
it's like you've actually takenmoney under false pretence from
(18:23):
the bank but no one seems tomind.
As I said, at that point intime the interest rate for a
home loan and an investment loanwas the same where the banks
have now got a higher rate forinvestment loans versus home
loans, so that's not asappealing doing that.
The reason this came back onthe agenda is I saw in the ABC
this week a gentleman who worksfor the retail banks
(18:46):
investigating mortgage fraud wasshowing how easy it is to
doctor one's pay slip.
When submitting that pay slipto the bank on a PDF document,
it was like surely people wouldnot be earning X and then just
tell the bank they're earning Xplus 20% and physically doctor a
pay slip.
But this fellow was in the newssaying so easy to do it doctor
(19:10):
the documents and happensregularly.
And if people are doing that toget a home loan, that is
absolutely madness.
Speaker 3 (19:18):
So that is madness, I agree.
Is this a sign, though, thatperhaps people are just
desperate to get into housingand some form of security in a
time where they're feelinguncertain, or do you think this
is more opportunistic?
Speaker 1 (19:31):
Look, if you've got to tell the bank you're earning
20% more than you really are toget a home loan, you're living
beyond your means.
Speaker 3 (19:40):
Did the article give any indication of it was?
Speaker 1 (19:42):
a TV report.
Speaker 3 (19:43):
Oh, the TV report, sorry.
Any indication of at which sortof lending level this was most
prevalent?
Is it you know?
Is it first home buyers lying,or is it you know?
People in the $2 million?
Speaker 1 (19:53):
borrowing space.
Oh, it's across the board.
It's across the board.
This fellow investigatesmortgage fraud on behalf of the
banks and apparently lialones isthrough the roof, yeah.
Speaker 3 (20:02):
Okay, so he suggested that they're doctoring pay
slips to increase their pay.
Speaker 1 (20:06):
He showed on the television how you can doctor a
pay slip a PDF pay slip andincrease your wages, and then
just send that off to the bank.
Speaker 3 (20:14):
Unbelievable, unbelievable.
I wonder what the flow andeffect is going to be then for
the retail banks If this is suchan issue.
Are we likely to see a scenariowhere, to apply for a loan now,
you have to authorize youremployer to forward a pay slip
or something like that to tryand mitigate the risk of this?
I?
Speaker 1 (20:32):
think the banks have been on to it for some time.
It was just that at this pointin the cycle they decided to
take the story to the media andshow them.
We are looking, we are watching.
Be very, very careful ofsubmitting a liability, because
we will catch you out.
So it's clearly more.
It's not three or four peoplethat have done it.
If they've got someonepermanently, or it's just not
(20:52):
someone, I should say, ifthey've got a body of people
permanently investigatinglialones, it's clearly very
widespread.
So no doubt there's otherexamples that are happening out
there.
But I think telling the bankyou're moving in and then you're
going to rent the property out,I should say, and then moving
(21:13):
in on settlement day, that's oneversion of it.
That's, in fairness, that'stame in comparison to doctoring
a pay slip and suggesting thatyou're earning significantly
more than you really are.
Speaker 3 (21:23):
Yeah, really interesting.
In my research for this, peter,I did look up an article from
2021.
So in the boom period lookingat mortgage rates and looking at
lending and interestingly thesurvey found that ANZ had the
highest rates of lialones and65% of people that had a loan or
a mortgage with them in thatyear admitted they had lied, and
(21:46):
something like 80 to 90%.
Speaker 1 (21:47):
I'm sure we're speaking to the 35% of those
people tonight Of course we are.
Speaker 3 (21:51):
Of course we are.
Well, they're the only oneslistening.
But interestingly, 80 to 90% ofthose suggested that in fact it
was their local banker that hadrecommended they doctor the pay
slips.
Speaker 1 (21:59):
I've got little doubt about that and, as I said
earlier on, it was mortgagebrokers phoning in on the whole
rental letter thing that wasdriving that as much as it was
the actual home buyer.
Yeah.
And it speaks to the wholesystem.
Speaker 3 (22:12):
Yeah, look, absolutely, and it really does
speak to the importance ofhousing and the cost crisis that
we're in at the moment.
Speaker 1 (22:19):
And look, you can see why.
There was a banking royalcommission.
It was so confined in its scopethat it never actually got to
the nexus of the issue.
And here we are lialones.
I first heard about lialones 10, 12 years ago.
Here we are, the cycle's doneanother loop and we're back
talking about lialones again.
Speaker 3 (22:38):
Yeah, and then we'll get to our next pre-recessionary
period.
We'll talk about it again.
Peter, look, as always, reallygreat wrap up, some good topics
today.
I think we've covered someinteresting ones that hopefully
our listeners will find somevalue in.
As always, I encourage ourlisteners if you do have a topic
you are interested in, writeinto us and we will cover it for
you in depth, with Peterhimself offering, as always,
(22:59):
incredible insights andinformation for us all.
Speaker 1 (23:01):
Thanks, Kiran.
Speaker 3 (23:01):
Great to see you.
Thanks, Peter.
Thanks for tuning into CurrentMarket Insights.
We'll look forward to talkingto you next time.
Speaker 2 (23:08):
Thanks for joining us on the Current Market Insights
podcast brought to you by HarrisPartners Real Estate, the
podcast providing real estateinsights you won't find anywhere
else.
All down, all silent, going, going, going.
Go on, stop the black noise.
Speaker 2 (00:07):
Welcome to the Current Market Insights podcast
brought to you by HarrisPartners Real Estate.
Each episode we chat with realestate author and industry
leader, peter O'Malley, todiscuss the current property
market conditions and provideinsights to assist you on your
property journey.
Speaker 3 (00:30):
Hello and welcome to another episode of Current
Market Insights.
I'm your host, kieran O'Brien,and, as always, with me is my
good friend and the principal ofHarris Partners Real Estate, mr
Peter O'Malley.
Good afternoon, good to see you, kieran, peter, always good to
see you.
Not much really I want to talkto you about today.
We're getting so close toChristmas that it's time to kind
of wind down these reports andwind down the episodes, but it
(00:52):
is obviously early December.
The RBA have made their finaldecision for the year and
they've released a report.
I thought we might start theepisode just by getting a bit of
a recap for our listeners andtry to understand a little bit
about what the messaging isthat's coming out of the Reserve
Bank.
Speaker 1 (01:07):
Interesting messaging , kieran, and again the same as
what we've seen in the last fewmeetings, where the media get
hold of it and all draw slightlydifferent conclusions from the
RBA statement, if you like.
So the key takeouts that I tookfrom the statement is that they
were at pains to justify theirdecision to increase interest
(01:29):
rates in November, which almostsuggests that there's a little
bit of regret that they may haveoverdone it with that November
hike.
Only time will tell, but theysaid the decision to increase
interest rates last monthreflected the board's view that
progress in bringing inflationback to the target ban of 2 to 3
percent was looking slower thanearlier forecast.
(01:50):
And then, further on, they wenton to add housing prices were
continuing to rise across thecountry, as was the number of
new mortgages.
Given this, the board judgedthat the risk of inflation
remaining higher for longer hadrisen and an increase in
interest rates in November wastherefore warranted to be more
(02:13):
assured that inflation wouldreturn to target in a reasonable
time frame.
So that's the statement thatthe RBA have made when
announcing their no movement inDecember.
So it almost sounds like a bitof regret there, or
justification after the factdoesn't it.
Speaker 3 (02:30):
I was just about to say.
It sounds like they're tryingto justify you know.
Hey guys, this is what we did.
Yeah, honestly, this is why wedid it.
We're not so sure now, butwe're not going to do anything
because actually, the outlooksmay be looking a little more
positive than we thought.
Speaker 1 (02:43):
Indeed.
Well, the outlook for bringinginflation down, yeah, look, I
think what we can take out ofthat last line that I read from
the statement was that if houseprices continue to go up across
the country and it's such anuanced point across the country
, not in your suburb, not inyour street, not in the inner
west, not in your state, butacross the country they will
(03:03):
increase interest rates again.
So people next year may see thatproperty prices in their market
segment or in the next suburbover are falling, but across the
country property prices arestill rising.
And the RBA in this statementin December, point blank, have
said the reason for increasinginterest rates in November was
(03:24):
because property prices acrossthe country are increasing.
And they go on later on intheir statement.
If I can say that the outlookfor household consumption
remains certain, with manyhouseholds experiencing a
painful squeeze on theirfinances, while some are
benefiting from rising houseprices, substantial saving
(03:44):
buffers and higher interestincome from higher interest
income.
So what they're talking tothere is it's nearly a two speed
economy, where some people areactually doing quite well in
this environment and others aregetting crunched by it.
So the RBA are acutely aware ofthe challenges out there, but
they're dealing with a bluntinstrument.
Speaker 3 (04:02):
Do you think we're starting to see a bit of
delineation and I guess youmentioned a two-speed economy
but are we starting to see agenuine two-tier system here,
where some people really youknow the haves and the have-nots
, to use an old adage, I guess?
Speaker 1 (04:21):
I think that's been happening all year.
Actually, I think that's beenhappening since the beginning of
COVID, where some people aredoing really well out of the
current situation and others aregetting crunched by it.
So the wealth gap is wideningsadly in this country and it's
becoming clearer by the day to alot more people.
Speaker 3 (04:37):
Would it be safe to say that, given a large
percentage of the propertystrength has come from the top
end of town, that that's furtherexacerbating the problem.
And then the people at theother end of the spectrum who
are facing the financial crunchat home are having to do with
the fallout from, as youmentioned, the RBA's obvious
statement here that propertyprices nationally are on their
(04:57):
radar in terms of their policy.
Speaker 1 (04:59):
I wouldn't quite say that, and that's why I drew the
nuanced point that they aretalking about property prices
across the country, becausewhat's happened in cities like
Adelaide and Perth that have hadvery, very depressed property
markets is rents have shot up.
So therefore it's now cheaperto go and get a mortgage on
these cheap properties than itis to pay the rent that the
(05:22):
landlord's asking.
So you'll probably continue tosee increasing property markets
in cities like Adelaide, likePerth, possibly a little bit
more to run in Brisbane, andthen some of your regional
cities like Bunbury in Perth andmaybe Townsville in Queensland.
You might continue to seeproperty prices continue to rise
(05:44):
there because they're comingoff such a low base.
So, whilst the very top end, orthe prestige end of the market
is certainly stronger than mostother markets at the moment,
some of these lesser lightcities, if you like, cities that
don't end up in the media asdiscussion points, have got a
lot of room to move.
Speaker 3 (06:03):
And obviously some of these factors are influenced by
things well outside the RBA'scontrol.
They're not inflationaryfactors, necessarily, but
property prices and the impactof rents on these, as you're
mentioning, are driven by, aswe've mentioned many, many times
, some factors that the RBAreally have absolutely no
control over.
Speaker 1 (06:20):
They've got three options each month increase,
hold or decrease interest rates.
That's all the RBA can workwith, and they've got this whole
contradictory board of data andsituations in front of them.
In their statement they talkabout the global conflict on top
of all of that.
And, as I say, each month theycan only make three decisions.
So it very convoluted, a messypicture for them.
(06:43):
But they've said it plain andsimple If national property
prices continue to go up, sowill interest rates, and that is
probably why many of theseasoned analysts in society are
saying to us that they don'texpect next year to be as strong
for property properties as itwas this year, because if it's
anywhere near as strong, rbawill just keep increasing rates.
Speaker 3 (07:05):
Before we wrap up this section, is there any
indication or any hints in thestatement as to what they think
may happen at the start of nextyear with the rate setting?
Speaker 1 (07:15):
Look.
There were very light onavailable data between the
November meeting and theDecember meeting, so they didn't
have a great deal of data inwhich to make a decision on and
the safest decision this weekwas to keep it on hold.
They don't meet in January.
That's the only month of theyear that the RBA don't meet
under the current structure.
They'll be back at it on thefirst Tuesday in February and I
(07:38):
think it's January 31.
I saw There'll be a massivedata dump from the existing
quarter will come out on January31, 2024, and that will give
the RBA all the information theyneed to decide upon at their
February meeting whether toincrease rates, hold rates or
cut rates.
I see that there are somepeople based on the latest
(08:01):
economic numbers today, whichwere pretty grim, to be honest.
There's some really softnumbers today.
There are some people that areactually bringing forward their
rate cut scenario.
Speaker 3 (08:11):
Yeah, I think we'll just have to wait and see.
On that one there's still somuch up in the air.
I want to pivot, if we can,Peter.
I was talking to some clientsthis week who were looking to
purchase a property under astrata scheme and one of the
things they raised as a concernwas insurance and strata
insurance, and they had raisedthe issue, or raised the point.
I should say that they'd heardthat there's been massive
(08:32):
increase in strata insurancecosts across the country and I
thought we should have a bit ofa look at that and try and get a
sense of what's involved instrata insurance and why, if
anything, is causing these rises.
Speaker 1 (08:45):
Yeah, look, we did speak to a strata manager about
this, Kieran, and he said infairly blunt terms that
insurance premiums have gone up20% year on year for the last
two years.
There's a lot of insurers thathave backed out of this place,
out of this place and space ofensuring strata schemes.
We were involved this year inhelping establish a strata
(09:07):
scheme and we were absolutelyall bowled over by the amount
that we were charged by thestrata company.
Strata companies, in bluntterms, have been severely burnt
by this type of insurance,whether it be poorly managed
strata schemes, poorly builtstrata schemes.
They're particularly wary ofnew buildings.
(09:29):
They're particularly wary ofthe strata not overseeing
repairs being done properly andcoming back for a second bite of
the cherry as far as tappingthe insurance company for more
money, and what I'm told is thatthe payout ratio in the last
couple of years for insurancecompanies has been going up
while the premiums have beengoing down, and the strata
(09:53):
companies have had enough ofthat.
They are really coming down.
Tough on strata schemes.
Speaker 3 (09:58):
So you've mentioned a couple of factors there that do
play a role.
So obviously, the management bythe strata agency and the
building quality are big factors.
I read an article inpreparation for this talk about
the floods that we've had in NewSouth Wales and Queensland and
the impact that they've had onthe costs as well, and in fact I
think I read somewhere thatalmost $5 billion was paid out
in insurance premiums as aresult of those floods and that
(10:20):
that cost has been directlypassed on across the board.
Given that that's a naturaldisaster you know we're in a La
Niña period or La El Niña I'mnot sure which one it is at the
moment but the risk of ongoingnatural elements playing a role,
is it likely that we can seeany kind of reduction in these
premiums moving forward, or arewe just likely to see increases?
(10:40):
Do you think?
Speaker 1 (10:42):
I'm not seeing any reason why they'll go back down.
I think this is a reallyunwanted development in the
property market.
Given how many people now livein strata and how much property
has been built in the lastdecade, that's probably below
quality.
To be fair, the strata schemesthinking they can just tap the
insurance manager for a payout.
(11:03):
They look like they're over.
Insurance companies are gettingreally tough with strata schemes
.
Some insurance companies haveactually just completely backed
out of this space and sector andothers have just jacked their
prices up.
So what you'll see here isyou'll see landlords will look
to pass the increased stratarates because of the insurance
costs onto the tenant.
(11:24):
Owner, occupies, at a time ofcost of living, will be forced
to basically swallow these extracosts, and all of it's going to
not dominate the inflationaryreading, but it's going to put
pressure on the inflationaryreading because so much of our
society at the moment now livesin strata and whether you're a
tenant or an owner or occupy ora landlord, you're going to be
(11:47):
impacted by what's going on here.
It's a really big issue and Ithink it's something you're
going to see play out a lot morenext year.
Speaker 3 (11:53):
I'm glad you mentioned that we see more and
more strata living now,particularly given we are and we
have talked at length about thehousing supply issues in this
country.
One of the solutions is goingto be more high density housing,
which is most likely going tobe under strata management and
therefore it is meant to be anaffordable option for people to
get into the market.
But what you're saying withincreasing premiums some of them
(12:13):
, you know I've read somearticles suggesting up to 60%
over two year periods increasesin these premiums that's just
going to make these effectivelyunaffordable, is it not for many
, many people trying to get intothe market.
Speaker 1 (12:24):
Well, it depends how much amenity comes with the
respective strata, and I hope ifthey're talking about building
affordable housing here and thatwe're not talking gyms, list
pools, concierges, whatever itelse that goes with a high cost
strata plan.
You want one wants to see thembuilt as economically and not
(12:45):
built cheaply, but built them aseconomically and, you know,
sustainably managed as possible.
Speaker 3 (12:51):
Not to hate on insurance companies here a
little bit, but do you thinkthat insurance companies
mathematics to insurancecompanies, so there's no motion
from them.
Speaker 1 (12:58):
Yeah, the mathematics are out of whack at the moment
and they're just correcting it?
Speaker 3 (13:03):
Yeah, of course, of course.
I read a really interestingarticle on this regarding
insurance brokers and stratacompanies, and one of the little
known or relatively unknownfacts is that brokers do receive
commissions for providingstrata insurance.
I mean, they do in every otherinsurance.
We know that.
But one of the things discussedwas that insurance brokers in
(13:25):
this space quite often then paythe commission to the strata
company and then the stratacompanies pay it back, but
rolled out in increased stratalevies.
Now, as someone who owns in astrata environment, that seems
like an incredibly unfair way todo business and for us to have
to foot that bill.
Do you have any sense of howwidespread this might be, and is
this something that any youknow respective buyers might
(13:47):
want to try and look into orconsider when they're looking to
buy a place?
Speaker 1 (13:52):
Look, no, I don't, but that's a broker that's going
and sourcing the best availableinsurance for the strata scheme
that they can.
And because insurance insurancecompanies are backing out of
the space, I think you'll findthe brokers fees go up as well.
So commission is a success feeand success in this space is
(14:13):
getting harder, so you canexpect the success fee to
therefore go up next year.
Speaker 3 (14:19):
It's just unfortunate .
It's unfortunate for everyonewho has to pay it, though, peter
.
Speaker 1 (14:22):
Oh, that's why I say it's a really horrible issue and
it's not an issue that we'retalking about today with any
glee, but it is something thatis brewing in the background and
the news flow and the cost ofliving and Christmas and all the
rest of it is happening soquickly that there's so much to
take our attention away fromthis.
But, as I say, I think there'llbe many strata meetings in 2024
(14:44):
where people will be shocked tosee the increase that they're
being hit with for insurance.
Speaker 3 (14:52):
Yeah, absolutely.
25% or 20%, as you mentionedearlier, is a huge amount of
money for a lot of people,particularly at the moment.
Speaker 1 (14:59):
Well, we're up in arms earlier in the year about
inflation running at 8% in thiscountry and we're happy that
we've got it down to 4.9% as perthe last reading.
But we're talking insurance.
Inflation is up 20% year onyear.
So a horrible issue.
And the thing about insuranceis that it's not a product or
service that you respect or haveany great joy for until it is
(15:21):
that you need it.
Now there may be some strata'sout there that have been
systemically managed poorly andthey can't get insurance, or
there's no insurance companythat wants to take it up for
them other than at a draconianprice, and one does wonder
whether the government's goingto have to step in and support
such strata schemes at themoment, because we can't have
(15:42):
people living in apartmentblocks uninsured.
Speaker 3 (15:45):
Yeah, and potentially unsafe if they can't receive
insurance.
Perhaps this is a goodopportunity for the Mins
government to raise some moneythrough a green slip for strata
buildings, who knows?
Now I want to change again whatwe're talking about, peter.
We've obviously just talkedabout the RBA.
We've talked about increasingcosts in strata, which is a
really great segue, I think,into a topic that has just
popped up this week, which isthe prevalence of so-called liar
(16:07):
loans.
Now, this is something I'dheard a little bit about before,
but wasn't overly familiar with, but I wonder if you could take
our list as through what is aliar loan?
Why is it making use at themoment and, I guess, what are
the implications of liar loansfor us down the line?
Speaker 1 (16:22):
Well, a liar loan is simply where you lie on your
loan application by making yourincome appear higher than it
actually is or your outgoingsappear lower than it actually is
, in order to help you get ahome loan and because you're
making that home loanapplication to a financial
institution a little bit likeinsurance companies.
A lot of people don't have agreat deal of sympathy for a
(16:45):
financial institution and I'mnot saying everyone operates on
this space, but there is a senseof they can afford it.
Who cares?
They're only a bank, it won'tmatter.
I can tell a little furphy here.
Speaker 3 (16:56):
You're not alone in that view, Peter.
Speaker 1 (16:58):
Yeah now, my first experience with liar loans was
about 10 years ago, beforeinvestor mortgage rates were
higher than home loan oroccupier rates and they were
essentially at the same level.
So what a lot of people weredoing is going to the bank and
saying I want to buy this houseat Smith Street, and when I buy
(17:18):
this house at Smith Street I'mgoing to rent it out, so please
use the $800 a week rental valueas part of the overall equation
in assessing my viability andability to pay this property
back.
And then they'd ask us for arental letter saying the
property at Smith Street willrent out for $800 a week for the
(17:38):
bank.
And then on settlement day, thebuyer would come in with a
removalist truck out the frontof the office and say, great to
be settled, can I have the keys?
And I'd say you're moving in,are you?
And he'd say, yeah, we aremoving in.
It's like alright, but Ithought you said you're going to
rent it out.
I know that was just for thebank.
Yeah, wow, and that's soinnocent and that was so common
at that time, kieran, that thebuyer would run out with their
(18:00):
keys and it's like this person'sactually just committed a form
of fraud to get the home loan.
Yeah, that's financial fraudpretty clear and the whole
system was running on this andeveryone just thought it was
okay.
Even mortgage brokers weresaying just tell the bank you're
going to rent it out.
Once you've settled, who cares?
Just move in.
And that was my firstexperience with lialones, where
it's like you've actually takenmoney under false pretence from
(18:23):
the bank but no one seems tomind.
As I said, at that point intime the interest rate for a
home loan and an investment loanwas the same where the banks
have now got a higher rate forinvestment loans versus home
loans, so that's not asappealing doing that.
The reason this came back onthe agenda is I saw in the ABC
this week a gentleman who worksfor the retail banks
(18:46):
investigating mortgage fraud wasshowing how easy it is to
doctor one's pay slip.
When submitting that pay slipto the bank on a PDF document,
it was like surely people wouldnot be earning X and then just
tell the bank they're earning Xplus 20% and physically doctor a
pay slip.
But this fellow was in the newssaying so easy to do it doctor
(19:10):
the documents and happensregularly.
And if people are doing that toget a home loan, that is
absolutely madness.
Speaker 3 (19:18):
So that is madness, I agree.
Is this a sign, though, thatperhaps people are just
desperate to get into housingand some form of security in a
time where they're feelinguncertain, or do you think this
is more opportunistic?
Speaker 1 (19:31):
Look, if you've got to tell the bank you're earning
20% more than you really are toget a home loan, you're living
beyond your means.
Speaker 3 (19:40):
Did the article give any indication of it was?
Speaker 1 (19:42):
a TV report.
Speaker 3 (19:43):
Oh, the TV report, sorry.
Any indication of at which sortof lending level this was most
prevalent?
Is it you know?
Is it first home buyers lying,or is it you know?
People in the $2 million?
Speaker 1 (19:53):
borrowing space.
Oh, it's across the board.
It's across the board.
This fellow investigatesmortgage fraud on behalf of the
banks and apparently lialones isthrough the roof, yeah.
Speaker 3 (20:02):
Okay, so he suggested that they're doctoring pay
slips to increase their pay.
Speaker 1 (20:06):
He showed on the television how you can doctor a
pay slip a PDF pay slip andincrease your wages, and then
just send that off to the bank.
Speaker 3 (20:14):
Unbelievable, unbelievable.
I wonder what the flow andeffect is going to be then for
the retail banks If this is suchan issue.
Are we likely to see a scenariowhere, to apply for a loan now,
you have to authorize youremployer to forward a pay slip
or something like that to tryand mitigate the risk of this?
I?
Speaker 1 (20:32):
think the banks have been on to it for some time.
It was just that at this pointin the cycle they decided to
take the story to the media andshow them.
We are looking, we are watching.
Be very, very careful ofsubmitting a liability, because
we will catch you out.
So it's clearly more.
It's not three or four peoplethat have done it.
If they've got someonepermanently, or it's just not
(20:52):
someone, I should say, ifthey've got a body of people
permanently investigatinglialones, it's clearly very
widespread.
So no doubt there's otherexamples that are happening out
there.
But I think telling the bankyou're moving in and then you're
going to rent the property out,I should say, and then moving
(21:13):
in on settlement day, that's oneversion of it.
That's, in fairness, that'stame in comparison to doctoring
a pay slip and suggesting thatyou're earning significantly
more than you really are.
Speaker 3 (21:23):
Yeah, really interesting.
In my research for this, peter,I did look up an article from
2021.
So in the boom period lookingat mortgage rates and looking at
lending and interestingly thesurvey found that ANZ had the
highest rates of lialones and65% of people that had a loan or
a mortgage with them in thatyear admitted they had lied, and
(21:46):
something like 80 to 90%.
Speaker 1 (21:47):
I'm sure we're speaking to the 35% of those
people tonight Of course we are.
Speaker 3 (21:51):
Of course we are.
Well, they're the only oneslistening.
But interestingly, 80 to 90% ofthose suggested that in fact it
was their local banker that hadrecommended they doctor the pay
slips.
Speaker 1 (21:59):
I've got little doubt about that and, as I said
earlier on, it was mortgagebrokers phoning in on the whole
rental letter thing that wasdriving that as much as it was
the actual home buyer.
Yeah.
And it speaks to the wholesystem.
Speaker 3 (22:12):
Yeah, look, absolutely, and it really does
speak to the importance ofhousing and the cost crisis that
we're in at the moment.
Speaker 1 (22:19):
And look, you can see why.
There was a banking royalcommission.
It was so confined in its scopethat it never actually got to
the nexus of the issue.
And here we are lialones.
I first heard about lialones 10, 12 years ago.
Here we are, the cycle's doneanother loop and we're back
talking about lialones again.
Speaker 3 (22:38):
Yeah, and then we'll get to our next pre-recessionary
period.
We'll talk about it again.
Peter, look, as always, reallygreat wrap up, some good topics
today.
I think we've covered someinteresting ones that hopefully
our listeners will find somevalue in.
As always, I encourage ourlisteners if you do have a topic
you are interested in, writeinto us and we will cover it for
you in depth, with Peterhimself offering, as always,
(22:59):
incredible insights andinformation for us all.
Speaker 1 (23:01):
Thanks, Kiran.
Speaker 3 (23:01):
Great to see you.
Thanks, Peter.
Thanks for tuning into CurrentMarket Insights.
We'll look forward to talkingto you next time.
Speaker 2 (23:08):
Thanks for joining us on the Current Market Insights
podcast brought to you by HarrisPartners Real Estate, the
podcast providing real estateinsights you won't find anywhere
else.
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