04 May Banks and Brokers under review + 3 ways to buy before auction + Housing affordability solutions
Highlights from this week:
- Complications over exchange time frames
- The way not to get your offer accepted
- How brokers work with banks
- Why housing in Australia is not unaffordable
- How a ‘boardroom auction’ works
- Where many buyers go wrong in research
- The role investors play in rental affordability
Housing affordability – Danni Addison
Kevin: Well, there’s so much talk about housing affordability. Do we really have a problem? Is it affordable or is it unaffordable in Australia? Stability, security, comfort, and control, now these are some of the reasons why Australians value home ownership so highly and why it’s so highly sought after.
Danni Addison is the Victorian CEO for the Urban Development Institute of Australia. She joins me now to look at this from a Victorian perspective, but also looking at it as to what it takes to get into home ownership and what we should be considering if we’re looking at making housing more affordable.
Danni, thank you very much for your time.
Danni: Hi, Kevin, how are you? Good to be with you.
Kevin: Yes. It’s always great talking to you, too.
So, is home ownership in Australia unaffordable in your view?
Danni: I don’t think it’s unaffordable overall. I think there are definitely supply issues in the market, and they’re concentrated mainly in our larger cities. In Melbourne in particular we’re building less new dwellings every year than we need to to keep up with population growth, and we’re also, unfortunately, under-delivering in some of the areas of the city and even regional Victoria where the demand is highest for properties.
So, it’s something that government needs to take seriously, and we hope they do. And it’s something they need to take seriously from the supply side as well as demand incentives like First-Home Owners Grants and other things.
Kevin: You mentioned in an article in Your Investment Property magazine that you felt that home ownership was a little bit restricted to the overly privileged. Do you strongly hold that view?
Danni: I hope that that’s not the case more broadly. My nervousness is that in the future that might be the case, especially as our lifestyle changes play more of a role in whether we buy housing or whether we choose locations to live that we might not be able to afford but can live there through rental agreements or other forms of entry into the market that we might see come in the future.
I think what people more and more are thinking about is not necessarily having the definition of their own wealth being attached to whether or not they own their own home. And that’s a generational shift. We have much more mobile millennials in our housing market who are really happy to rent for a longer period of time.
In Victoria, for example, the government has moved to change the length of leases to be longer, so that people are able to enter agreements with their landlords that are, say, five years’ long or two years’ long or even ten years’ long in some cases, where they can get some security of tenure around their living situation.
But it also offers an alternative to home ownership if that person is looking at different ways to build their own wealth or can’t afford to get into the market in where they want to live.
Kevin: Just on that point about rental properties, of course, investors have come in for a lot of criticism in recent times, and even being blamed for making housing unaffordable. Do you think we’re too afraid of investors? Do we read them the wrong way and look at them in the wrong light?
Danni: I think we absolutely do. Investors play a major role in the affordability of our rental market, in the availability of rental stock. If rental properties become scarce, then they become more expensive, particularly in our most livable suburbs and where they have the best access to transport.
They’re in high demand, these properties, and if we don’t have investors buying properties to put on to the rental market and then receiving appropriate yields from them, then we’d have a serious affordability issue at that entry point of the market.
Kevin: We talk about infrastructure and the importance to build the infrastructure, and of course, it becomes more expensive as we get urban sprawl, as we go out further. Is one of the answers that we should be looking at making our cities more dense, having more infill?
Danni: Where it is appropriate, absolutely. And there’s a lot of suburbs in Melbourne that are not as dense as they should be. Our suburbs are incredibly well serviced by transport, both major roads and rail infrastructure and trams in Melbourne, and a lot of the suburbs of Melbourne are not dense enough along those transport routes. And when I say not dense enough, I mean there is not enough housing taking advantage of the capacity that that transport enables.
So, really, there’s a strong case to be made that certain local government areas are taking a lot of capacity and building a lot of new housing around transport areas and others just aren’t at all, and often that comes down to local politics.
And until we see councils and the state government take more of a leadership role in terms of housing provision, we’re actually going to battle, I think, to get enough housing supply in our urban areas, which will then push up prices of existing housing and also limit the availability of housing for people who might want to live where they’ve always grown up or been to school, because there simply won’t be enough housing in those areas or it will be too expensive.
Kevin: Danni, great talking to you. Thank you very much. Danni is the Victorian CEO for the Urban Development Institute of Australia, and we thank you for your time, Danni.
Danni: My pleasure, thank you.
How to buy a property before auction – Cate Bakos
Kevin: We’re definitely seeing more and more auctions being conducted, particularly in Sydney and Melbourne, but we’re also seeing it in the other in the other cap cities as well that traditionally probably haven’t been as pro-auction as Sydney and Melbourne. It raises the question about buying before auction. No doubt many buyers would prefer not to put themselves under the competition of auction day.
So, what are the rules about buying before auction? It might seem attractive, but maybe there are some things that you should be aware of. I was interested to read an article by the Real Estate Buyer’s Agents Association of Australia – and they were quoting their vice president Cate Bakos – about this. And Cate joins me.
Cate, firstly, congratulations once again.
Cate: Thank you.
Kevin: Your Investment Property’s Buyers Agent of the Year makes you the best buyer’s agent in Australia, doesn’t it?
Cate: You’re too kind, Kevin, thank you.
Kevin: That’s okay. Let’s talk about this, because in the article you point out there are three different ways that a listing agent can actually manufacture the selling of a property prior to auction. I always thought of only one. So, let’s deal with these.
I think Kate there is a very important point up front, isn’t there? And that is many buyers who think if they try and buy a property before auction that theirs is the only offer that’s going to be presented to the seller.
Cate: You’re absolutely right. People are often naïve when they decide to be aggressive and try and push an offer through. And there are some auctions that can’t be stopped. There are some legal reasons why some auctions have to run publicly.
So, first and foremost find out if the possibility exists for the property to sell prior to auction. And then before you go ahead and put your offer in, understand how the agent wishes to deal with competing buyers.
Your point about assuming your offer will be presented as the only offer is so naïve, because most agents want to do the right thing by their vendors and they want to give every buyer a fair opportunity to throw their hat in the ring.
Kevin: Yes. They have a legal obligation, too, to make sure that if they’re going to try and sell the property before auction that they at least contact all the other buyers to let them know to give the seller the opportunity to get the best possible price, Cate.
Cate: Yes. The word “legal” is an interesting one. I think “moral” is very important. And our legislation varies from state-to-state but the reality is that any good agent who is aware that there are competing buyers on a property will give everyone an opportunity or a heads up that it’s happening quickly at the very least.
Kevin: In your article you mention that some agencies actually have published how they handle this process. Is that fairly common, or is that more common in the southern states?
Cate: I think it’s very common in Melbourne and Sydney, particularly for the larger franchise groups as well. They like to have a really clear process. And I’ve seen situations where different sales offices have different processes and even different sales agents have processes.
The key point is that it is up to the agent and the agency as to how they’d like to deal with competing buyers when it’s outside of that public auction environment. But many agencies do have a published process, just to avoid confusion and to avoid having angry buyers pointing fingers if they feel that they haven’t been dealt with fairly.
Kevin: Yeah, it’s a very difficult thing especially for buyers to understand that when they’re put in competition like that they could feel like they’re being a little bit cheated. We’ll deal with that in just a moment, but I do you think that good agents when they’re listing of property for auction, should actually say to the owner “Look, I the event someone wants to make an offer prior to auction, how would you like me to handle that?” In other words, have that conversation with the seller right up front.
Cate: Yes, I think even to take it a step further, to describe to the seller with the various options are and why they have a particular preference for one over the other.
And different situations might create different opportunities and outcomes. It could be a property that was hard to put a figure on, or it might be a property that the agent anticipated to be a difficult one to sell, or it could be a crowd-pleaser where they know they’ll have lots and lots of willing buyers. So, every situation can be unique as well.
Kevin: You name three styles. One is the boardroom auction, the second one is a round robin style, and the third one is the best and highest. Let’s deal with each one of those.
The boardroom auction: you say here the following day. Is that if a property is passed in, is that what you’re talking about?
Cate: A boardroom auction doesn’t necessarily mean a simulated auction takes place in the boardroom, but more often than not, that is what happens. And it doesn’t have to be the next day, but generally the agent will give a deadline and they’ll say “In the absence of any other offers, we’ll sell the property to you at 6:00 tomorrow, but if there are other offers, we’ll host a boardroom auction in our office.” Or they could host a simulated auction at the property.
They’ll let people know exactly what’s going on, but the point of it is that buyers will be seeing each other face-to-face, so it is one process that eliminates that feeling of “Am I being bluffed, or is there really another offer or really another buyer?” And that’s why a lot of agents like doing it. It’s visible. It’s transparent.
Kevin: And in that situation, the boardroom auction, is it likely there may be some conditional offers put on the table?
Cate: Generally, they’ll make sure that everybody’s offer is unconditional, or if there are conditions, they’ll make sure that the conditions are the same. So, for example, if they have three buyers and they’re all putting forward offers that are subject to finance for two weeks, they’ll make sure everyone is on the same page and agreeing to that. Because otherwise, you do create a bit of unfairness because someone with a strong offer will be bidding against someone who has a condition.
Kevin: Is it typically run like an auction? Is there an auctioneer who actually calls it?
Cate: Generally. It doesn’t necessarily have to be quite the same style as an auctioneer, and it doesn’t necessarily have to be someone who is well practiced and qualified to conduct an auction.
But it needs to be a process where the person who submitted the offer that got the property on the market agrees that that’s the price that they submitted, and then everyone has the chance to go around in circles.
The person facilitating that process might say “We have a minimum of $1000 bids.” Sometimes they’ll have people in separate rooms and they’ll go around with a clipboard and you have to write your offer down and initial it.
It just depends on how they want to handle that process, but it’s handled by usually the listing agent or someone who’s handling the campaign, and it’s transparent. That’s the point about the boardroom auction; you can see the other buyers.
Kevin: Yes, that’s right.
The second one was the round-robin style. Describe to me how that works.
Cate: It’s literally a phone call, or it could be driving around with an offer and getting it updated, but it’s an agent going backwards and forwards, not necessarily with the buyers seeing each other, so it does rely on trust.
But as I say to most people if an agent is saying the property is about to sell prior to auction and you have competition, it would be a very dangerous game to play to be bluffing without officially having another solid offer.
It might be a case of an agent calling backwards and forwards to various buyers until they have one person left standing, and sometimes those phone calls can go past midnight – and I’ve been part of that on many an occasion – or it could be calling people to come back in and initial offers and upgrade offers. It just moves backwards and forwards until one person is left.
Kevin: Do you run the risk in that situation of gazumping?
Cate: That risk is always there, but it’s a low risk if it’s a transparent process in terms of knowing that it’s happening right now and tonight, and in the absence of anyone else, it will sell tonight.
You generally don’t find that there’s gazumping unless there’s a bit of foul play at hand or people trying to knock out another agent who has another offer so that they get a commission. That’s a whole new story and it’s not often that you face that. When it happens it’s horrible, but I prefer to focus on agents to do the right thing.
Kevin: Yes, so do I, but I raise that question because I think that’s a question that many buyers would ask as well. Is it likely in this scenario that you’d have different agents running with different buyers? Or is it just generally one agent?
Cate: You do find that. Agents can have different buyers, and it depends on the internal policies within an office. With round-robin, you often find that someone else’s buyer is on something but the fact is that it is back and forth and the offers are disclosed means that the buyers are reliant on that transparency.
Kevin: And the final one was best and highest, which is the one that I’m most used to because everything is fairly clear but describe to me your understanding of how that works.
Cate: I don’t like best and highest very much because it’s not transparent. What happens with best and highest is everybody gets one shot to submit their offer with the terms, conditions, and price that is their best.
It’s meant to go in an envelope and presented to the vendor along with all of the other offers at the same time. No one is meant to describe what the others offers are, and in the case of multiple agents handling the offers, the agents aren’t meant to tell each other, either.
Now, it can be a difficult process because if someone is privy to a best and highest offer, then they’ll have time to tip off a buyer, they might be able to increase, but the whole point of best and highest is that the buyer stretches into deep pockets as deep as they can and gives their best offer.
And that’s one reason why I hate it really. Our job is to try and buy as optimally for our clients as possible, so we don’t want to give them everything we’ve got.
Kevin: Yes, two edges of the one sword here because from a buyer’s agency point of view I can understand how that would not be appealing to you, working on the emotion of a buyer. But for an agent working on behalf of a seller, it gives them the opportunity to actually maybe get a premium price.
Cate: That’s right. There is one time when a best and highest can work well for a buyer, and it’s when you think that that perfect property for you is on the very cusp of your affordability and you’re happy to throw absolutely everything at it and if you get it for that price, you’d be ecstatic. That’s when it can work and if it goes above that, then you have no regrets.
But the challenge with best and highest is if you do try and work out where the pin could land and you give an offer that you’ve thought about that isn’t your best and highest and then someone gets it for $500 more, you can be devastated. And likewise, if you beat someone by $40,000 that’s a horrible feeling as well.
Kevin: Yes, hopefully you’d never find that out. But if you do miss it for $500 and you were prepared to pay that $500, then you only really have yourself to blame, haven’t you? That’s as I understand it in the best and highest because it’s full disclosure, letting everyone know that they’re in competition, “We’re letting you know now that we may not come back to renegotiate.”
So, it’s really difficult. And you can see this debate between you and me, how difficult sometimes it must be between the agent and the buyers.
Cate: Very difficult and it gets really difficult if there isn’t a comparable sale and the window of where you think it could reasonably land is wide. If you don’t really want to go in at in at the very upper end of that window, then maybe if you throw the pin somewhere in the middle of it and then another buyer is slightly above you, you’ve lost the property in an effort to save a little bit of money.
But it is a hard one, and it often results in remorseful buyers. But what it does do is if it’s done properly is it takes away that emotion of competing agents in an office, because everybody’s buyer gets the same shot, and it also allows people to have a conditional offer and have the vendor judge that offer fairly. So, for example, a vendor might take the second-highest offer but it’s the one that has no condition.
Kevin: Such a good conversation, this one. But I guess the bottom line is pretty much what you said right at the start, and that is understand if you’re going to be doing this what the ground rules are. Ask for them up front.
If you’re a little bit confused about this, certainly an option for you would be to employ a buyer’s agent like Cate who deals with this all the time. They know what the rules are and they know how to operate.
Hey, Cate, great talking to you as always. Congratulations again on being the Buyer’s Agent of the Year for Your Investment Property, and look forward to catching up again real soon. Thanks Cate.
Cate: Thanks, Kevin. It was lovely to chat.
Getting caught with rule changes – Brad Beer
Kevin: I recently received an e-mail from Kathy, an investor who purchased an investment property, which settled after a 30-day cooling off period. That’s not normal, but anyway it settled in August 2017.
Kathy writes “Hi Kevin,” she goes through the details there. “I made two previous offers on the house commencing late May 2017” – I’m emphasizing these dates because they’re fairly important in this overall question – “and after two crashed contracts from other people’s higher offers, we were successful in our offer in July, and then settled in August.
“During this time, the new laws came into effect disallowing depreciation of existing assets in the home, of which this property has many. It has a little depreciable value in renovation capital. Is it just a bit of bad luck for me with regards to the timing of the laws that were made, or is there any allowable grace with regards to the dates this came into effect?”
This is a bit of a cheeky part. “It’s just a real shame for this particular investment property. I just didn’t think those laws would get up. Thanks so much for the opportunity.” That’s my pleasure, Kathy.
I’m going to turn now to answer that question, and also talk a little bit more about those changes with Brad Beer from BMT. He is the Chief Executive Officer of BMT Tax Depreciation.
Brad, thanks again for your time. I sent you Kathy’s question. Can you answer that first? And then I’ll ask you a few more questions about those changes.
Brad: Yes, for sure. Great to be here, Kevin. I can answer, and there’s a bit of a long question there with a few little parts to answer. But the simple fact is when they announced these changes in the Budget in May 2017, they talked about that anyone who exchanges a contract from that evening at 7:30 p.m. is affected by those rules.
The fact that they didn’t actually finalize this legislation until the middle of November was left as irrelevant. If it had fallen over and not got passed then I suppose you would have been back to the same situation, but no, unfortunately Kathy there’s no allowable grace. The legislation talks about all of these dates coming into effect back at the time that they announced this draft legislation.
Even when Kathy started to put offers on these, if you’re in late May, you’re after that date anyway, and it’s all around that exchange of contract that really matters, and it is a little unfortunate.
I’ve even had someone who signed their contract on Budget day in the afternoon before 7:30, but the other side didn’t sign and exchange until the next morning, and unfortunately for them that didn’t exchange until the next day, so they’re affected by these rules after they actually signed their contract.
Kevin: Yeah. So, there’s no grace whatsoever, is there?
Brad: No grace whatsoever.
The only question I have is she says “It has little depreciable value in renovation capital,” means that someone has spent some money on that property and she’s thinking maybe it’s not enough to be valuable to look at it from a depreciation point of view, but talk to us. Ask a couple of questions about what’s been spent, and we can give you an idea of what those dollars need to be to make sure it is worth it. But, yes, unfortunately Kathy, no grace.
Kevin: There you go, Kathy, that’s answered your question. Probably not what you wanted to hear. Kathy did want to get a bit more clarification. I think it’s a good opportunity for us to do that, Brad
Can you just give us an overview of all of those recent changes that have taken place? And what do they mean to investors?
Brad: At the federal Budget, what they’ve done is they announced what they called an integrity measure where they wanted to stop plant and equipment items being claimed in excess of their original value by multiple owners. And what that means is that the things – the carpets, the hot water service, stoves, blinds – what they’ve done is said once they become second-hand and you buy them as a second-hand item, you don’t get to claim a deduction against those.
Now, it took until 15th of November to pass it, but the new rules apply to anyone who exchanged contracts on a second-hand residential property after that date. If you bought before this date, nothing changes for you. If you buy a new property after this date, nothing changes for you because it only affects these second-hand owners.
If you add a new item to your property after this date, you go and buy a new stove and put it in there, you get to depreciate your stove as per normal. But what it is is anyone who’s just buying a second-hand stove, carpet, hot water service, whether it’s one year, five years, or twenty years old, they’re saying no deductions allowable for this plant and equipment item.
Kevin: I was going to ask you who won’t be affected by the change, but I guess you’ve answered that pretty much.
Brad: Yes, I have pretty much answered that, sorry. I guess the things also that aren’t affected on top of that are this claim against the structure of the building, and the capital works as it’s called – concrete floors, walls, and roof – where those dates are not affected. People with commercial properties are not affected. Other than that, I think we’ve covered that, the new property buyer and the people that are adding things afterwards.
Probably one that is also affected that we didn’t touch on is someone who actually already owned the property and then moved out of it after that date, so if you bought it before the Budget, lived in it for a year, moved out after the Budget changes, then your plant and equipment is second-hand for the purpose of investment, and you don’t get to claim deductions against them.
Kevin: What effects do the changes have on capital gains tax?
Brad: It’s something that’s made a bit of a change to the capital gains tax legislation, or the way items are treated for the capital gains tax. They’ve talked about being able to change your cost base based on what you couldn’t claim in depreciation on some of these items. It’s very non-cut-and-dry, the answers depending on individuals’ scenarios.
We have things called K7 events, which when you sell and you couldn’t make a deduction, that you may be able to reduce your cost base based on things that you have thrown away in between in the year you throw them away, or if it’s in a different year to otherwise?
I think what we do is provide the value of these things at the time so that when you do look to sell this property, then there’s a way to work out these numbers. If you lived in the property for part of the time, then these things also create a different answer to the CGT event if you were claiming it as your principal place of residence.
It’s actually made it very complex. What you actually get and what happens to you is hinged on your own situation. What we do is put the numbers in there so that the accountant can use those at the time to calculate these things, but it’s not as simple as you can just claim those deductions otherwise off your capital gains tax. Some of the original thoughts were that, but it’s not actually quite that simple.
Kevin: Mate, thank you very much for clearing that up. And Kathy thank you so much for raising that question with us, as well. Brad, thanks for your time.
Brad: Thanks, Kevin. Always a pleasure.
Kevin: Brad Beer is from BMT Tax Depreciation.
How to get more money when you sell a property – Greg Dickason
Kevin: Greg Dickason joins me. Greg, of course, from Core Logic, a regular on the show.
Hi Greg, thanks again for your time.
Greg: Hey, Kevin. Good to be here.
Kevin: I want to pick up on an article that you wrote because there were some really great points you made in there, helping people understand how to improve the price that they get when they come to sell their property. You gave us ten. I want to cherry-pick, if I may, because a number of them we’ve discussed on the show before, but I want to go into a little bit more depth with a couple of them.
One of the points you made was know what’s happening in your marketplace. There is so much information now available through organizations like yours, CoreLogic. How do we interpret that market, that information, Greg?
Greg: So, two points on that, I think that one is that a lot of people make a snap judgment to sell because their neighbors have sold or a property around the corner has sold, and they don’t do enough research. They almost go straight into the conversations with agents and looking at property in the market.
If you take a little bit of time and do the research… So, one is yes, you go to sites like ours, like OnTheHouse.com.au, or the portals and you see what they have to say about what’s happening in the market. But also, probably more importantly, you do very local research.
You actually go to local homes, you go look at three-bedroom properties that are similar to yours. And see how are they getting marketed, what kind of prices are they getting? You walk through them.
That way you get a real feel not only for what’s happening across the property market in general but much more local and specifically around exact properties.
Kevin: You also made the point, and I think it’s quite a good one, that when you’re looking, you’re looking at properties that have been listed, maybe at a price. You can’t always take that as value, can you?
Greg: Exactly. So, properties get listed at all sorts of prices. Some prices are really, honestly, way too high, some are quite too low. So, you can’t always take the value at the prices getting quoted – if you get any prices, because some areas, it’s very hard to see what price.
But if you’re researching over a period of time, what you will see is what they actually sell for. So, you might see them on the listing process and then what they sell for, and it really is worth taking a couple of months to get a good feel for the market before you put your property on the market.
Kevin: Yes, that is such good advice about taking your time, and take some time to do that. Now, once you’ve done that research… And doing that research is not part of appointing an agent, because they’re two totally separate things. You do your research to establish value for yourself, but then you have to make a decision about getting the best agent.
How do you go about doing that?
Greg: Part of that that research is you’re seeing agents. Remember, you’re going to open homes; you’re seeing agents in their native environment. You see how they interact with you as a potential buyer. And that’s, I think, very, very important.
Also, look at referrals, people who have sold or people you know who have sold, they know how well an agent has operated for them. And that’s a very good way. A referral network is very good.
But the third thing is once you know your market a bit and you start to actually interview agents when they come to the pre-listing presentation, it gives you a really good feel of how well they know the market and how well they’re going to work with you.
And trust your instincts in that, absolutely trust your instincts.
Kevin: Absolutely. You mentioned, too, in your article that your objective should be to get a good price relatively quickly while your product is nice and fresh. And that’s a very important part of picking the right agent, Greg, isn’t it?
Greg: It absolutely is. If an agent tries to give you too high a price, then sometimes that’s not… You don’t necessarily choose the agent who thinks they’re going to sell your property for the highest price. Choose the agent who you think is realistic about selling the property but also has a clear plan as to how they’re going to do it.
And the plan needs to involve how they’re going to get multiple people interested in your property at the same time, multiple buyers involved. That’s when you get the best price, when you have a bit of competition for your property.
Kevin: Another piece of really good advice is that when you decide to sell your home, you have to be prepared to spend some money on marketing. Why is that? Why shouldn’t it be up to the agent to do that, Greg?
Greg: Because agents ultimately have a lot of properties that they need to sell. They have a lot of things that they have on their plate. They will absolutely work for you, but sometimes it helps for you to go above and beyond and actually get as many different eyeballs looking at the property through many different places, both through the agent’s site, what’s in their windows, what’s on the portal, but even through places like print and everything else, so you have many, many different eyeballs – because you don’t know where your two or three active buyers are going to come from. And that one extra active buyer is going to push your price up quite a bit.
Kevin: And this is a key point, too. When you’re making your choice of an agent, you should be asking them about their marketing. Do they understand how the marketing works? Where would they market your property, and how would they make it stand out, Greg?
Greg: Exactly. A lot of things we’ve looked at from CoreLogic is in different areas different marketing strategies work. So, in some cases it’s sending out e-mails, other cases it’s mail drops, or just online only. And in some cases in some areas, and not necessarily only the affluent areas, print can work very, very well.
So, when it comes down to your mix of marketing, it’s also quite a local decision, and your agent should know.
Kevin: And the final point I want to make it is, and I love this saying: “If you don’t know where you’re going, any road is going to get you there.” Now, this is talking about the price, knowing about what you want to get, but don’t be too greedy.
Greg: Exactly. I think sometimes we get carried away. We under-play the disadvantages in our property and over-play the good aspects. Sometimes, we can say, “Oh, the reason my property is going to get another $30,000 or $50,000 more than that property is because it has these things.”
Be more realistic. Try and take off that bias that you have for your own property and look at the market in general. Look at other houses, see what’s good and bad about them, and that way you can get a much better feel for what you’re going to get.
If you’re realistic – and obviously be optimistic but be realistic – you will get a good price.
Kevin: I love this question you ask in the article, and I’ll just read it out. “Ask yourself this question: if I don’t sell at this price and I have to wait two months longer, would I then accept this price?” That is such a valuable question to ask when that offer comes in.
Greg: It absolutely is. A lot of our research shows that often the best price is almost the first offer you get. Sometimes people, they’ve wanted to get $20,000 more, but they end up accepting a lower price two months later.
Kevin: Yes, I just have this saying that “real buyers know value,” and the first group of buyers who come through have been out there shopping around. They know value, they know what you’re place is worth, and in fact, in a lot of cases, they may know more about the value of your property than you or even the agent, Greg.
Greg: Absolutely. Because they’re doing a lot of due diligence, and as you’ve said, they’ve looked at a lot of other properties and maybe offered on a few. So, the ideal scenario is to get a few of those early buyers to make an offer at the same time, and then you’ll probably get the best price you could get in the market.
Kevin: Good talking to you. Greg Dickason from CoreLogic. Thanks for your time, mate.
Greg: Thank you, Kevin.
Just how bad are the banks? – Siobhan Hayden
Kevin: The calls for a full banking inquiry have been relentless for years from a broad cross-section of the community. Prime Minster Malcolm Turnbull announced a Royal Commission into the banking sector late last year, after sustained pressure from within his own government and an admission by Australia’s Big Four banks that an inquiry is necessary to restore public faith in the financial system.
The inquiry is, of course, in full swing, and we’re learning lots about how the financial sector works. So, just how bad are the banks, and what are we learning about the relationship between the banks and brokers?
HashChing is a website that has been developed to help borrowers connect with brokers. Siobhan Hayden is the COO for HashChing and joins me.
Siobhan, thank you very much for your time.
Siobhan: Thanks for having me, Kevin. Nice to chat.
Kevin: Interesting to get your insight into what’s happening here. Half of Australia’s mortgages are written by brokers, who act as a third party between the customer and the lender, but who are they really working for?
The reason I ask that question is because Australia’s largest institution, the Commonwealth Bank, admitted that there was a conflict of interest created by commission payments that banks made to mortgage brokers. So, that’s the question: who are they really working for?
Siobhan: Yes, a big question, so let’s start from the beginning. First off, the statistics now, it’s nearly 60% of all new residential lending in Australia is introduced by mortgage brokers, and that growth rate has increased at about 2.5% year on year. So, successively, more people are choosing to partner with a mortgage broker than walk into a branch.
The CBA’s commentary: there was quite a few pieces that CBA talked about and one part was that their brokers were not able to accurately identify the commissions they earned on the loans they introduced.
And that, straightaway, when I read that article, flagged to me that what they were talking about was CBA mobile lenders, not mortgage brokers that have access to multiple lender brands around the country. Because the documents required to be completed by mortgage brokers requires a broker to accurately document “On this loan, for this loan amount, you will be paid X and Y, upfront and trail.”
So, the conflict of interest, the main piece around that was around the commission payment, and particularly how commissions are paid based on the size of the loan introduced to the lender. And that has been talked about in the previous review into mortgage brokers through ASIC, which is our industry regulator.
So, what that means is if I provide a loan to a customer of $600,000, I earn commission on the $600,000. And what’s to say the client maybe needed $550,000 or $580,000? What’s interesting for me, Kevin, is the difference between $580,000 to $600,000, we’re talking such a little amount of money: $20, $40, $60 – it’s nothing.
The other part is the Combined Industry Forum, which came out of our original review for the last few years in the sector through ASIC, has already started to discuss solutions to that, which is around the brokers should be remunerated on what the loan is drawn down on at day of settlement.
Probably, an example of that would be customers who often talk to brokers talk about getting an additional lending amount for things like renovations to a kitchen or bathroom after they’ve settled into their new home. And often, if they’re able to, they will borrow just a little bit more – $50,000, $80,000 – more to do those renovations in a six-month period.
If those funds are sitting in an offset account, the industry groups have discussed the idea of not paying on the money that is sitting in an offset, purely what is used to purchase the home from day one – which sounds like a viable option.
One of the alternatives that’s been touted, particularly by lenders, is the notion of a fee-for-service model, which I find really interesting because at the end of the day, it would decimate the broker channel.
Brokers work only for the money they earn on commissions, which is when they settle alone. Now, every customer a broker deals with, those loans don’t all settle, they do lots of customer engagement, lots of analysis, and work unpaid, hours of unpaid work.
So, where would the fee-for-service model come in? And would customers be prepared to pay it? And at what stage would a customer be required to pay money?
Kevin: Can I just ask you a question, though? There is some evidence that’s come out of the hearing, as I understand it – correct me if I’m wrong – is that customers going through brokers have a higher total loan-to-value ratio. They pay more interest and they pay their loans more slowly. Is that correct?
Siobhan: Well, those commentary pieces are not untrue in many ways, but I think you need to be clear about the type of customer who chooses to partner with a mortgage broker. So, in my pervious role, I was working at the industry body for mortgage brokers in Australia, and a piece of the work we did was the type of customers who choose to work with a mortgage broker: 40.5% of customers are investor clients.
So, these are fiscally alert, often second-property owners, and normally for taxation purposes it’s not uncommon to see investors choose to have an interest-only feature. And if you have an interest-only feature on your loan, you may obviously be paying that loan down a little bit slower than you would if you’re doing principal and interest. You tend to also have a higher loan-to-value ratio, and you would also tend to have a higher loan amount.
So, suggesting comments like that without contextualizing why… So, 14% of mortgage brokers’ business is first-home owners. And it kind of makes sense, Kevin. if you’re a first-time buyer, you don’t fully understand the notion of a mortgage broker. You may walk into a local branch and deal directly with a single-lender brand.
Whereas people who are fiscally alert, aware of what mortgage brokers do and the service proposition they provide, that tends to be people who’ve maybe been around the tracks once or twice, bought, sold, re-financed, and don’t wish to walk into a branch. They want to deal with a broker that has access to 25-plus lenders, and will do all the servicing for them and assist them through that process.
Kevin: What’s happening at the inquiry? One, are you in support of that? And is there a light at the end of the tunnel here?
Siobhan: Well, I go back to the previous two years that the industry body has been reviewed. And let me just go through some data here. In 2015, ASIC, the regulator, gathered over four years’ worth of data. 1.4 million home loans were analyzed. They surveyed 3000 consumers to learn about their experiences with brokers and analyzed $550 billion in new loans. So, this was all done in a two-year window, in collaboration with the industry, to identify what is actually being achieved and are brokers delivering good consumer outcomes?
Once that finished at the end of last year, obviously we had the Royal Commission announced, and I think it’s important to understand, again, the context. We have the major banks being held responsible for what has deemed to be a poor culture within banking and as a result of their culture, delivering bad outcomes. I think CBA was also on record of saying “We’d like to tweak the commission provided to brokers but we don’t feel we’re capable of doing that because we’ll lose business.”
So, I think there’s a number of issues going on here. It’s in the interest of the major banks, is it not, to maybe suggest that brokers are doing the wrong thing, because that would provide more additional flow to their bricks-and-mortar locations. But all the second-tier lenders, all the banks that don’t have a retail outlet, would be completely cut off from consumers if they don’t have a direct digital model, if brokers didn’t exist.
So, the competition piece, which is really important for consumers and definitely brings about better pricing on home loan products, is to have that broker proposition available. And the industry is not averse at all to working collaboratively, particularly with ASIC, who has done a lot of robust analysis on the industry, to refine what we currently do and make it even more transparent for consumers and everyone’s a supporter of that approach.
Kevin: Yes, certainly. The mere fact that half of all Australian mortgages, as I said at the outset, are written by brokers, there’s certainly a great demand for that.
Do you see that popularity growing? Is there an indication that it’s actually getting greater?
Siobhan: Well, every year it grows conservatively and deepens the usage of mortgage brokers around Australia. So, I think that it will only continue to do that. And we don’t even capture accurately the flow of deals through the commercial lending channel. So, this is only residential lending.
In the UK – obviously, we look to the UK for a lot of learnings and experiences – their flow over there is 67% through mortgage brokers. What’s also been interesting, if you look at the UK model, is the lending environment there has been asked to divest their ownership of mortgage broking businesses.
So, potentially, if CBA believes it’s such a conflict of interest and other grounds, potentially that could be an option for them.
Kevin: Wonderful stuff and very good insight there, Siobhan. Siobhan Hayden is the COO for HashChing.
Siobhan, thank you very much for your time.
Siobhan: No problem, Kevin. Nice to chat.