There have been some mighty big changes going on in the world of property finance over the last month or so.
In fact, they are some of the most significant and fastest occurring changes I’ve come across and they’ll affect property investors to some degree.
To help you better understand what they may mean to you as a property investor let’s do a Q&A.
So what’s happened?
In short the Australian Prudential Regulation Authority (APRA) has introduced directives aimed at curbing investor borrowing.
The reason behind APRA’s involvement is the significant growth of lending to property investors, particularly in Australia’s two largest capitals property markets – Melbourne and Sydney.
Just to make things clear – APRA were not really concerned about property prices; they wanted to ensure the stability of our banking sector (after all that’s their job.)
In December 2014, APRA recommended the banks restrict the annual growth in residential property investment loans to 10% or less year-on-year. But this appeared to have little effect on investor home loan approvals, with those loans creeping up to over 50% of all lending, so in May APRA tightened the screws causing several major banks to significantly change their lending policies to investors.
Then at the end of June, APRA released a temporary directive to five banks requiring them to increase the amount of capital they hold against their residential mortgage exposures.
This means that ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank will have to retain billions of dollars that would otherwise have gone out in home loans. The result is likely to be more expensive mortgages and reduced mortgage volumes.
How have the banks responded?
Put simply: they’ve made money harder to get and more expensive for property investors.
Changes introduced by some of the banks include:
- Amended loan serviceability calculations, including ‘stress test’ requirements. In other words – could you afford your loan repayments if interest rates rose to 7.5% (or more) and you would also have to pay principal plus interest each month. Clearly this would knock out some marginal investors
- Removal of negative gearing concessions from their calculations.
- Restrictions to maximum loan-to-value ratio requirements – now down to 80% LVR for investors and 70% LVR for SMSF’s, and
- Removal of discretionary pricing on investor loans – in other words raising interest rates for investors.
For investors, this essentially means the need for a bigger deposit and an increased onus on proving their ability to service the loan throughout its term.
How will this affect the property markets?
Last week I wrote about how these changes are a ticking time bomb for those who’ve bought off the plan.
Thousands of investors face financial ruin because many of those who bought “off the plan” won’t be able to obtain finance to complete their purchase.
The new house and land market may also be affected but existing housing markets in established suburbs are unlikely to feel significant effects.
It’s likely that some of the heat will also come out of the capital city inner suburban established apartment markets as competition from investors dies down a little.
The upside of this will be more stock to choose from and less competition and while prices in this market are unlikely to fall, capital growth will probably be lower over the next few years.
Now, this is a good thing.
The rate of property price growth over the last few years, especially in Melbourne and Sydney was unsustainable. Slower growth means an increased likelihood of a gentle landing when the market slows down, rather than a crash.
The changes are likely to have a smaller impact on apartment prices in Brisbane and Perth where currently the number of investors in the market has been less.
How will this affect beginning investors?
First-time investors who usually get into the market with high loan to value ratios using mortgage insurance are likely to be hit the hardest. Many will have difficulty scraping up the 20% deposit required or proving they can “service” their loans.
Those who would in the past would have bought at lower price points will struggle to afford “investment grade” properties in good locations. In my opinion they should be patient and avoid the temptation to get into the market at any cost and end up buying secondary properties.
How will existing investors fare?
Existing investors will be hit with a slight increase in interest rates, unless they have fixed-rate loans.
However, investors with strong incomes and good equity will still be able to obtain loans and be in a great position to add to their portfolios. After all the banks are really just money shops and need to lend to make a profit.
But some existing investors with a multi-property portfolio who plan to release equity to purchase another property could be hit hard by the new serviceability requirements.
Even though prevailing interest rates are generally around 4.5 – 5% interest only, the banks are likely to assess their ability to service the loans on their entire portfolio at an interest rate in the order of 7.5% with principal and interest repayments.
Now that requires vastly different serviceability and will make it a lot harder for some existing investors to refinance and continue growing their portfolios.
The bottom line
APRA will get what it wanted – a cooling down of the investor segment of the property market and clearly we’re in for some interesting times as the changes work their way through the system.
The upside is that anything that prevents our property markets from taking a solid downturn is a good thing.
And there’s no sugar-coating it – if the Sydney and Melbourne property markets kept steaming along as they had over the last few years, we were setting ourselves up for a significant slump (not a crash – a slump!) so this has probably been averted.
If you’re looking to buy a new home, there’s probably never be a better time and if you’re a long-term property investor there will be some great opportunities in the market – but careful property selection will (as always) be critical.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property. Subscribe to his Property Update blog.