David Johnston

What do the lending changes mean for you?

By David Johnston

The lending landscape is vastly different to that of just a few months ago – here's what the changes will do to you and your properties.

Blogger: David Johnston, founding director, Property Planning Australia 

The past months have seen significant changes in the property finance arena that will affect all Australians planning to purchase and borrow in the near future, and those who have existing investment loans.

The nation's financial services industry regulator APRA has recently implemented measures to slow investor demand due to concern the property market is overheating. More specifically, APRA has: increased the capital reserves the big banks are required to hold for their exposure to residential property mortgages; and enforced their requirement that banks' investment lending does not grow more than 10% annually. This has resulted in the banks raising investor interest rates and constricting lending standards.

An overheated property market can cause two main problems:
1. Making it unaffordable for first-time entrants seeking the 'Great Australian Dream'
2. Bigger picture, a 'burst property bubble' would damage the whole economy and significantly affect mum-and-dad and 'Joe average' property owners.

Changes target hot Sydney and Melbourne markets, but whack the rest too.

APRA's changes are aimed squarely at the Sydney and Melbourne markets, but they affect our other capital cities that arguably don't require the regulator's 'hand brake'.

To put the current state of the market into context, let's look at how property values have changed in Australia's capital cities during the past 12 months (as advised by Core Logic/RP Data). It really comes down to a tale of two cities: Sydney and Melbourne.

Sydney remains the hottest housing market, with values rising 18.4 per cent over the past 12 months – the highest rate of growth since 2002. Melbourne is also booming, recording an 11.5 per cent increase during the same timeframe. In contrast, other capital cities' performances have been significantly lower, ranging from -5.3 per cent for Darwin to 3.9 per cent for Brisbane.

While Sydney's dwelling values grew 4.9 per cent and Melbourne 3.3 per cent in the past month, I expect APRA's recent actions to slow this growth. This slowing will be compounded by the increase in properties expected to come onto the market during spring.

The APRA measures will prompt caution among investors (which comprise 60 per cent of Sydney buyers) that the property boom in our two largest cities may be coming to an end.

Inevitably, general investor confidence will start to wane. How much it will diminish by is the million dollar question.

Is it a good time to buy or put your purchasing plans on ice?

As APRA's changes start taking effect, ironically we're likely to see improved buying opportunities this spring and into next year. There is likely to be reduced competition over time and spring inevitably brings an increased supply of property. High supply in any market means a good time to buy.

As we move into a flatter period, our experience suggests that inferior properties tend to show little or even negative growth in value. Conversely, blue-chip real estate generally increases its value (incrementally) and continues to outperform the average value growth across the geographical market it is located (during the same period).

Even if quality property is only growing at one, two or three per cent per annum versus the 10 per cent to 20 per cent we have seen in Melbourne and Sydney, the values are getting more expensive. These limited, yet ever increasing values, combined with not knowing when the market will take off again in the future, are why limited growth periods usually prove to be a great time to purchase quality real estate.

As we educate our clients, the simplest path towards making money through property investing is by selecting a great property that you can hold onto for the longer term (i.e. seven to 10 years at least) due to high entry and exit costs. We believe simplicity is genius; buying well and holding is our preferred approach. Our philosophy is quality over quantity when it comes to residential property investing. Of course, investment needs to fit comfortably within your affordability levels by maintaining significant equity/cash buffers as well as flexibility, should interest rates increase.

What does this mean for you?

As always, the question from clients is: 'What should I do?'

If you have an existing investment loan, the interest rate adjustment is very similar across all lenders, but you will almost certainly be paying more than you were a month ago.

The APRA changes will surely affect the property investment landscape – with some buyers reaping benefits and others needing to rethink their plans.

If you are (or were) about to purchase a property, your borrowing capacity will be reduced and even more so if you're looking for an investment property rather than a home.

At the coalface, we've seen investment loan rate increases for all lenders and larger deposits or equity contributions required for investment property purchases. It's become more difficult to borrow money (i.e. the same income will get you a lower loan amount than a month or so ago) and harder to access interest-only loans. At a private presentation I attended with the head of banking from one of the major players in Australia, his analysis suggested that loan sizes would drop by 10 per cent to 15 per cent for the same level of income. This will have some impact on property values over time.

Would-be investors (who have lower equity and/or savings) will be affected the most, whereas first home buyers may benefit from having reduced competition from investors who often are competing with first home buyers.

During the last five to 10 years we have seen a trend towards first-time property buyers selecting an investment property rather than a home, we may see this trend begin to recede (due to the increased requirements).

We are witnessing a huge change to the lending landscape in Australia, but we have had many major impacts to the economy, financial and property markets over the decades and quality property has stood the test of time. The Australian economy in general, and the banks specifically, require property values to grow over time to protect Australians' wealth and the banks' largest assets – your mortgage.

This is why it's important to remember that with property investing there are no genuine 'get rich quick' schemes, just 'get rich slow' strategies that can actually deliver.

In changing times, I often reflect on the most common property-based regret of people we meet at Property Planning Australia – not having the courage to purchase and/or hold blue-chip property when they had the opportunity.

As legendary American investor Warren Buffet said: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

We might be about to enter a 'fearful' period, but history suggests that such times make for the best buying – if you're willing to be courageous.

Read more: 

Housing solution could spell disaster for investors 

EXCLUSIVE: The 6 week property transformation - episode 4.1 

Property slump in sight 

New prognosis for Gold Coast market 

Commercial yields to continue growing 

Exclusive series: The 6 week property transformation - episode 2.2 


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About the Blogger

David Johnston

David Johnston

David Johnston is the founding director of Property Planning Australia (PPA) and co-author of Property For Life - Using Property To Plan Your Financial Future. Property Planning Australia was established in 2004 and is a multi-award winning property, finance and financial planning consultancy that provides its clients with a holistic approach to financial and investment advice.

The PPA team specialise in developing holistic property strategies for first home buyers, investors, upgraders and those transitioning into retirement.

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