Recent changes on lending regulations and interest rate guidelines have made it harder for property investors to get finance and build a substantial portfolio in today’s market—is there any way to get through this “tough cycle” without losing too much?
The Australian Prudential Regulation Authority (APRA) has made lenders work within guidelines that aim to avoid the rapid growth of investment books. As a result, the disparity between interest-only rates and principal interest rates has widened and there are fewer investors entering and staying in the market since property markets across the country have slowed down.
According to Aussie Parramatta’s Ross Le Quesne: “[It was] a lot easier when you have six or seven different lenders that excess on the actual repayments that you're paying. A lot of our investors … would pay interest on their repayments.”
“Now, where you've got the upper benchmark … they're servicing it, principal and interest, 7.25 [per cent] across the major deposit-taking institutions,” the mortgage broker added.
While it’s true that these new structures added a level of complexity to the processes involved in securing finance, making it more challenging for many property investors, one must understand that the APRA and other regulation boards only put them up in order to sustain the market.
Smart Property Investment’s Phil Tarrant explained: “[APRA is] in charge of keeping our economy ... in check, to make sure that things don't go too crazy.”
“[They] put regulation in place to sometimes temper, sometimes promote, sometimes supercharge our economy by putting the rules down [through] which banks and stuff can operate within.
“[These changes are] enforcing to the investor … in their ability to manage the debt they have associated with the property, paying the mortgage … which people should be doing anyway,” he said.
The importance of property professionals
One way to keep growing your property portfolio and stay afloat amidst the constant changes in the property market is through regular assessments with your financial team. Property investors must be able to determine a strategy that will help them hold their investment properties for the long-term because, after all, it’s not only about finding the cheapest interest rate possible.
This strategy will depend largely on one’s specific goals, capabilities, and limitations.
Ross said: “It's about ‘What is my ability to hold the property?’ It's a case by case, that's why you need to review it.”
“The client with a $4 million debt position opposed to the client with a $500,000 debt position is a totally different category because the $500,000 can easily convert all these loans to principal and interest. The person with a $4 million portfolio makes it a little bit [harder],” he added.
Moreover, the path that a property investor takes should also be based on the types of assets that he buys and their respective locations. Australia has markets within markets—some markets perform better than others while some remain stagnant, so it’s important to establish the dynamics of different areas to be able to make the best financial decisions.
Real estate agents play an integral role in educating investors about the factors that affect the growth of their investments. There are many different drivers of movement in the property markets including, but not limited to, macroeconomics, microeconomics, and a variety of global factors, and it takes knowledge and experience to ensure that the investments you make are worthwhile.
Finding a good real estate agent is similar to finding a guide that will help you through a maze.
According to Phil: “Real estate is very much the trials and tribulations … There's a certain sense of resilience with real estate agents that we've seen … The good ones, irrespective of market conditions, will always drive ahead.”
Real estate editor Tim Neary explained further: “There's a real opportunity in tough markets … When it's easy, it's easy, but when it gets a bit tougher, that's when they have to really put the stuff that they've learned into practice and really work for it … It makes them better real estate agents.”
“[Property investors have to] see them as someone who can really support you to secure the property how you want it,” Phil concluded.
Tune in to The Smart Property Investment’s Show special "Top 10 articles of 2017" episode to know more about foreign investment, crowdfunding, the threat of the bursting bubble, and the many reasons why you should invest in property.