Finance advice

Special report: APRA tries to take the heat out of the market

By Jack Needham and Vivienne Kelly
BUILDING

Concerned that investor activity in Australia’s two largest capitals is pricing first-time home buyers out of the market, the Australian Prudential Regulation Authority (APRA) has introduced directives aimed at curbing investor borrowing.

The new directives from APRA come at a time of intense growth in the residential property sector in Melbourne and, in particular, Sydney.

The median house prices in each city stand at $706,000 for Melbourne (REIV) and $930,000 in Sydney (REIA), and winter auction clearance rates have been at record highs.

The heat in each market is largely attributed to a high level of investor activity fuelled by the low interest rate climate, and is being blamed for pricing first home buyers, and other low-income purchasers, out of the game.

In December 2014 APRA announced tighter home lending standards for investors, with the aim of keeping annual growth in residential property investment loans to 10 per cent or less year-on-year.

This appeared to have little effect on investor home loan approvals, with reports in May indicating that several major banks were close to exceeding the threshold.

Again in May, APRA announced its preference for banks to adhere to a 7 per cent ‘stress test’ when assessing lenders borrowing capabilities.

In a speech at the COBA CEO & Director Forum in Sydney in May, Wayne Byres, APRA chairman, said Australia needed to ensure it didn’t place its historically stable banking sector at risk.

“The current economic environment for housing lenders is characterised by heightened levels of risk, reflecting a combination of historically low interest rates, high household debt, subdued economic growth, and strong competitive pressures. Many of these features have been emerging over a number of years, and APRA’s supervision has been intensifying in response,” he said.

Mr Byres said as “housing-related risks have potentially grown” the regulator has sought to “turn up the dial” in terms of scrutiny and management.

APRA investigations into hypothetical borrower scenarios found that “common sense was sometimes absent” when it came to the banks’ treatment of borrowers’ income sources and credit assessment processes.

He also said lending standards were “a little disconcerting in places”.

Several major banking institutions have made significant changes to their investor lending policies in recent weeks and months, largely in response to directives and comments issued by APRA.

These have ranged from changes to serviceability requirements and approval terms right through to the suspension of all loan approvals.

In the final weeks of May, several banks announced changes to their loan serviceability calculations, including ‘stress test’ requirements and the removal of negative gearing concessions from their calculations.

Other changes included tighter restrictions to the maximum loan-to-value ratio requirements and the removal of discretionary pricing on investor loans.

For investors, this essentially translated to increased deposit requirements during the approval phase of a loan, and an increased onus on proving their ability to service the loan throughout its term.

At the end of June, APRA released a temporary directive for five banks to retain capital that would otherwise have been released in the form of home loans.

APRA ordered ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank to increase the amount of capital required for their residential mortgage exposures, meaning they will have to retain billions of dollars that would otherwise have gone out in home loans.

The result of this announcement was widely touted as translating to more expensive mortgages and reduced mortgage volumes.

In the past two weeks, ANZ, CBA and NAB (amongst others) all announced increases to variable rate home loans for investors.

Some banks, including CBA and ANZ, simultaneously announced reduced rates or concessions for fixed rate owner-occupier products.

This week, AMP announced the suspension of new and existing investor home loan application approvals until later this year.

More institutions are expected to announce changes within the coming weeks.

APRA Special Report: 

 Special report: APRA changes to meet with mixed success

Special report: first-time investors hit the hardest 

Special report: pain and gain for existing investors  

Special report: investors unfazed by lending changes

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Getting finance approved in this tightening lending environment

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