How changing bank policy affects investors and tenants
Just over two years ago, APRA stepped in with some tough measures in an effort to reduce the amount of investment lending by our Australian banks. The roar was loud and the changes were noticeable.
Investors quickly felt the brunt of the banking policy changes and all of a sudden, we saw investor budgets reducing, lending rates being hiked up for investment lending, and in some cases, investors being locked out of the market altogether.
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At the time, APRA’s desired outcome seemed so unlikely and it was hard to imagine how they’d reduce the lender’s activities to a mere 10 per cent of new investment lending. Little did we know how tough the policy changes would continue to get.
Fast-forward two years and we now see some varied but tough policy conditions out in the marketplace from our lenders, and the imposed conditions have been quite pivotal across the broader property market.
Buyer numbers in the eastern state capital cities have continued to be strong (relatively speaking when benchmarked against prior years), but the mix of investors to owner-occupiers is what has changed, as is the energy and appetite of investors at the coalface.
Not surprisingly, our strongest auction results we’ve recently witnessed have been fuelled by owner-occupiers and investor caution has been palpable. Investors who have remained eligible buyers in the property market have had to flex around and adapt to the increased lender scrutiny.
From tougher imposed conditions on expats to higher-than-actual servicing calculators (lender systems for modelling the cost of servicing the loan), higher interest rates on interest only loans, tighter loan to value ratio limits and restrictions on equity releases, limits on portfolio sizes, and lastly the need for investors to be able to demonstrate that they can cover the cost of both principal and interest repayments at a higher-than-current lending rate, the cards have certainly been stacked against investors.
And that’s not to mention valuation shortfall risk, lender rejection of specific securities (properties used as collateral for the loan), and developer liquidation risks.
Whether these changes to investment lending are a good thing or a bad thing carries varied sentiment. Clearly, we need to be confident that investor sentiment isn’t driving up property prices to the detriment of owner-occupiers, but we also have to consider the effect of limited investor activity on existing investors, developers and tenants.
For the first time in our major eastern capitals in a while, we have had a renewed pressure on rents and a shortage of rental properties in many suburbs.
Rental stress cannot be underestimated and we can anticipate that the resultant effect of this new imbalance will be higher rents and tighter vacancy rates, but also rental stress and affordability concerns for those who are most vulnerable in the housing market.
For current investors (particularly those who have numerous properties in their portfolio), the need to be mindful of changed conditions as their loans exit from interest-only is imperative. The inability to service heightened repayments could be disastrous for those who aren’t prepared.
Like times before, this cyclic balance between rental yield and investor acquisition activity reminds us how tightly bound all of the dynamics are in the world of property investment.
Now, more than ever, is not a time for investors to be nonchalant about lending criteria or borrowing capacity. It’s tough out there for investors and having a trusted finance advisor is absolutely critical.
