Finance advice
Ian Ugarte

How APRA increased the prices of property in the marketplace

By Ian Ugarte

In recent years, there have been changes forced on to lenders to ensure that investors do not put themselves at risk by the Australian Prudential Regulatory Authority (APRA). What this ironically did was to force the market upwards. Let me explain.

These changes stunted the movement of sophisticated investors and promoted increasing the purchasing power of first-time investors who did not know the marketplace.

The hot Sydney market was creating uncertainty and the rising prices on a monthly basis were not in line with historical capital growth. Some opinions say that doomsday is on its way. I do not believe so. However, something needed to be done and the result was not great.

Let’s first look at the reasons that APRA enforced its changes.

  • The lending institutions had higher Loan to Value Ratios (LVR) and this was considered to be a risk to investors;
  • The risk of interest rate increases on high LVR loans could adversely affect people in the future as cash-flow changes could be significant enough to send some mortgage holders into financial stress;
  • The deposit taking–lending institutions had a ratio of savings to debt that could have created high risk outcomes. What that means is that if a GFC style event happened and everyone who had their money in savings asked for their cash back, it would create an internal crash as actual cash on hand was at a ratio of nearly 20:1; and
  • Assessment the lenders were using did not involve any increases to costs or interest rate rises.

What APRA created was a set of rules and benchmarks that tightened up the lending practices. These include:

  • Reducing LVRs to below 80 per cent for investors;
  • Ensuring that interest only loans had been diminished for lenders;
  • Creating serviceability requirements that looked at all investor loans across the entire portfolio at much higher interest rates and principle and interest regardless of the current interest only and interest rate that is being paid; and
  • Increasing the amount of shadowing on rental property income.

Those changes would make perfect sense except that the sophisticated investors have found it increasingly difficult to fund new and existing deals because of the amount of properties they own while first time investors are finding it very easy to purchase their first investment property.

Let me explain with two scenarios:

Firstly, the sophisticated investor has a large investment portfolio. They have been involved in property for many years. They earn income from their property deals via positive cash-flow or profits from developments.

They sat at a 60–80 per cent LVR and purchased properties to develop or increase the value and cash-flow. The majority of the loans are sitting at interest only and all below 5 per cent. They approach a lender to buy another property or to apply for a construction loan and the lender looks across the whole portfolio. Every loan from every lender that has given them a mortgage is now treated as an 8 per cent interest rate and principal and interest. This absolutely shatters the ability to further increase the portfolio or move forward.

The first-time investor has their own home. They have equity or savings and a reasonable job. They have a 90 per cent LVR and the new lender looks at the existing serviceability and sees no problem. They can afford it as they have their home loan, a PAYG job and no extra costs attributed that would incur them to not being given a loan.

Here is the rub. A sophisticated investor goes out looking for a deal, goes to an auction and has set their price. Firstly, they have set their price because they are educated and experienced and know that the value of a property is set on the outcome that they can achieve. Paying too much will not get them a desirable outcome.

The auction starts, the developer puts the first bid in low to ensure that the auctioneer is aware that they are in the crowd. Before too long the first-time investor that has a preapproval starts bidding against another first time investor. The sophisticated investor and the developers stop their bidding.

The first timers continue their ego driven, APRA (un-)regulated bidding to the point that it is driving the price well beyond the reserve. You hear the dulled internal squeal of the owners in the front bedroom, the silhouette of their dancing inside the un-renovated home after the hammer drops, 10–20 per cent above reserve!

The first timer who has won the bidding war pretends to be cool and calm and internally they are emotionally confused about this huge negative gearing debt that will have a reality TV show renovation at 10 times the cost of what is really shown! Reality? I do not think so — but that is for another day.

The developer and sophisticated investor look at each other, roll their eyes and head to the next auction that pushed the market up even higher. The issue here being that APRA was forced to make changes, those changes affected the industry professionals that would have ensured the market was not driven by lack of experience and sustained growth over a longer period of time rather than an 18-month ramp.

APRA is required to protect, do not get me wrong, however, it would have been smarter for the changes in lending to activate a more balanced approach as a ratio of investments rather than a sledge hammer across the entire industry. Measured risk comes with measured experience. Soon there will be lenders not making the half-year profit gains and loosening up the market, and we wait in anticipation.

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About the Blogger

Ian Ugarte

Ian Ugarte

Ian Ugarte is the founder of the Australian Housing Initiative. He is a property expert, educator, author and change maker.

He is and passionate about creating co-operative partnerships between Social Agencies, Government and Private Investors to bring back the genuine connection of community through the provision of elegant housing diversification.

Get Access To Your FREE National Report Here: Revealing, High Demand and High Yield Affordable Housing

FROM THE WEB

podcast

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Luke’s first property investment included what he now looks back on as “learning experiences”.  He chose it only because it was close to where he lived, he bought it at the peak of the market and he elected to manage his (unreliable, damage-prone) tenants alone. Now, 16 years on Luke has 30 properties and a much better idea about how to approach the investment game.

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In this episode of the Smart Property Investment Show Luke joins host Tim Neary to unpack how he went about educating himself, how his investment style has changed over time and why patience is the name of the game.

Luke will also share how his initial mistakes discouraged him and had him doubting the wisdom of being an investor, and how his realisation of the importance of active management bought him back into line.  He will discuss the importance of having a strong support team and why it’s smart to put a proper value on your personal time.

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:

How to profit from changing market conditions
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4 tips for first time property investors

AREAS MENTIONED: 

Sydney
Brisbane
Adelaide
Wollongong
Geelong
Melton South
Cairns
Perth

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An unsure start in property investment leads to a 30-property portfolio
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  ["title"]=>
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Promoted by Blue Ink Finance.

Budgeting tips when your Personal Debt is High.

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Credit card debts and personal loans are the greatest obstacle between everyday people and their potential to live in financial freedom.

Of course, I understand that sometimes getting a small personal loan is absolutely necessary. Unexpected costs like medical expenses can make personal loans the only option.

However, the majority of us have debt simply because we spend more than we earn.

In either case, your number one priority is unlocking those chains of debt that are holding you back.

I’m going to give you some tips for budgeting with hefty personal debt, but first I want to talk about the impact those loans are having on your life.

How much is your debt really costing you?

Over the years that you’re paying off your loans at the minimum repayment, the interest on those items will end up costing you multiple times more than the original borrowed amount - and those endless due dates will haunt you. There’s no freedom in that!

Let me give you an example. You’ll be shocked, I guarantee it!

Let’s say you have around $4,000 of credit card debt, charged at 19.99% p.a. If you paid only the minimum monthly amount, it would take 37 years to pay off the total debt.

How much will that $4,000 debt cost you? $19,200. Depressing, isn’t it?

You might feel like you need a full-blown money explosion to get out of debt, but don’t despair just yet.

What you need to do is arm yourself with a strategic budget, and I’ve got some tips to help you.

Budgeting while you have hefty personal debt is tough, but possible – and it’s essential for eliminating that debt forever. Let’s have a quick look at how you can start to tackle that mountain of borrowed money.

It’s time to take charge and break some chains!

There’s a method for reducing debt that has an excellent success rate, if you’re committed:

  1. Make a realistic budget (and stick to it)
  2. Reduce your expenses and/or increase your income until you are in the black
  3. Save an emergency fund first
  4. Pay off your personal loans and credit cards, starting with the either the smallest debt first or the debt with the highest interest rate
  5. Revise your budget as you go along.

Why an emergency fund is paramount to success

You’ll see I’ve put saving an emergency fund before paying off your loans. Even a small amount initially, like $500, is enough to stop the cycle of borrowing to pay bills, then paying out even more in interest each month, which leaves less in the bank to pay the next bill.

Once you have a buffer saved, then you can start aiming some serious firepower on your debt, and that’s when it gets exciting!

Think back to my credit card example. If you upped the payments each month from $84 per month to $212, you would have the card paid off in two years and save $14,285 in interest. That’s worth a little bit of effort, wouldn’t you agree?

Tips for a budget that works

You may need to cut back drastically on your expenses to clear your debt, but here’s some other ways to make the most of your budget:

  • Find micro-ways to reduce your expenses every day. Make work lunches at home, cancel a pay TV subscription, find a better phone deal, or pass on your afternoon chocolate bar from the vending machine. Instead of spending $40 on a takeaway dinner, have a bowl of cereal!

  • Find a friend who will keep you accountable. Having someone else who shuns a pricey outing to the day spa for a walk along the beach instead will make you feel better about saying ‘no’ to expensive events that will blow the budget.

  • Refinance your home loan to release some funds. If you have a mortgage, talk to us at Blue Ink Finance about the possibility of refinancing your home loan to allow you to release some equity to help clear your high interest, personal debt. It’s not always the best strategy, but it’s worth investigating, especially if you can consolidate it into a home loan that has a significantly lower interest rate.

  • If your income increases, leverage it! The only place that extra money should go is into paying off more debt. Enough said!

  • Refine and polish your budget as your circumstances change. Your budget shouldn’t stay the same. As you find more ways to decrease your expenditure and become adept at sticking to your financial plan, fine-tune your budget to reflect your savvy saving. Any spare change goes directly onto your debt.

  • Automate payments of bills, so you don’t spend the money first. This saves you from late fees if you forget, too.

The reality is that you won’t have a profitable budget until you get rid of that high-interest debt. The beauty of a budget is that it can get you there! Knock the debt, stay away from borrowing except for assets like property, and you’ll have a well-oiled financial plan that kicks goals instead of paying lenders!

At Blue Ink Finance, we have a team of expert brokers as well as a panel of industry experts that understand all the nuances of positioning your personal finances to kick real goals with Property Assets and can support you in achieving your goals.

Give the team at Blue Ink Finance a call on 1300 888 796 or click here to request your Complimentary Finance Review with one of our experienced Finance Coaches now.

And see how having a panel of industry experts on your side, can fast track your property goals.

About The Author

David Wegener
Chief Executive Officer
Blue Ink Finance

Who I am, and why I want to help you succeed.

As an award-winning Mortgage Broker with nearly 20 years’ experience in the finance industry, I’ve seen it all.

I’ve gone through constant industry changes and yet I still successfully help my customers borrow the money they need to get ahead.

As a Finance Coach, my goal is to help you understand your financial potential so that you can borrow with confidence.

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Leveraging your Blue Ink Finance Broker for more than just a loan.
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With the softening market impacting property values in many parts of Australia, Sally Dale, Opteon state director for NSW, ACT and Qld joins us to discuss the importance of valuations in the current property market

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Joining host Phil Tarrant, Sally will draw on her 25 years of experience in valuation and discuss the processes involved in arriving at a value for a particular property. She will also share how that process differs between commercial and residential properties and the difficulties which regional property valuations can present.

Sally will unpack the importance and cost of regular valuations on your properties, discuss whether presentation and owner input can sway a valuation and share what you should look for when seeking a reputable property valuer.

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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AREAS MENTIONED: 

Sydney
Brisbane
Adelaide

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Can property presentation result in a higher valuation?

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