Why are investors getting stuck on the sidelines?

PIPA chair Nicola McDougall said the significant uptick in rates in such a short period of time has led to many borrowers, particularly investors, not being able to secure lending for their property purchases. 

Since May, the central bank has consistently increased the official cash rate from a record low of 0.1 per cent to currently stand at 2.85 per cent in November. 

While the monetary policy tightening was undertaken to quell the rising inflation, it also made borrowing more expensive for Aussies. 

With all of Australia’s big four banks expected to pass the interest rate hike on to mortgage holders, as they have done for the past six months, there is potential for mortgage repayments on loans valued at $500,000 to increase $74, culminating in a total increase of $760 since May, according to RateCity.

In addition to higher mortgage costs, Ms McDougall said that the Australian Prudential Regulation Authority (APRA)’s decision to boost the lending buffer in October 2021 is still being felt by borrowers. 

“In fact, many of these borrowers are stuck on the sidelines due to the servicing buffer of 300 basis points still being applied to lending applications — even though interest rates are significantly higher now than when APRA announced the measure in October last year,” she said.  

Ms McDougall cautioned that with these factors hindering investors from accessing financing to add to their portfolios or even purchase one rental dwelling, the market should brace for “further drag” in the months ahead.

Citing historical data, she commented that the current situation was similar to what unfolded in 2017, back when APRA tightened their serviceability buffer.

“There is an element of déjà vu about this situation, with a similar circumstance occurring when caps on investment lending as well as higher rates more generally for investors wiped out lending possibilities for many during the 2010s,” she said.

She recalled that the flow-on effect from the regulator’s intervention was the continued decline in investment activity, which hit rock bottom at the start of the pandemic — when the percentage of investors active in the market was just 22.9 per cent compared to a long-run average of nearly 35 per cent.

If the same course of events unfolds, Ms McDougall cautioned that the country’s rental market — which is already struggling with a supply shortage — could be under further pressure. 

She pointed out that vacancy rates are at record lows around the nation because the usual volume of investors were absent from the market for years. 

The executive cited the results from the 2022 PIPA Annual Investor Sentiment Survey, which showed that a staggering 16.7 per cent of investors have also sold at least one dwelling over the past two years. 

“While opportunities clearly exist for home buyers and investors in the current market, if they are unable to secure finance, then we are likely to see a further reduction in prices as well as sustained downward pressure on vacancy rates for some time yet,” she stated.