There have been many changes to investor lending in Australia in recent months, but it is unlikely that these new restrictions will have widespread effect.
Blogger: Todd Hunter, director, WHEREGROUP
Recently APRA made some major changes that affect the banks and credit unions. These changes have forced the banks to make some pretty drastic policy changes immediately. Anybody with an investment loan would have seen their interest rate increase recently, unless of course they had it locked into a fixed rate.
But why have these changes occurred?
In essence, to stop the banks hanging themselves…
In the neverending fight to gain market share, the banks get more and more appetite for risk. This appetite has seen various mortgage policies enabling some investors to get into the market with very little due diligence into their ability to afford the debt should rates increase and/or a vacant property periods. This has created a vast difference in borrowing capacity from one lender to another. Due to the policies, investment lending has taken over owner-occupied lending with all lenders across the board. So much so, that investment loans have reached a staggering rate of 60 per cent of all loans written.
So what level should this be at? A much more comfortable level is 33 per cent – almost half of where it is now.
Now all the blame can’t be put onto the banks, low interest rates have certainly played their part in this dilemma.
As a result, this added activity has seen prices skyrocket in both Sydney and Melbourne.
So much, that if these price increases continued, we would see another “GFC-like” crash occur in our marketplace. With APRA stepping in and controlling what the banks can and cannot do (to a certain degree), hopefully we will see a step back to normality.
These changes however, only really affect the Sydney and Melbourne markets. But how can that be?
Price point – you see the majority of Sydney and Melbourne houses are now well over $500,000.
So let’s look at some of the changes:
Investment loans have increased by 0.27 per cent – 0.29 per cent and fixed rates for investment loans have also increased. Some lenders have stopped investment loans all together. With the Sydney and Melbourne markets increasing so fast, rents have struggled to keep pace. In fact, they have been decreasing right across Australia because the volumes of investment loans have increased, meaning there are many more investment properties available for rent.
This has in turn created a renter's market. Vacancy rates increase and vendors must decrease their rents to get their properties filled. Now, houses over the $500,000 mark do not attract the same yields as those properties below the $500,000 mark. So, combine that with increased prices and a gluttony of available rental properties, and you get yields as low as three to four per cent. This increase now makes a Sydney and Melbourne property negatively geared. So the increase in interest rates has put investors at the tipping point of deciding whether it would become a good investment now or not.
Servicing on new loans has become much tighter. Now this tightening of servicing means that those investors who were close to borrowing their maximum mortgage limits, now cannot borrow the same level of funds as they could before. This generally occurs in higher price points where again, the rents are lower and the properties are negatively geared. This change has capped borrowers' ability to continue to invest in these higher priced markets, especially given the poor yields on offer. This is forcing them to look elsewhere, outside of Sydney and Melbourne, where properties are cash flow positive.
Reduced loan-to-value ratios (LVRs): all but one major lender has reduced their LVRs on investment loans, with several reducing them to 80 per cent of the purchase price. This means investors wanting to continue to invest must tip in more cash of their own to purchase, or use more equity in other properties. The higher the purchase price, the higher the extra funds required as a deposit. This has a much lesser effect on properties under $500,000. So those investors with limited cash deposits and/or equity, would be forced to look and invest elsewhere where they can purchase for less.
Proof of this occurring is visible in other cities like Brisbane and the Gold Coast, where there are many houses under the $500,000 mark and the markets are in full swing, increasing in both value and popularity. Closer to home in Sydney, Campbelltown and the western suburbs of Sydney are still in red hot mode. Why? Because there are still deals under the $500,000 mark.
Through either a stroke of genius or a very clever-thought-out plan, the changes have and are slowing these two markets down. And the funny part of this is, that it was the same banks that put themselves into this predicament with APRA that came up with these policy changes themselves. And they are ingenious to say the least.
Why execute an entire market? Just slow down the problems and bring back normality.