Property investors have been in the spotlight the past few years, largely because the country’s biggest market, Sydney, has been more competitive than ever. The assumption that investors are responsible for the city's surging prices has been supported, at least in part, by recent lending statistics. For example, investor housing loan approvals in New South Wales increased by almost 150% over the three years to 2014, the Reserve Bank of Australia says.
Most of these loans are attributed to buyers in Sydney, on account of the city's median home values jumping 18% to $932,000, year on year to August 31, according to CoreLogic RP Data’s home value index. It's a rate of growth that greatly exceeds every other city nationally.
However, this value also represents a gradual fall over the past month, dating back to August 20, as per CoreLogic RP Data's weekly numbers. It appears that Sydney’s long-term price gains are easing as lenders tweak their policies in line with new guidelines from the Australian Prudential Regulation Authority. Furthermore, the Australian Bureau of Statistics’ monthly loan figures show that the value of investment housing loans nationally rose by just 0.5% in July (seasonally adjusted), after slumping in the few months prior.
Lenders make moves
APRA's changes, which include the removal of discretionary pricing on investment lending, increased floor rates for loan servicing, loan to valuation ratio restrictions on investment lending, and the removal of negative gearing benefits, are all affecting investors, says spokesperson for mortgage broking firm Mortgage Choice, Jessica Darnbrough. Additionally, a number of lenders have increased the interest rates on their suite of investment lending products by as much as 40 – 50 basis points (or 0.5%), says Darnbrough.
"We believe these pricing and policy changes will reduce the proportion of investment lending over the longer term as potential property investors find it harder to access finance to buy property,” she says.
It’s clear that not all investors are equal though, and the new guidelines are likely to impact each differently. For example, Mortgage Choice data shows that 22% of all investor borrowers over the last 12 months have been first homebuyers. These investors are young, don’t have huge deposits or big incomes and realise that purchasing an investment property is the only way to get a foot onto the property ladder, says Darnbrough.
"The reality is, these buyers are more susceptible to interest rate increases and changes in lending policy than others,” she says. "So while the recent price and policy changes will reduce the current level of investment lending, it won’t be the middle-aged, middle-class or foreign investors who are locked out of the market. It will be first home buyers - those struggling to get a start."
Time for caution
APRA's new rules take effect from July 1, 2016 and will force accredited lenders to raise the average risk weight on their residential mortgage exposures from approximately 16% to at least 25%. This simply means that lenders need to carry more capital against the cost of their mortgage books to make sure they can absorb any significant losses. (Banks typically set their own risk weightings, which allows them to reduce the capital they hold against assets).
Managing director at Bell Partners Finance, Mark Stevenson says it's important to understand that these lending changes are therefore driven by the government, and are not led by banks. He says that the primary concern among authorities such as APRA has been the continued increases in property values in Sydney and Melbourne, widely believed to be fuelled by investors.
Stevenson adds that the changes have particularly impacted the major lenders – CBA, ANZ, NAB, Westpac/St George, as well as AMP and Macquarie Bank, "some of which have investor loans on their books far in excess of what the regulator is comfortable with."
"Investor lending across the board is now in a more cautious phase as many look to see what impact these most recent changes will have,” says Stevenson. "This now gives many second tier lenders who have not been impacted as much by these regulatory changes a comparative competitive advantage over the lenders who have had to pull back."
Pitfalls of interest-only loans
Some of the worry among economic experts is actually due to the type of home loans people have been taking on. For example, a recent investigation by the Australian Securities and Investments Commission found that while default rates for interest-only mortgages are currently low, demand for this type of loan has grown by around 80% in the past three years. Interest-only loans offer a short period of usually up to five years during which the borrower only has to pay the interest on the loan, instead of also paying down the principal amount. This tends to make repayments lower in the short-term, but higher over the full term of the loan.
ASIC says that interest-only loans are therefore generally more popular with investors, especially those who are basing their purchase on rising property prices and using negative gearing to claim interest payments as a tax deduction. However, ASIC also found that a growing number of owner-occupiers are being tempted by the initially lower repayments as well, freeing up funds for renovations or other investments. This might prove problematic down the road, especially if the costs of loans go up while the value of properties go down.
On the bubble
Principal at Smart Property Adviser, Kevin Lee says Sydney is in a bubble scenario that will pop with the first decent interest rate increase, simply because supply and demand are so out of balance. For example, he says that with its large population, Sydney has had significantly less residential property for sale on a monthly basis than Perth, Melbourne, or Brisbane since February of 2013. This has prompted a rush on what's available and consequently caused the rapid price growth seen over the last three years.
However, if investors are indeed dropping out of the Sydney market because of the aforementioned loan restrictions, it could negatively impact property values and ultimately hurt owner-occupiers who’ve taken on large mortgages with the hope that interest rates will stay low.
"Lenders are being overly cautious with investment lending, where the property owner gets tax breaks, and over zealous with owner occupiers, where they get no tax breaks,” says Lee. "Who do think will be the group to feel the most pain when interest rates increase?”
By Jean-Paul Pelosi