Currently, it is difficult to accurately quantify and forecast the real impact and timing of APRA regulations on the market, given we are in the infancy stages post major lenders tightening LVR levels, increasing rates for investment only loans and generally decreasing their exposure to residential investment activity.

To add to this complexity, this cycle is also extremely unique in a sense that foreign investment into residential property is at levels previously unseen, coupled with a sustained extremely low interest rate environment and a generally weakened economy; with the exception of a strong and persistent demand in housing markets in Sydney and Melbourne.

Whilst the major impacts from the APRA regulations are most likely to be felt in the Sydney and Melbourne housing markets, where it is most required, other national housing markets like Brisbane, where it could strongly be argued is not required, still have the potential to experience negative impacts. Based on the recent strong growth experienced in the Sydney and Melbourne housing markets, and relative benign conditions experienced by other capital city markets like Brisbane, it could be deduced that a more targeted and balanced approach (based on specific geography/product/purchaser type) to slow residential investment activity in Sydney and Melbourne may be of far greater economic merit.

Given the structure of the imposed regulations, the RBA and APRA must also see something of concern on the horizon (mainly for Sydney and Melbourne), and if this is the case, by providing more specific detail to consumers in a timely fashion regarding the exact nature of this concern/risk could have potentially achieved the desired outcome with purchasers in those specific market segments curbing their own behaviour.

From an off the plan apartment developers perspective in Brisbane, the greatest concern now centres on settlement/valuation/rental risk, which can manifest itself in many different ways, including a decrease in consumer/market sentiment and projects simply not proceeding. From a settlement/valuation risk perspective, it will now become critical that developers have been appropriately qualifying their investment purchaser’s during the sales process to ensure they will have the financial capacity to settle their purchase. This should also have included contingencies in the event of an unforeseen change in the market landscape like a sharp increase in interest rates or that which has just occurred with the enforcement of the APRA regulations.

In light of the recent APRA regulations, investment purchasers that may contain the greatest settlement/valuation risk for developers include the following:

Purchasers who have paid a low deposit (under 10%) and required a financial institution to fund a high percentage of their purchase (over 90% LVR of the property).

Purchasers who don’t own a principal place of residence and consequently don’t have the ability to tip in equity or access extra money from an offset account if required.  Purchasers who have purchased lower quality property in questionable locations i.e. potential oversupply and weak demand fundamentals that will result in diminished rental returns.

Purchasers who live in an offshore location and may not have access to trusted, local advisers with the ability to clearly communicate and navigate the recent changes to the financial landscape.

Purchasers who have extended themselves financially to purchase an investment property and consequently are more susceptible to changes in personal circumstances like a loss of employment.

In summary, these recent APRA regulations are highly likely to further magnify a flight to quality in the market. This is already evident in the Brisbane apartment market with demand for higher quality/better value properties starting to increase from both an owner occupier and investment perspective. However, it will be far more wide reaching than from a pure product perspective.

Whilst time will ultimately convey the true impact of the recent APRA regulations, it would appear that now more than ever, developers and financial institutions will definitely need to place a higher importance on quality investment purchasers, with a quality investment strategy, who wish to purchase quality property that is located in quality areas.

For developers who have focused their business strategy around these core principles, these recent changes in the marketplace may in effect create additional further opportunities for them to reinforce the increasing demand for their product type, from the pool of more educated and selective clients that still have a strong appetite for investment property.