As the RBA board continues to convene each month for a spot of thumb twiddling, APRA and the banks are all out at sea, rocking the financial services boat with their own, none-too-subtle tweaks across lending practices.
It all started with APRA giving lenders a good talking to about the alleged ‘runaway’ growth of their investment based mortgage books, which was apparently adding fuel to the already raging Sydney property market inferno.
Even though no official restrictions were enforced, banks took the opportunity to remove all discount offers on the table for property investor customers, with almost every lender doing an about face and chasing down owner occupier business in a big way.
Many industry commentators were suggesting this would have a significant impact on investors, but fewer were talking about the full extent of the flow on effect to follow…
The real estate ripple factor
With profits being the banking sector’s top priority, it’s little surprise that lenders have decided to take matters into their own hands when it comes to upping the interest rate ante.
This process has been easier to justify in light of pressure being applied by APRA, in the form of promised regulatory changes as at 1st July 2016, which will see the amount of required capital held against mortgages raised by over 50 per cent, from 16 basis points to 25 basis points.
Among the various plays by lenders in the lead up to this announcement and immediately after, ING Direct made the decision to restrict investment lending in NSW to a maximum LVR of 80% (from its usual 90%). This 80% LVR rule has since been applied right across the board.
We know of other lenders who’ve recently demonstrated a newfound reluctance to finance at LVRs over 80%, particularly when it comes to what would be considered ‘high risk’ locations or assets.
If such tighter credit policies continue to catch on, existing owners in these locations could also be impacted, should they attempt to refinance under the new rules.
Are OTP apartments next on the hit list?
Given all the negative commentary surrounding so-called ‘saturation levels’ of high rise apartment construction across our Eastern seaboard cities, it’s not too far fetched to wonder if this will be the next sector to come under lender scrutiny.
As with secondary locations, questionable assets themselves can be deemed ‘high risk’ by the banks, particularly if they’re looking for reasons to decline some loan applications due to the prevailing conditions of the day.
This would leave the flood gates wide open for foreign buyers who might suddenly find themselves without much local competition, but with a whole lot of stock to select from.
These two changes alone are enough to create a significant shift in the way we interact with and buy property. Not to mention the way Aussie bricks and mortar is traded as a commodity on the global stage.
A tidal wave of change
So now we start to see the makings of a market transition, where investors flood certain suburbs because they’re buying options are limited by banking bureaucracy. And in the meantime, owner-occupiers are locked out of contention due to higher LVR requirements.
This will begin to impact how we choose to live, infrastructure and planning and at its most fundamental level, the demographic composition of entire cities and suburbs.
Put your rates up in the air, and wave ‘em like you just don’t care!
Obviously all this tiering and capping talk is a little too tedious for some lenders, as we saw last week when Westpac announced it was upping interest rates across all variable rate loan products by 0.20%.
This is the next episode in an ongoing saga around the bank’s overwhelming desire to turn a profit, and APRA’s need to singlehandedly contain Australian house prices, without stifling the real estate markets entirely.
It’s likely borrowers will be somewhat more receptive to the rate hike approach, even though it’s still a bitter pill to swallow when you consider the simultaneous Westpac announcement of a projected $8 billion annual profit.
But the fact is, a 20 basis point increase isn’t necessarily going to (excuse the pun) break the bank right now when it comes to cashflow. Whereas having to fund an extra 10% for each and every asset acquisition will eat up your serviceability at an alarming rate.
More proof that the fundamentals must be followed
All of this just highlights the absolute necessity for carefully considered asset assessment and acquisition.
If you were in need of a gentle reminder, investing is about hard and fast fundamentals and the application of certain rules around location. Moreover, what it is that makes some locations enduringly sustainable due to buyer demand and what makes some ‘flash in the pan’ speculative (read high risk) gambles.
Ideally, you want more of the former and none of the latter in your investment portfolio…and Aussie banks are increasingly feeling the same way.
If you’d like more information as to how you can navigate the changing lending landscape we find ourselves in presently, click here to connect with the Trilogy team today.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).