(03) 9020 2905You know that feeling when you’re stretching something rubbery to its absolute limits? That creaking feeling right at the point of maximum tension?
The rubber band on your fingers stretched a foot or so wide.
Exert a little more pressure and watch it explode? Hold it and hope it doesn’t snap? Or, release the tension and let it down gently?
Sometimes, you’ll continue stretching, but will turn your head away for the bang. Other times, someone will tell you to “cool your jets!” and you’ll gently release.
Most of the time, it’s happening elsewhere. It has nothing to do with you.
Are Australia’s property prices on the verge of snapping?
At least one corporate cop thinks so. And, after months of inaction, the plod’s threats are suddenly being taken seriously. Budding property investors are the target. There are going to be casualties.
Australia’s largest lenders are pulling the reins on investment property lending. For many young and first time investors, there’s going to be some pain to come.
I wouldn’t want to be a property developer trying to flog a project right now. Or anytime in the next 3-6 months.
The message is clear. Banks have had a gun put to their heads by the Australian Prudential Regulation Authority – the government copper badged with making sure our financial institutions stay safe.
APRA is concerned about property markets in Sydney (particularly) and Melbourne (a little less so) being so stretched. So, it has threatened banks with tougher capital restrictions to tighten up on investment property. The banks have responded like lapdogs.
I’ve been writing about investment property and banking for 15 years. I’ve never seen anything like it.
What are banks going to do?
Some banks have cut loan discounts above their “rack rate” discounts for investors, adding as much as 0.4 per cent to an investment loan rate.
Usually, now, if you had a $300,000 home loan debt and you bought a $500,000 investment property, the same interest rate would apply for both loans. Several banks will now charge higher rates for investments.
There will be loan-to-valuation restrictions. While some banks will lend up to 95 per cent for a home, if a borrower also wants to buy an investment property, the LVR of both loans must be under 80 per cent.
This will be a major impediment to first-time investors, who usually have to rely on limited equity in their first home to buy their first investment.
Previously, you could buy an investment property with a combined LVR was around 90 per cent. Many banks will now knock you back unless you have significantly more equity in your home first, or are prepared to put up extra cash.
From an income perspective, if a $500,000 investment property was going to give you $20,000 in rent (a 4 per cent rental yield), most banks would generally count 80 per cent of that rent (or $16,000) for income to service the loan. Some banks are now dropping that to 60 per cent ($12,000).
That will hurt.
Other banks will be increasing the “expenses” for property investors. Normally banks use minimums for, say, a single, a couple, or a family of four when they’re trying to figure out how much you can really afford to borrow. Those “expenses” could blow out.
Banks are reacting to APRA, who are reacting to a perceived property price bubble in Sydney and, to a lesser extent, Melbourne.
Sydney’s median house price is about $870,000. Sydney should have Australia’s highest house prices. It’s the most populous city, has the most corporate headquarters, arguably world-beating views.
But Sydney’s median house price is roughly 25 per cent higher than Melbourne’s, 45 per cent higher than Perth’s and 73 per cent higher than Brisbane’s.
Seriously? Sydney should have those sorts of premiums over Perth and Brisbane?
In my opinion, no. If a property market is in bubble territory, then it’s probably Sydney. (That’s not to say it is.) With possibly Melbourne coming next, but it’s a long way behind, as are Perth and Brisbane.
But Sydney is why APRA has put the screws on the banks. And why the banks have reacted with such serious investment lending restrictions.
When property markets start getting heated, they talk about it getting hard for first home buyers. APRA has just cleaned out a lot of property investors from the market.
Let’s hope they don’t snap the rubber band.
Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial (www.brucebrammall.com.au ). E: bruce@brucebrammallfinancial.com.au.