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A mystery shopping exercise conducted by Macquarie Bank has found that banks are willing to lend approximately $100,000 less to first home buyers, than what they would have two years ago.
The participants told bank staff that they were on a wage of $105,000, lived on $1,200 a month with no dependents and a good credit history. The results? The major banks are offering loan amounts between $550K-$600K, however two years ago and under the same circumstances, they were offering $650K-$700K. But why?
This is the result of an ongoing effort by APRA, who has introduced a second round of macro prudential regulation measures to slow down the Sydney and Melbourne property markets. APRA have stepped in as a proxy for the RBA who cannot afford to increase interest rates due to the negative impact on the broader economy.
The current APRA initiatives are much more impactful than those in 2015 which temporarily halted the upward progression of property values. This time, it feels like the broad sweeping changes are significant enough to have a meaningful effect.
So what are some of the recent measures that lenders have instituted at the directive of APRA?
- More stringent assessment of borrowers living expenses
- Increasing the ‘assessment rate’ at which affordability is calculated. For example, if you took out a loan today at the rate of 4.50%, your ability to make repayments is calculated on the higher ‘assessment rate’ which sits typically around 7.50%
- If you select an ‘interest only’ loan for 5 years, as part of a 30 year loan term, your borrowing capacity will be severely reduced. You will now be assessed based on being able to repay the loan over 25 years rather than 30 years
- If you select an ‘interest only’ loan, you will be paying higher interest rates than if you selected a ‘principal and interest’ loan
- If you have an investment loan, you will be paying higher interest rates than an owner-occupied home loan
- SMSF loans have more restrictions around LVR’s and serviceability
- One of the major banks just announced that they are no longer offering: (1) equity release products for seniors and; (2) low-documentation loans for self-employed customers who lack the financials to be approved for a regular loan or PAYG customers with irregular income payments.
The federal and state governments’ have also undertaken some initiatives such as:
- Taxing foreign buyers
- Taxing properties left vacant
- Reducing the ability to claim on plant and equipment within an investment property if you did not purchase the items yourself
- Reducing the ability to be able to claim interstate travel on investment properties
The above is by no means an exhaustive list, but it highlights the various steps that have been taken to make it more difficult to finance property, and more expensive to hold investment properties.
So, what does this all mean for the property market and you?
One of the main drivers of property growth is the ability to access debt to fund property. If this is severely restricted, it is logical to assume that on a macro level, the amount of money flowing into the property market will be reduced. Less money into the property market, or any market for that matter, will have an impact on the prices paid for the product, good or service.
In our eyes these changes are not a bad thing. Lenders should be prudent when deciding how much and who to lend to, and quite possibly some lenders were taking greater risks than was appropriate in the battle for greater market share. The reality is that the longer a market surges for, the greater the potential for an increased adjustment or correction, which most people do not wish for.
We would prefer to see a steady realignment of the fundamentals rather than a boom-then-bust scenario. This is what we expect, and obviously hope for. There have only been a few early signs of the creaking and cracking on the back of the property market, we hope that the adjustment is gradual and mediates in a reasonable manner without moving into significant negative territory, nor for an extended period.
All in all, market cycles are inevitable. Provided that you have the right planning, mortgage, money and risk management strategies in place, and take a long-term view, there is nothing to fear. In fact, if property values do retreat into negative territory, history suggests we could be on the doorstep of a golden period to purchase – for those courageous enough to take the plunge. Just make sure the water is deep enough when you jump in. Happy diving!
David Johnston is the founder of Property Planning Australia and the author of ‘How to succeed with property to create your ideal lifestyle‘ and ‘Property for life – using property to plan your financial future’.