Spring is around the corner, meaning warmer weather, AFL finals and a nation-stopping horse race, but what’s forecast for the property market during this traditionally busy buying season?
Analysts are predicting tougher conditions (compared with spring 2014) due to Australia’s finance industry watchdog, APRA, ordering the banks to tighten lending conditions for residential mortgages with a particular focus on investors.
Property Planning Australia’s Managing Director David Johnston explains what it means for you.
APRA prompts big banks to tighten lending – a market ‘game changer’
The past month has seen significant changes in the property finance arena that will impact all Australians planning to purchase and borrow in the near future and those who have existing investment loans.
The nation’s financial services industry regulator APRA has recently implemented measures to slow investor demand due to concern the property market is overheating. More specifically, APRA has: increased the capital reserves the big banks are required to hold for their exposure to residential property mortgages; and enforced their requirement that banks’ investment lending does not grow more than 10% annually. This has resulted in the banks raising investor interest rates and constricting lending standards.
An overheated property market can cause two main problems:
1 – making it unaffordable for first-time entrants seeking the ‘Great Australian Dream’
2 – bigger picture, a ‘burst property bubble’ would damage the whole economy and significantly impact mum-and-dad and ‘Joe Average’ property owners.
Changes target hot Sydney and Melbourne markets, but whack the rest too
APRA’s changes are aimed squarely at the Sydney and Melbourne markets, but they impact our other capital cities that arguably don’t require the regulator’s ‘hand brake’.
To put the current state of the market into context, let’s look at how property values have changed in Australia’s capital cities during the past 12 months (as advised by Core Logic/RP Data). It really comes down to a tale of two cities: Sydney and Melbourne.
Sydney remains the hottest housing market, with values rising 18.4% over the past 12 months – the highest rate of growth since 2002. Melbourne is also booming, recording an 11.5% increase during the same timeframe. In contrast, other capital cities’ performances have been significantly lower, ranging from -5.3% for Darwin to 3.9% for Brisbane.
While Sydney’s dwelling values grew 4.9% and Melbourne 3.3% in the past month, I expect APRA’s recent actions to slow this growth. This slowing will be compounded by the increase in properties expected to come onto the market during spring.
The APRA measures will prompt caution amongst investors (which comprise 60% of Sydney buyers) that the property boom in our two largest cities may be coming to an end.
Inevitably, general investor confidence will start to wane. How much it will diminish is the million dollar question.
Is it a good time to buy or put your purchasing plans on ice?
As APRA’s changes start taking effect, ironically we’re likely to see improved buying opportunities this spring and into next year. There is likely to be reduced competition over time and spring inevitably brings an increased supply of property. High supply in any market means a good time to buy.
As we move into a flatter period, our experience suggests that inferior properties tend to show little or even negative growth in value. Conversely, blue chip real estate generally increases its value (incrementally) and continues to outperform the average value growth across the geographical market it is located (during the same period).
Even if quality property is only growing at 1, 2 or 3% per annum versus the 10-20% we have seen in Melbourne and Sydney, the values are getting more expensive. These limited, yet ever increasing values, combined with not knowing when the market will take off again in the future, are why limited growth periods usually prove to be a great time to purchase quality real estate.
As we educate our clients, the simplest path towards making money through property investing is by selecting a great property that you can hold onto for the longer term (i.e. seven to 10 years at least) due to high entry and exit costs. We believe simplicity is genius; buying well and holding is our preferred approach. Our philosophy is quality over quantity when it comes to residential property investing. Of course, investment needs to fit comfortably within your affordability levels by maintaining significant equity/cash buffers as well as flexibility should interest rates increase.
What does this mean for you?
As always, the question from clients is, ‘What should I do?’
If you have an existing investment loan, the interest rate adjustment is very similar across all lenders, but you will almost certainly be paying more than you were a month ago.
The APRA changes will surely impact the property investment landscape – with some buyers reaping benefits and others needing to re-think their plans.
If you are (or were) about to purchase a property, your borrowing capacity will be reduced and even more so if you’re looking for an investment property rather than a home.
At the coalface, we’ve seen investment loan rate increases for all lenders and larger deposits or equity contributions required for investment property purchases. It’s become more difficult to borrow money (i.e. the same income will get you a lower loan amount than a month or so ago) and harder to access interest-only loans. At a private presentation I attended with the Head of Banking from one of the major players in Australia, his analysis suggested that loan sizes would drop by 10-15% for the same level of income. This will have some impact on property values over time.
Would-be investors (who have lower equity and/or savings) will be impacted the most, whereas first homebuyers may benefit from having reduced competition from investors who often are competing with first home buyers.
During the last five-to-10 years we have seen a trend towards first time property buyers selecting an investment property rather than a home, we may see this trend begin to recede (due to the increased requirements).
We are witnessing a huge change to the lending landscape in Australia, but we have had many major impacts to the economy, financial and property markets over the decades and quality property has stood the test of time. The Australian economy in general, and the banks specifically, require property values to grow over time to protect Australians’ wealth and the banks’ largest assets – your mortgage.
This is why it’s important to remember that with property investing there are no genuine ‘get rich quick’ schemes, just ‘get rich slow’ strategies that can actually deliver.
In changing times, I often reflect on the most common property-based regret of people we meet at Property Planning Australia – not having the courage to purchase and/or hold blue chip property when they had the opportunity.
As legendary American investor Warren Buffet said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” We might be about to enter a ‘fearful’ period, but history suggests that such times make for the best buying if you’re willing to be courageous.
‘Click here‘ or call us to discuss any impact of the APRA changes on your specific circumstances and how to identify blue chip property.