The property investment craze is coming to an end as the big four banks – Westpac, Commonwealth, Australian New Zealand Banking Group (ANZ) and the National Australia (NAB) – increase interest rates, and the Australian Prudential Regulation Authority (APRA) change investment lending guidelines. With investment demand decreasing, comes less competition in the market, which could be just what first home buyers have been waiting for.
According to data, for more than 12 months now more than 50% of lending capital has been snapped up by investors. These figures are high in comparison to 1990s data, where only 10 to 20% of lending capital was given to investors. Back then, Australia predominately bought homes to live in.
In May of 2015, investor lending hit an all-time high at 53.5% of lending capital. In August, this fell to 50% and in October to 48.5%.
The biggest driver of property investment is capital gains. The greater property values rise, the more investment property is bought. Of course, low-interest rates have also encouraged even more people into the investment market as the interest paid on an investment property is less, meaning that it becomes more affordable for an investor.
Plus, when the Reserve Bank of Australia (RBA) dropped its official cash rate to 2% in May 2015, property investment became more attractive, especially when bank deposits were showing far less in return. The Sydney market surged, with 60% of buyers being investors, with competition pushing many first home buyers out of the market.
Sure the RBA is still sitting on a cash rate of 2%, but Australia’s big four banks have made an independent move to increase variable interest rates by .15 to .20 basis points. This comes only weeks after the big four and AMP reclassified home loans as either owner-occupier or investment loans, and then charged investors a higher rate of interest, which, in some cases, was up to .47 basis points more.
These moves, say the big four, was made in order to comply with the APRA’s new investment lending guidelines where the banks needed to increase their capital to reduce lending risks and keep within their 10% speed limit for their annual in investment loans. This ruling was introduced by APRA due to record Australian household debt, and dwelling price to income ratios being up to five-and-a-half-times higher in some instances. In addition, APRA has also demanded that investors have a 20% deposit to secure a loan and that they cannot borrow more than 80% of property’s value.
So gone are the days where an investor could borrow 100% of a property’s value by using another property’s equity to secure the loan. This, in turn, means that in order to buy an investment property, investors need a higher cash flow, which many don’t have.
Economists are suggesting that Australia property prices have peaked and will begin to fall. Many are saying that this is a market correction. Macquarie Bank economists have stated that housing prices will fall by as much as 7.5% in early 2016, but will recover by the second half of 2017.
At present, credit growth, auction clearance rates, home prices and settlement numbers are falling, along with the value of settlements. In addition, consumer spending has fallen as out of cycle interest rate hikes see many home owners tighten their belts.
The ANZ and Commonwealth Bank have suggested that they will also tighten property development lending. This is due to these banks having concerns that changing property market conditions will create an oversupply of apartment styled housing when the market cools.
While the initial data makes you want to sell-up and run for the hills, economists are saying that this activity is perfectly normal for the housing market. It is consistently ebbing and flowing, with home prices rising, and then falling.
During the last housing market price correction that occurred in late-2010 to mid-2012, home values fell by 7.4% in many capital cities. But then, gained in value during 2013, 2014 and 2015.
If you’re a property investor who has a number of investment properties, then consider holding onto these properties until the property market makes a recovery and prices increase again. If you cannot afford to hold onto your properties due to interest rate rises, then consider refinancing to reduce your costs and increase your cash flow. The home loan market is very competitive and there are a number of smaller lenders who can offer you investment home loans for around 4%. If, however, you have no other option but to sell, then make sure your timing is right so that you don’t incur a loss.
For first home buyers, fewer investors mean less competition. It also means that as the market cools property will become more affordable. Therefore if you are looking to buy, then the next 12 to 18-months could represent the perfect time to enter the market as median prices are expected to fall.
Are you thinking of buying a home? Then contact eChoice and find the right home loan for YOU today.