The Australian property market is beginning to cool. Many property experts suggest that this is due to the fact that the Australian Prudential Regulation Authority (APRA) changed investor lending laws, which has seen many investors exit the market.
Tighter regulations introduced by APRA in 2015, which reduced the number of risky loans that lenders held, appear to be having an impact on the market. Just how this will affect the market long-term though is unknown.
Home loan approval rates for investment property in October 2015 dropped by 6.1% or $832 million. In fact, according to data, investor home loan approvals are currently at their lowest since June 2014. Since July, investor borrowing has declined by $2.1 billion.
Owner-occupier housing loans, on the other-hand, rose by 0.4%. The total number of home loans approved for the month of October dropped by 0.5%. Furthermore, the total value of housing loans declined by 2%.
Financial experts suggest that there may be further declines to come, as what started out as a relatively small decline in investor loans, when new guidelines were introduced, has now turned into a landslide. The hundreds of millions of dollars less on lenders books, due to the changes made by APRA, may just be the tip of the iceberg.
The biggest deterrent for investors, after APRA changes, is the need to have greater cash flow so that they can purchase property. Plus, theres the new home loan classification, which defines homes loans as either owner-occupier or investor orientated. Typically, owner-occupier home loans attract a lower interest rate than investor home loans. Interest rates between the home loan types can vary by up to .50 of a percent, in some cases.
APRA should be satisfied that its new limitations of a 10% growth in investment loans has been adhered to. But, financial experts are concerned that the changes may have a negative impact on the property market and lending figures as a whole.
Another restriction for would-be investors, which is said to be having an impact on the property market, is the fact that lenders have increased the rate of home loans independent of any Reserve Bank of Australia (RBA) decision. The rate hike that occurred in November of 2015 saw as much as .47 of a percent added to all home loans. At the time, the lenders said this rate hike was to increase their capital holdings, which APRA had demanded that they make. But, many investors are now asking whether banks could rise rates independent of the RBA in the future.
While many lenders have said that this rate hike was needed to cover APRA demands, and that it wont be become a regular occurrence, home loan holders are still sceptical. This may also be another reason why investor numbers are declining.
Financial experts are also wondering if lenders will become selective in relation to home loan pricing and rates that they offer investors, and owner-occupiers who have smaller deposits. If this is the case, then home loans for some borrowers may become more expensive.
Under proposed new lending guidelines, lenders that are smaller will have their mortgage risk weights determined by loan-to-value ratios (LVRs). This, in turn, then determines the lenders capital requirement in terms of the amount of money that they will need to hold.
This change encourages lenders to write-up more loans that have a low LVR, rather than writing-up riskier loans that have a value over 80% of the propertys value. Making this change will reduce the lenders risk to loan default, which could have dire consequences to the institution at a later date.
If this new ruling is put into place, then this could represent a new barrier for investors, which may further reduce Australia housing prices. The hardest hit though, will be off-the-plan buyers who have only allocated 10% as a deposit for their purchase. These changes will mean that these buyers will need to find more capital to fund their settlement costs.
In addition, banks may be forced to allocate a greater amount of capital to their investor lending books, as officials have ruled that investor loans are a greater risk as they are dependent on cash-flow generated by the property. If bank capital requirements need to be increased to cover investment loans, then it is highly likely that lender will once again raise investor interest rates to cover their expenses.
Under the proposed ‘new legislation’ mortgages with LVRs below 60% could be risk weighted below the flat rate, or base level of 35%, and in some cases, may go as low as 25%.
This new legislation is still in the review process with the Basal Committee still to hand down its findings. The report is expected to be finalised by the end of 2016. Once handed-down to APRA, the report will be analysed and APRA will then be responsible for implementing any changes to legislation.
Are you seeking to buy an investment property? Then contact eChoice today and discuss your options with an investment home loan expert, so you can save more.