A number of property developers are concerned that some home buyers and investors will find it hard to finance their off-the-plan purchases, which in some cases where purchased some 24-months ago. This is due to the Australian Prudential Regulation Authority (APRA) changing its lending requirements and banks beginning to tighten their lending criteria.
A number of industry experts have stressed their concern at the latest changes by APRA, with many stating that this is cause for alarm throughout the industry as many first-time buyers will not be able to meet their financial obligations under their contract. For many buyers, this means that they’ll lose their deposit as most pay a 10 percent holding-fee or deposit when they sign an off-the-plan contract, and then seek finance for the rest of their purchase as it the property nears completion.
APRA have restricted investment loan lending growth to 10 percent per lender over a 12-month period. This, in turn, is expected to ease any fears of a nationwide housing bubble, and to bring the Sydney and Melbourne markets back into line. APRA have stated that they have introduced their new guidelines so as to reinforce sound lending practices and to reduce bank exposure to the higher-risk home loan segment.
In addition, APRA have specified that the four major banks, ANZ, CBA, NAB and the Westpac will have to increase the amount of capital they hold by 2 percent. This is so that the heat is taken out of the market’s finance, so to speak. APRA have also stated that if a lender exceeds its 10 percent growth in investor lending over a 12-month period, then it may consider further action.
According to the Australian Bureau of Statistics (ABS), investor lending increased to $12.6331 billion in April of 2015. This was a rise of $425.3 million or 3.5 percent on March figures. Not only was this figure higher than previous records, but over a 12-month period lending growth grew by 23.44 percent when compared to figures from 12-months prior.
Changes to regulations for lending by APRA has seen a number of measures introduced by banks to reduce lending rates, these are as follows:
|ANZ||• No rate discount for new property investors without an ANZ owner-occupier loan.
• Investment loans will have a higher interest rate than owner-occupier loans.
|CBA||• 80 percent loan-to-value cap for investor loans.
• The $1,000 rebate for new investors has been removed.
• Investment loan rates have been increased by 0.27 percent.
• New investor discount has been reduced.
|NAB||• Exited investment lending to self-managed super funds.
• Reduced the rate of discount for new investors.
|Westpac||• Stricter lending criteria for investment loans.
• The rate of discount for new investors has been reduced.
|AMP||• Pulled out of investment loan lending|
For off-the-plan home buyers who have signed contracts this may mean they get caught out. This is because most off-the-plan projects take years to complete, and home loan pre-approvals are only valid for 90-days. For any off-the-plan buyer, this means paying a 10 percent deposit upfront and then seeking a loan for the remaining 90 percent of the purchase price at the time of settlement.
Of course, up until a few months ago, this wouldn’t have represented a problem. But now that APRA have changed lending requirements, many of these buyers will find it difficult to secure finance, which means they will default on their contract. If these buyers cannot secure finance within a specified time, then they will forfeit their deposit and they may be sued for compensation.
Compensation is usually the difference between the original agreed value of the property and what the developer actually sells the property for. So if the market value of the property has dropped, then the original purchaser will have to pay the price. In most cases, off-the-plan developments initially sell for above-market values, as a result of the incentives that developers offer. So this may be costly for many off-the-plan buyers.
Let’s look at apartments to see how this can become a bigger problem.
According to reports, there are some 90,000 apartments being constructed at the moment that are off-the-plan and have been sold, but these properties are still waiting to settle. Around 18,000 of these properties have a 10 percent deposit securing their purchase, but with lender criteria now requiring a minimum of a 20 percent deposit, this means 18,000 off-the-plan buyers will need to find an additional 10 percent of the purchase price to secure a home loan.
But that’s not all. If the properties these buyers are looking to purchase are valued by the bank at less than the asking price, then the buyer will have to make up the shortfall. For a buyer who has purchased a $1 million apartment that is valued by the bank at $950,000, and who has only paid a 10 percent deposit, this could mean that they have to find an additional $50,000 to cover the valuation shortfall, and a further $100,000 for the deposit.
What’s even worse, is if an off-the-plan buyer has their property valued at the same price they’ve paid for it, they still are not guaranteed that they’ll secure a loan. This is because lenders are continually changing their criteria to meet new regulations, and shareholder demands.
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