More than one in three residential loans is now for investors. It represents great opportunities for brokers but, as history tells us, a super-charged investor market’s not without its dangers too…
May 2014 appeared to be the month for milestones. The broker channel hit 50 per cent market share, mortgages (as a percentage of credit extended) by the big four hit 60 per cent; while more than one in three of all residential loans in Australia was for investment buyers – an increase of eight per cent from 2013.
Over the past two years investor lending has arguably become the hottest ticket in an already white-hot property market. That represents real opportunities for savvy brokers, although that’s not to suggest standards – either from the lender or the borrower – should be compromised.
Not to overly simplify things, but the advantages of investor lending are: loans are typically large, LVRs are typically less than an owner-occupier loan (due to the existing equity), and the days of quick investor loans – where opportunists would buy, renovate the kitchen and sell for a markedly inflated price four months later – appear gone; resulting in better client retention and no clawbacks for brokers.
In many ways investor lending is following the great generational divide. Gen Ys, priced out of the capitals, appear happy to rent where they want to live and get into the market by investing in regionals. The middle-ageing X-ers are using equity in their own homes for long-term investments. While the boomers – low on super and fast approaching retirement – are (arguably) looking to take more risks.
The Commonwealth Bank’s Home Finance Index Survey released in June confirmed that is was the X-ers and the boomers – those with an existing property – that were most likely to be considering an investment property. CBA identifies these as ‘next home buyers’ and the survey found of those looking to refinance, 58 per cent intended to do it for an investment compared to 42 per cent who intended to upgrade their current home.
It also revealed that ‘next home buyers’ savings levels had hit their highest levels since 2009 (saving 16.6 per cent of their income) and, be they upgraders or investors, the category now represents 86.3 per cent of all home loans in Australia.
Commenting on the results, CBA’s general manager of home loans, Clive van Horen, said: “The strong increase in next time buyers’ savings since March 2013 is evidence this group will continue to play a major role in the residential property market.”
Nothing beats knowledge
Trilogy Finance is a Canberra-based brokerage that has specialised in investor lending for a decade. Far from clients wandering in with a vague idea of wanting to invest, somewhere, company CEO, Ed Nixon, says clients have typically done their homework.
“They start with a buyer’s agent in the particular area they are looking for, so by the time they come to us they’re pretty well educated in what they want to buy,” Mr Nixon says.
“Sure, some of them might be a little off track in their thinking, and we might have to give them a little guidance, but generally by the time they get to the finance stage they’ve pretty much made up their minds.”
Trilogy targets ‘mum-and-dad’ investors who often have multiple properties already. Mr Nixon says, typically, they’ll borrow around 80 per cent, against a security, which means “there’s a lot of loan structuring going on”.
He says another advantage of investor lending is they tend to borrow big. “Yes, they tend to borrow more and it’s not uncommon for them to have over $2 million in borrowings. And that’s why we target investors as a business model; they borrow more because they want their investments to work.”
And what do investors look for in a lender? “It’s not about rates,” Mr Nixon says, “it’s about functionality and structuring. It’s the functionality of the loan, it’s the use of the loan, and by that I mean online banking; it’s also risk management too. Typically we only go to $1–1.5 million per lender. Once you go past that the bank’s personal banker gets involved and you have the very real risk of being cut out of the transaction.”
The quickie loan is over
In the past, a lot of investor lending came with a reputation for being short term. Buyers would buy rundown properties, give them a cosmetic renovation and sell quickly for a profit; or ‘flipping’ as it’s occasionally known. This was bad news for brokers – in terms of trail and clawback.
Yes, it still happens but less so. The director at Perth’s Mortgage Solutions Australia, Colin Lamb, says he still sees investors “out to make a fast buck” but they’re of the minority.
“They’ll buy a $400,000 property, do a quick reno, put some lipstick on it and try and make a fast $50,000,” Mr Lamb says. “That’s not happening as much now, buyers are shrewder; they can see what the investor bought the property for a few months ago from data sites like RP Data and so there’s a lot less of that stuff going on now. It’s actually not a market I target and obviously with clawbacks etc. there’s no real advantage in dealing with that sort of client.”
Mr Nixon agrees Trilogy baulks at working with investors looking at flipping. He says: “Sure, some investors are looking to make a fast dollar but we’re not really interested in working with them. We want strong, long-term clients who will be on the books for a long time; any business model wants clients for a long period of time.” Mr Nixon adds that the average loan life of a Trilogy customer is now nine years.
Yet, that’s not to say speed isn’t imperative in this business. Mr Lamb says a lot of Mortgage Solutions’ business is ‘off-the-plan’ and clients are looking for lenders with fast turnarounds. “They want a lender that can settle in 10 working days,” he explains. “Once the title is issued you’ve got 10 days to settle and there are a lot of lenders out there that don’t perfect their documentation until the titles are issued, which can lead to delays in settlement and cause the client to incur interest penalties.”
Mr Lamb adds that he’s worked hard on his relationships with developers and the ‘off-the-plan’ business very often “naturally falls in your lap”.
However, he’s quick to stress not all lenders are fans of all investments. “Some lenders aren’t big on lending for smaller, inner-city investments or short-term stay accommodation, a lot of lenders have pulled away from them or are reducing their LVRs to minimise their risk and exposure,” he says.
There’s advice and there’s ‘advice’
One of the murkier areas of investor lending – particularly for novice clients less certain about where they want to invest – is exactly how much ‘advice’ a broker can reveal.
This would certainly be the case for a broker acting on behalf of a developer where commissions were paid. When it comes to NCCP regulations, mentioning to an investor client a particular suburb may be ‘hotter’ than another and whether that constitutes actually advising the client remains a very grey area.
Mr Nixon says his customers are very well educated on what and where they want to invest and so by the time they walk into the Trilogy office he provides “strictly mortgage advice”.
“We may provide a little bit of clarity over what they are looking at doing,” he says.
“We might add some commentary like ‘that market’s very hot at the moment’; we challenge them a little bit, but we never give advice on where they should buy.”
Likewise, Mr Lamb says that any investor information Mortgage Solutions Australia provides its clients is always of a general nature.
That said, he admitted that his clients were becoming far more savvy and far more educated on all things investing.
“There’s such a wealth of information out there – websites, magazines, data, investor information – they’ve done all the groundwork before they come and see us,” he says.
FBAA’s CEO, Peter White, says the advice to brokers when it comes to advising investor clients is – if you aren’t qualified to give it then say nothing at all. Brokers also need to be aware of any investment advice that may inadvertently go out via their marketing, on mail-outs or appear on their websites, Mr White said.
“It all depends on what’s actually said,” Mr White says. “It’s about how far you go down that path. If a broker stops short of actually giving the advice, if the broker recommends a third-party – a real estate agent or a buyer’s agent – then that’s okay. But if a broker tries to be that professional and they’re not licensed to do it then you’re going to get yourself into a whole heap of trouble.”
And that “trouble” could be anything from a delisting, a visit from ASIC or a threat of jail term.
“A broker needs to be very careful; any hint they’ve influenced a client when they weren’t qualified to do so and the deal goes belly-up then the broker is opening themselves up to things turning pretty ugly – from being sued right through to a jail term,” he said.
A cooling market?
It’s the big question – have investors missed the boat as markets look set to cool? According to RP Data’s senior research analyst, Cameron Kusher, if you wanted the super-hot Sydney market and it’s slightly cooler Melbourne cousin, then you’re arguably two years late.
Mr Kusher’s other fear is that investors are solely thinking short term and could pull out of property if other investment asset classes improve.
“I think that’s a very real risk at the moment,” he says. “Housing has always been a long-term asset class and at the moment investors are simply shopping around to park their money somewhere they can get a return; but are these investors in there for the short or the long term?
“If it’s just for the short term, then yes, you could very well see a huge amount of investor stock coming onto the market as the market’s slowing.”
Mr Kusher also warns – although he stresses it’s highly unlikely – that APRA could cap the amount of investor lending done by the banks to cool markets, particularly in Sydney and Melbourne.
“I don’t think they’d go ahead with it, but it’s certainly something they could look at,” he says.
But for now, Mr Kusher says “rates are low, people are looking to invest, people are keen to borrow, so that means good news for brokers”.
Mr Kusher also warns cheap money could naturally lead investors to over-borrow. “People may have thought their borrowing limit in the past was $500,000, but with rates so low I’m certain there are some investors thinking ‘Hey, what’s another $50,000 over 25 years?’
That’s certainly a trap people could fall into; whether that’s from brokers or banks or just a lax attitude by the borrower because borrowing’s so cheap at the moment,” Mr Kusher said.
However, Mr Nixon still sees plenty of opportunities for investors willing to look further afield. “People say the market’s hot everywhere, and, sure, the Sydney market is hot, and some pockets of Brisbane and Melbourne, but not everywhere else,” Mr Nixon says. “Canberra is actually quite soft at the moment, I still think there’s plenty of opportunity there.”
While Mr Lamb agrees any rate rise would temper the market, he cites the dichotomy in the industry at present where economists are predicting rates will go up when, in fact, most lenders are actively cutting them.
“It is all about responsibility,” Mr Lamb says. “It’s about borrowers behaving responsibly, brokers behaving responsibly and lenders too. There’s some very good lending practices by the banks, which has made sure clients aren’t taking on too much debt. Responsible lending practices are going to make sure the investor market remains pretty strong into the future.”
A word from CBA: general manager of broker sales Sam Boer
The Year 2014 could well turn out to be the year of the property investor. Recent reports show that this important segment has grown to 40% and in some states, even higher.
The cooler months have seen a cooler property market, but underlying demand remains strong as auction clearance rates, especially in Sydney and Melbourne, stay above long term averages. A recent report from RP Data shows that rents have not kept pace with property price growth, and yields are falling as a result.
If anything, the current state of the market leads to more questions such as: Will these trends continue? Are investors concerned about the recent price increases in our two largest cities? Are investors looking to “cash in”?
In this feature we talk to brokers who are targeting the investor market and they share with us their experiences on how they capitalise on the opportunities this market segment offers.
CommBank has a full range of flexible lending solutions for property investors. Many of the brokers featured here are experienced in the investor segment and have found the CBA solutions ideal for customers wanting to build a property portfolio.
Where to for negative gearing?
Nothing stirs the investor debate like talk about tax. Here, leading housing expert Dr Andrew Wilson from Domain Group gives his opinion on one of Australia’s more controversial concessions…
Australia has produced – by good luck or good management – one of the most robust and resilient property markets on the planet; even the universe.
And part of that reason is the mechanism is finally balanced between the aspiration between home ownership and the aspiration for home investment. Those two things are inextricably linked and provide the balance going forward that maintains that resilience and robust underlying nature of the Australian property market that keeps ticking over, even through the bad times.
Up to 50 per cent of what happens in our housing markets [are because of] investors and investors provide our private rental stock.
Gone are the days when we built Soviet-styled towers for public housing, when those who were marginalised from home ownership had to rely on the government to provide them with housing.
The private sector now does that, and what’s part of the equation for them providing housing is the risk. As an investor, there are no guarantees that you’ll get your tenant, you’ll get your yield, you’ll get your cash flow, or your capital growth.
As a response to that investors are offered tax advantages and so they should be. Where would people live without private investment stock?
If there’s no incentive the property market would be dead; investors would take their money to equity markets or gold or stamp collecting!
The argument against negative gearing is nonsense; sure they might tinker with it at the edges, but it’s here to stay.
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