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Safe as houses

14 minute read

When APRA recently announced a crackdown on investor lending, The Adviser was flooded with comments from readers – and opinions are decidedly mixed

It didn't come as much of a surprise when the Australian Prudential Regulation Authority (APRA) announced measures to try and rein in investor lending in property – particularly residential property. Such measures had been mulled over for months before any formal announcement was made.

Now though, everyone across the property sector and its related industries, led in no small part by the mortgage broking profession, are speculating as to the effects (if any) these changes will exact on investor lending.

When The Adviser conducted a snap poll recently on the subject, we expected a few dozen responses at best.

However the comments came thick and fast, reflecting a truly diverse range of opinions and ideas. Clearly as a collective, the broking industry has plenty to say on the matter.

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The following results and comments reflect the views of the 768 brokers from around Australia who responded to the snap poll.

Property still attractive

Despite the intervention by APRA, nearly two-thirds of brokers (62.7 per cent) believe investors are unlikely to shift their focus away from property investment, with brokers pointing to everything from Australia’s traditional love of bricks and mortar to the security blanket provided by negative gearing and the relative stability of property as an asset class.

The latter is of particular interest given that the poll was conducted before July’s stock market crash in China and the concerns surrounding the Greek economy.

Indeed, there are many brokers who think investor lending is, if you’ll pardon the pun, “safe as houses”. According to these brokers, the majority of their investor clients have healthy LVRs in place and as such will be unlikely themselves to shy away from property.

Adam Kingston, director at Best Foot Forward Mortgage Solutions, suggests there may be considerably less short-term speculation in property than is widely believed.

“There is no/ very little evidence that would support investors buying property for very short-term gain; the majority of investors are holding property for longer than 12-24 months. The NSW and Victoria stamp duty tax is more of an inhibitor to the speculative short-term investor [than lending restrictions],” he says.

“Australians don’t fear the property market in the same way as they fear the stock market. Very few would have experienced a drop in property prices, unlike the experiences in the stock market. Ultimately, the purpose of the investment will drive the choice of property or equities – for example to reduce tax for accumulators or searching for yield as a retiree.”

Rooma Nanda, director of AllRLoans, comments that “because investment debt is tax deductible … astute investors will not be deterred by it. However normal mum-and-dad [borrowers] who were thinking of stepping into the investment zone may step back”.

Others, however, suggested that a turn of the tide against investment lending will, at least to some degree, be inevitable.

“Any time any regulation is implemented in the finance sector making it more difficult for borrowers to obtain funding it will create a slowdown,” declares Jim Ventrice of CEG Direct Securities.

Cameron Stillman, director of Picket Fence Finance, states that “I am expecting a 15 per cent to 20 per cent decline in loans written from my office. It will be harder to refinance investment loans to a cheaper interest rate now”.

According to director Leanne Watson of Your Finance Angels, any effect would be restricted to the supply side of investor loans rather than demand.

“I wouldn’t necessarily expect to see a downturn in people wanting to invest, however there could very well be a downturn in approvals by lenders because of a tightening of lender policy and serviceability requirements,” she says.

“Some lenders have already reduced and/or removed the negative gearing component of servicing and I can’t think of one lender off the top of my head who allows 100 per cent of the rental income in servicing.

“These things will make a difference in how much people can borrow, which would contribute to a slowdown by default. [However] there will always be people who prefer to have investments in something they can see and touch.”

A different view again is that the move by APRA to reduce investor lending will, over the longer term, actually improve the desirability of property as an investment class by restoring balance between prices and rental returns.

“If less people can invest in property, then obviously the ones that can’t will find other investments,” says Neil Baker, business manager, of Princeville Credit Advocates.

“Also, if the median house price growth slows, as APRA and others want, then investors will compare the new lower capital growth returns to other options.
However, do not overlook the investor benefits of APRA’s policy, and that is with fewer investment properties there will be fewer rental properties, so rental returns will increase. 

“This, however, will not be apparent as quickly until the existing rental property stocks reduce when the investor wants to realise their capital growth.”

Changing lender landscape

One of the major reasons why most brokers do not expect demand for property to cool is the belief that APRA’s crackdown on the banks will simply push a higher volume of borrowers to non-bank lenders.

Nearly two-thirds (63.7 per cent) of brokers said they expect to be writing more investor loans with non-bank lenders in the near future.

Many, such as the managing director of Home Loan Experts, Otto Dargan, hold the opinion that “the overall market for investor loans will slow down, however some broker businesses will benefit as people leave the major banks and look for alternatives”.

Some, such as Lisa Montgomery, believe that while non-banks are well placed to capitalise on the changes, their own lending standards are unlikely to loosen significantly.

“There is certainly potential for those non-banks supplying products through the third-party channel to stand out from the crowd in relation to interest rate and approval criteria.

“That said, I have absolutely no doubt that the non-bank sector will want to remain prudent when it comes to lending practices and legislative requirements. The regulators are watching,” she says.

Loan Studio’s lending expert, Colin Sheppard, gave an unequivocal yes to the question of whether would- be investors would increasingly head to non-banks.

“[I] can’t see how you can give the majors investment lending when it’s clear they can’t accommodate the application based on APRA requirements.

“No question you will see increased investor loans being declined for no good reason as the major lenders’ appetites continue to decrease,” he insists.
“[I] rarely use majors anyway,” says Geoff Thompson, director of Finance That Fits.

Of those not expecting to see more loans going toward non-banks, a fear among lenders of attracting the ire of APRA and a customer preference to deal with the majors regardless of lending standards stood out among their reasoning.

“The big banks are still very competitive with price and our clientele prefer a major lender with the functionality of a professional package,” argues Damien Roylance, partner at iProperty Plan.

Trent Carter, principal of Echo Finance Solutions, says: “The ‘mum- and- dad’ type investors will need to seek out alternative lenders if they want to purchase/ refinance their investments.

“The larger investors who sit within commercial or private banking channels may find it harder to refinance their interest away or get access to their equity.

“But that said, where they are outside of the regular retail banking channels, they are likely to be less impacted by the policy changes.”

The possible windfall of new investor business by non-banks comes as the sector enjoys positive satisfaction rates from both brokers and customers.

“Non-banks seem to be picking up their game as far as service levels etc,” notes Keith Vayne, adviser at Liberty Network Services.

“Some are already cheaper and easier to deal with, so their business should only grow,” adds Sandra Djalo, Real Home Loans sales and operations manager.

Mission accomplished?

Rather than achieve the desired aims of cooling runaway markets, particularly the raging Sydney property market, two- thirds (66 per cent) think the move by APRA will do nothing to take heat out of the booming Sydney property market.

And of the remainder who supported the move in the context of Sydney house prices, a large number qualified their statements by pointing out they themselves don’t live or work in Sydney or have a solid understanding of its market fundamentals.

One of the common justifications for this belief is that domestic investors are just a small portion of the overall pool of buyers pushing prices skywards.

“The Sydney property market is not necessarily being driven by your typical Australian property investor, so why would the proposed/suggested changes affect it? There are many factors, this is only one tooth in the overall cog,” says Mr Kingston.

Foreign investment, a rise in the number of first home buyers purchasing as investors, strong immigration and even domestic migration away from the once booming mining states are all cited by multiple brokers as reasons for the runaway price growth in the harbour city.

“[Not] unless there is a clampdown on foreign investment. I would like to see an accompanying policy to assist first home buyers into the owner-occupied market,” says Smartline’s Jim Ellis.

As would be expected, many also question the prudence of targeting activity in just one or two property markets with national policies.
“It will take ‘some’ heat out of the market, most likely not enough however. Perhaps lending policy needs to be different for each state/ territory,” argues Mr Stillman.

“Implementing unfair and unjust rules nationwide to curb the Sydney market is ridiculous and will slow the nationwide market, making it harder for everyone to buy property except for those people with high worth and high incomes,” cautions Lee Spyda, director of Investor Loans Network Gold Coast.

Kevin Wheatley, managing director of Bayside Commercial Mortgages, was blunt in his assessment of APRA, suggesting that the move will achieve its aim of cooling the Sydney market, but for the wrong reasons.

“APRA have got it wrong. We had consumer confidence in the property market and [a] relaxing of bank lending criteria, and now that is going to create uncertainty with investors because of over regulation. Dumb decision,” he says.

SMSF demand questionable

The biggest impact from APRA’s interventions, according to The Adviser survey respondents, will not be on private investor loans but on people purchasing property using their SMSF.

A slim majority (56.8 per cent) believe there will be a reduction in the number of people seeking to invest in property this way.

A number of those supporting this point of view say that APRA’s measures are misguided and, far from increasing financial stability, may actually destabilise financial markets over time.

“With the pullback of some lenders in this space and the regulatory ramblings about potentially banning it altogether, it will certainly reduce the demand.

“I personally think this is ridiculous, because the whole superannuation sector is so heavily overweight in equities and bonds that having minimal exposure to residential property that exists today is actually not prudent from a diversification perspective,” argues Smartline’s Ian Simpson.

“SMSF lending to purchase property will reduce the income of the financial planning and superannuation managed funds sectors, so they have every reason to push hard for such an outcome.”

Mr Dargan points to a material impact already playing out.

“NAB just pulled their SMSF product; there is a clear movement against gearing property in an SMSF and I think we may see a big reduction in this,” he says.

Others suggest that conjecture and rumours doing the rounds will do more to reduce demand for loans by SMSFs than any official regulatory measures.

“I have already seen less enquires, due to the uncertainty surrounding the future of SMSF lending,” says Ivo De Jesus, director of Sanford Finance.

Yet despite the voracity of some comments, others took a different view entirely, believing APRA’s changes will have little if any impact on SMSF lending.

“[A] higher LVR and interest rates apply anyway,” says Sandra Joseph from Mortgage Solutions Australia.

When it comes to whether reducing SMSF lending is a wise decision, Zac Peteh, director of Mint Equity, suggests not. He believes the risk in SMSF lending is significantly lower than for other types of investment loans.

“There is no discounting whatsoever for SMSF loans currently. The assessment criteria is much simpler, as the borrowing capacity of the fund is assessed in its own right and only needs to be demonstrated through yields.”

But countering this notion is David Dwyer of BBFF who, while believing there will be a slowdown in the SMSF space, suggests this would actually be positive for the broader economy.

“I think that people are being advised by accountants to run an SMSF to feather the nest of the accountant. I am not sure that some people who set up these funds have the ability to manage them properly,” he says.

“I have had the opinion for some time now that some people should spend more time managing their business and leave the management of their money to professionals (by this I mean managed funds). The end result that counts is what’s available in the kitty at retirement and the cost to unravel it (accountants and advisors win again).

“The real test will be when the interest rates start to rise. Should rates go up two per cent in the next couple of years, how many people are going to hurt by owing more than their properties are worth? Values will fall faster than leaves from a dead tree.”

Alter strategy, not abandon it

Overall though, a common undercurrent among broker comments is that APRA’s rule changes may simply have the effect of causing investors to tweak their investment strategy rather than abandon property, or Sydney, altogether.

“Even though some lenders have reduced the max LVR, there are still options to borrow at 90 per cent LVR. There [were] only a couple of lenders that did [lend] to 95 per cent LVR plus LMI for investors, so the fact that they have reduced down to 80 per cent just means that a little more time or amendment to the property strategy,” concludes W Financial’s principal, Michelle Coleman.

“Smaller purchase price or perhaps land and construction to save costs with stamp duty are both options to utilise a smaller deposit from 95 per cent to 90 per cent lending. Or use more equity from their homes. The fundamentals to invest in property are the same. Whether the interest rate is slightly higher or they can’t get a further discount shouldn’t be the reason why they change the asset class they consider to invest in.” 

VIEW FROM THE TOP

It is undeniable that the forecasts for investment lending vary greatly depending on the areas in which brokers operate. Those working within the booming Sydney market have a much different customer make-up and lending outlook in the more subdued markets of Perth and Darwin. Yet even within those markets, microclimates are also at play, making the experience of one broker completely different from that of another on the opposite side of the same city. As such, we thought it useful to compare the views of brokers operating on the ground with those of several lenders of various sizes.

When a regulator starts talking about macroeconomic objectives, you know that smacks of pressure from Treasury and also from the RBA to do something,” declares Mr Way. “I think the elephant in the room is negative gearing. So long as there’s negative gearing, there’s going to be investors.”

Mr Way also suggests that increased regulation of the market is unwarranted given the current frameworks in place.

“I don’t think that property investment portfolios for the banks are in massive risk anyway because the ASIC coverage is pretty well there and investors are long thinkers so if there’s any change in the property market they’ll just sit and wait for the mean distortion to come up to parity.”

In terms of the Sydney property market, Mr Way agrees with the majority of brokers that APRA’s investor crackdown will do little to dampen the market.

“I don’t think the market is reaching anywhere near problematic in terms of what people term as being a bubble. Auction closure rates … indicate that there’s still more buyers than sellers. And … the [fall in the] value of the Aussie dollar all indicate that there’s going to be more inflows into investment at the moment.”

Andrew Way
director, Semper Capital

Mr Daniell says that APRA’s restrictions on deposit-taking lenders means that the non-banking sector has “come into its own”.

“Non-bank lenders are again able to be nimble and provide the answer that the market requires with products and lending policy to fill the gap the banks have left with their overreaction to APRA’s instructions to restrict investment lending growth by increasing interest rates, servicing rates and reducing LVRs,” he says.

“Without being directly regulated by APRA, the mortgage managers and non-bank lenders are able to offer the products and credit criteria that investors have received for the past few years.

“Simple credit criteria like 90 per cent LVR and using actual repayments on other property mortgages are still available.”

As such, Mr Daniell says, brokers should be prepared to change how they do business so as to continue meeting the needs of their customers as the mortgage landscape adapts to the new regulatory settings.

Doug Daniell
CEO, Origin Finance and Walker & Miller Training

NAB's chief of broker relations says the biggest change for brokers is their increasingly important role as advisers to consumers.

“I actually think brokers are in a fantastic position to help with that opportunity because these changes potentially bring confusion to consumers out there,” he states.

“Brokers are in a fantastic position to offer the help and guidance and advice that’s needed to customers to make sure that they understand those changes, to make sure they can make informed decisions and make sure that they get the right deal that they’re looking for when they’re out there shopping around.”

Mr Waldron suggests brokers keep in close communications with lenders and aggregators in order to stay fully informed of changes as they happen.

“Many lenders are making changes and they’re making them in short, sharp announcements,” he says.

“That’s a pretty hard situation, because you’ve got to be able to absorb all that information, you’ve got to be able to analyse it, and you’ve got to be able to use it in the next interview you have with a customer, so that makes it pretty hard times for brokers as well.”

Anthony Waldron
executive general manager of broker partnerships, NAB

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