With lenders such as ANZ and CBA tapping investors with new share offerings in order to meet higher capitalisation requirements, could APRA’s ‘magic fix’ on speculative investment be drawing investors away from property and back to the share market?
All of us here at The Adviser have been closely following the changes to investor lending and bank capitalisation imposed by the banking regulator, and the debate this has sparked across the mortgage market about the ramifications of such moves.
Three of the most commonly asked questions doing the rounds at present are:
Just what exactly do industry heavyweights think of the measures and their potential impacts on the broking sector?
Are real estate networks starting to see lower numbers of investors coming through open houses and bidding at auctions (which will impact on future investor-loan writing for brokers)?
And just how is APRA responding to criticism of its measures and lack of industry regulation?
Amid the somewhat hurried moves to reduce speculative lending by property investors, questions are now emerging about the ramifications such measures could have on the broader housing market, and with it the national economy.
The Australian Financial Review, for instance, published a story suggesting that around 90,000 investors – many of them first home buyers – could lose the deposits they have paid on off-the-plan properties if they are unable to secure finance for the remainder of the purchase price.
Brokers don’t seem overly concerned by this particular example. The Adviser spoke to several who suggested that even if property prices stagnate from now on, capital growth between now and when the deposits were paid, combined with probable growth in rental rates, should mean most, if not all, these investors will still be able to secure a mortgage.
But first home buyers, who are increasingly stepping onto the property ladder as investors in order to simply get into the market, are the ones likely to suffer most, given the higher LVRs, interest rates and reduced rental income considerations demanded by the banks.
The four majors, Heritage Bank, Suncorp Bank and BOQ are among those lenders to have changed their rates on a range of products since late July. Most combined rate hikes for investors with cuts for owner-occupiers, creating, in effect, a two-tier lending market.
AMP Bank went a step further, putting a freeze on all new and existing investor loan applications until “later in 2015”.
“The whole state of affairs is very confusing for borrowers,” says John Kolenda, managing director of 1300HomeLoan.
Of course consumers aren’t the only ones caught up in the confusion.
Justin Doobov of Intelligent Finance – who was named Residential Broker of the Year at this year’s Australian Broking Awards – notes the situation is making him nervous.
“It’s, as they say, a moving target. It does make me a little bit nervous to see what… the fallout from it [will be],” he says.
“Our business has been around for so long that our clients are loyal. However I am nervous as to what it’s going to do to the industry as a whole, because if that affects investment properties and it makes buyers nervous, it’s going to affect the whole market. So we’re treading cautiously every day.”
Hinting at widespread frustration at APRA’s lack of industry consultation before imposing its measures, Mortgage & Finance Association of Australia (MFAA) CEO Siobhan Hayden noted that the changes have far-reaching implications for consumers and the broader economy.
“There is no doubt that the numbers indicate the volume of loans in the investor market versus the owner-occupier sector show a widening gap. APRA’s key concerns are to ensure banks maintain a prudent approach to lending practices, particularly in the environment of increasing/high house prices, and increasing household debt/expenses,” she explains.
However Ms Hayden says that in the event of a serious economic downturn in Australia, it would be salary-supported owner-occupiers who would present the greatest risk to banks rather than investors.
Questions of effectiveness
According to CoreLogic RP Data, rents remained fairly stagnant nationally in the year to July, climbing by just 0.9 per cent – the lowest growth on record according to the group’s head of research, Tim Lawless.
“Rental appreciation continues to be sluggish and can be largely attributed to the ongoing boom in dwelling construction across Australia’s capital cities accompanied by record-high participation in the housing market from investors,” Mr Lawless says.
However the country’s hottest property market – Sydney – posted the highest increase in weekly rents of any capital city, rising 2.5 per cent, suggesting investors are simply putting up rents to cover higher mortgage costs.
There are concerns too that APRA may be killing what little growth was present outside of Sydney and Melbourne.
Then there are foreign investors - from whom Century 21 Australia chairman Charles Tarbey expects to see even greater inflows of capital.
“APRA and the RBA are, in effect, at odds with each other – while one is holding rates low to stimulate needed parts of the economy, the other is trying to manage the fallout created by such low rates, and that fallout can be seen in the immense amount of borrowing that is taking place,” he argues.
“Over the next 12 months, international investors will play a greater role, not just because of the interest the world has in owning real estate in Australia, but also due to the fact that domestic investors will be progressively squeezed out due to a stricter borrowing environment.”
Investors still active
At least so far, estate agents are reporting little if any impact on the volume of investors scouting for property.
“Property investors appear undeterred that Australian banks are shifting the goal posts on their investment lending policies and pricing in response to APRA’s limits on property investment loans, with Raine & Horne offices in many markets still seeing a significant volume of investor activity in 2015,” says Raine & Horne executive chairman, Angus Raine.
His sentiments were echoed by the heads of other real estate networks.
“There has been a very slight drop of investors of late, but certainly not material at this stage anyway,” notes McGrath Estate Agents CEO John McGrath.
Mr McGrath adds that he doesn’t expect a major shift away from residential property toward commercial premises.
“Commercial property will definitely offer better rental yields, as it always has, but it doesn’t traditionally offer the same capital growth as residential property.
Also in this day and age, where technology is creating some uncertainty around the future of retail and commercial property, small investors often run with the proven lettability and capital growth profile associated with residential property.”
Mr Raine says that at the end of the day, investors will look for whatever delivers the best returns and most attractive entry price.
“Regardless of property type, savvy investors will still shop around to find the most suitable loan. If your current lender doesn’t come to the party with a competitive rate and the break costs are not prohibitive, then it might be worth seeking a more competitive rate elsewhere,” he says.
APRA stands firm
APRA has faced criticism that rather than well-considered policy, its approach has been nothing more than ‘We need to do something, this is something to do, let’s do this now’.
Yet APRA’s chairman Wayne Byres recently told the federal Inquiry into Home Ownership that its investor crackdown is a success in terms of its 10 per cent cap on investor lending growth.
“Actual growth remains marginally above this level and may well be so for the next few months, but we have seen clear moderation in the previous strong upward trajectory, and the large lenders have all indicated their intention to move within this benchmark,” he said.
“This has generated a range of responses over the past month or so, including, most recently, differential pricing for owner-occupiers and investors.”
However the effectiveness of the regulator’s other move – increased capital requirements for the big four plus Macquarie Bank – remains to be seen.
“The extent to which those banks are capable of repricing their business in response will provide an interesting insight into the extent to which the largest banks are subject to competitive pressure from the range of other housing lenders present in the market,” Mr Byres said.
Brokers the winners?
If Westpac CEO Brian Hartzer is to be believed, brokers shouldn’t get too comfortable just yet.
“I think you will find the regulators are going to be increasingly asking questions about sales practices in mortgage broking,” he told delegates at Aussie’s bi-annual conference.
“They are worried about us [the banks] from a responsible lending point of view and are already saying to us, ‘So the broker is your agent in this transaction; how have you assured yourself that what the broker is telling you is correct?’”
Yet given the tight frameworks and compliance requirements within which brokers already operate, there may be little to worry about. Indeed many key figures in the mortgage market are toasting the increasingly central role brokers are playing in property transactions, linking confused buyers with an increasingly divergent lender base.
“I was looking at it when it first started [thinking] ‘Well this is a bit of a threat’. Then I thought ‘Gee, if I can’t go to my bank and borrow a bit of money, who am I going to turn to?’ So it’s guaranteed that the broker industry should jump an extra 10 per cent market share because of these changes,” Origin Finance CEO Doug Daniell tells The Adviser.
“This hopefully will [also] allow some of the smaller lenders to be able to get some more market share back, which is always going to be good for an industry isn’t it? To be able to get a bit more diversification.”
Paul Liccione, eChoice’s general manager of sales and distribution, agrees that brokers will be the big winners.
“An event of this nature highlights a prime reason brokers exist. That is, to deliver better quality outcomes for consumers in relation to the choice of their mortgage product,” Mr Liccione says.
“And with access to a wide variety of products from lenders both large and small, brokers are in the box seat to deliver even more value to borrowers as the playing field changes.”
Mr Liccione adds that brokers already account for more than half of mortgage system growth, which can only continue given consumer confusion about the changes currently taking place.
Property, though, is unlikely to fall out of favour, according to Mortgage Choice CEO John Flavell.
“When we asked potential investors whether or not now was a good time to invest, more than 70 per cent said yes, which goes some way to explaining why so many potential investors are not deterred by the spate of pricing and policy changes,” he says.
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