With the escalation in investor lending activity in recent years, many mortgage brokers would have been relying on investors to grow their loan book – so what’s happening with that segment of the market and what economic forces could change their dominance? The Australian Lending & Investment Centre’s Jason Black reveals what’s around the corner.
Despite growing pressures, property investors will once again be turning to bricks and mortar, thanks to the volatility of global share markets and the ASX dropping to 2013 levels.
However, the road ahead should be tread carefully as the opportunity to seize a bargain or ‘beat’ the market could be a costly one without the right advice.
The key challenges ahead for property investors include:
Ongoing foreign investment
With the Australian dollar at just over US$0.70, our market continues to be attractive to foreign investors, which means competition at auction will remain brisk.
This comes despite changes to foreign investment laws last year that sadly added up to little more than ‘extracting a few more coins from the ashtray’ and have done little to materially dampen foreign investment or the purchase of owner-occupied properties.
Australian investors keen to avoid a bidding war – and one which they are unlikely to win – would be best served turning to a buyer's advocate and purchase properties well before they go to auction.
Oversupply of investment property looms
Given the number of cranes dominating the skylines of many of our capital cities and the recent availability of secure – but cheap – finance, oversupply is set to be a major issue in the coming years. Those affected will be investors and home owners buying off-the-plan properties, and they will begin feeling the impact of their poor investment decisions in late 2016 and through to 2017.
Coupled with ASIC and APRA changes, this will place enormous pressure on rental yields and valuation prices at settlement time, with buyers needing to kick in additional money or equity.
For many buyers, they could be better off walking away from their deposit than being lumbered with a poor-quality asset for the next 10 years.
Impact of APRA/ASIC regulatory changes
These major regulatory changes, such as servicing sensitisation and the introduction of tiered interest rates (which have tightened bank lending to property investors) will have a knock-on effect well into the rest of 2016. While I will always support a safer environment for Australians to both invest and lend in, the changes will mean that it is tougher for new and existing investors to expand their property portfolios, making it more difficult for those looking to become self-funded retirees to grow their wealth and retain their independence.
Ironically, these changes come at a time when the federal government is facing a deluge of Australians entering retirement.
Tiered interest rates
The move last year by banks to a two-tiered interest rate structure saw many investor borrowers paying interest rates between 0.27 and 0.60 percentage points higher than those charged to owner-occupiers. These additional costs are likely to be passed on to tenants rather than being borne by the investors in Victoria and New South Wales, but may see rents fall in Western Australia – a market that is already under pressure with the mining boom now over.
This will remain on the agenda as the government looks for pools of revenue to fund its $44 billion deficit.
As we all know, negative gearing is the practice whereby an investor borrows money to acquire an income-producing investment property, expecting the gross income generated by the investment (at least in the short term) to be less than the cost of owning and managing the investment and so on. Usually, investors entering this arrangement expect the tax benefits and the capital gain on the investment on disposal to exceed the accumulated losses of holding the investment.
What the government will discover is that negative gearing is not awash with the rivers of gold it had hoped. The reality is there are few people on the top marginal tax rate in a position to truly benefit from this property strategy.
Also, 70 per cent of all investment property owners own just one investment property!
Changes to the negative gearing laws could have a harmful and far-reaching effect on the entire property market – from buyers to sellers, developers and even those who rent. We could see the knock-on effect in the ancillary industries that supply the construction industry, resulting in the devaluation of the property market and a reduction in net wealth as pressure applied to the investor market begins to affect the more than two million investment property owners in Australia.
It should not be forgotten that property has been a key strength in an economy facing challenging headwinds, so it absolutely needs to be in good shape to help secure our future.
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