Following the Australian Prudential Regulation Authority's (APRA) announcement back in December that it will take measures to slow bank lending to property investors, it’s now clear that it’s really starting to bite. Bank lending standards to investors have clearly been toughened with lower loan to valuation ratios and tougher income tests. In addition to this, mortgage rates (for mostly investors) from most of the major banks have now increased. As it’s the first hike in mortgage rates since 2010, it’s quite a change in direction for the property market.
What does it mean for property markets?
Expect property investor demand to slow: While the rate hikes for property investors are mostly modest, they come with a raft of other measures to slow growth in property investor lending. It’s likely that it will start to impact and make life tougher for property investors. And, of course, in the unlikely event there is no discernible impact, APRA will likely come down even harder on the banks.
Expect average home price gains to slow: The moves come at a time when momentum in the property market is already showing signs of rolling over, so expect average home price gains over the year ahead to slow to around 5%. Sydney may come in a bit above this, but some cities like Perth will likely see further price falls.
Owner occupiers may find it a bit easier to get into the property market: Owner occupiers now seem to be being favoured by the banks. It’s doubtful, however, that they will simply fill the gap left by investors - so average price gains are still likely to slow.
There’s also a risk that the crackdown on property investors may result in overkill as such macro prudential measures are often hard to apply with precision. In particular, the tougher loan to valuation ratios could hit first home buyer investors the hardest, as they usually have less capital for a deposit, and impact markets that are already showing signs of weakness. Perhaps the banks should be focussing their efforts to slow property investors mainly in Sydney and Melbourne?
It’s still too early to expect an outright decline in average home prices
The bottom line is that it means we have now entered a more uncertain environment for the residential property market. Those investors who can still get finance need to be a lot more cautious as capital growth is likely to slow. This is critical as net rental yields are already very low, meaning that investors are dependent on decent capital growth to make an investment in residential property stack up. However, on the positive side, it will be a better environment for owner occupiers.
More broadly, APRA's intervention adds to the case for another interest rate cut. A slowdown in property investor demand and price gains, particularly in Sydney, is something that the Reserve Bank of Australia (RBA) has been looking to achieve. At this point in the cycle, the RBA certainly wouldn't want to see banks raise mortgage rates for all borrowers. Another RBA rate cut with the banks not passing it on in full is one way to avoid this. So coming at a time when the economy remains sluggish and inflation benign, the upshot of all this is that the chance of another RBA interest rate cut has been given a boost. This means that it’s perhaps still too early to expect a decline in average nationwide home prices, albeit this is already happening in some cities.
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