This week as seen some major players in the banking sector tighten lending criteria for investors on the back of APRA expectations. The Australian Prudential Regulation Authority (APRA), is a government body who oversees banks, credit unions and other finance, super and insurance related industries.
In their wisdom they have made the recommendation to limit the Loan to Value ratio for investment loans. Actually it was for loan applications that stated the intended purpose was for investment, there is a difference. The drop from up to 97% LVR to 80% LVR is a large one and APRA suggests this will reign in the current property boom that is supposedly Australia wide.
(I have chosen not to go into the details surrounding the lack of a national property boom and let’s just run with their assumptions that this is happening.)
This announcement from APRA has created a lot of news in property circles this week; this tends to happen when you speak one day and major banks respond the next. APRA has said this is for the benefit of all Australians and if GFC mark 2.0 hits, it will mean Australia’s housing market will be much more sound and secure.
There are so many things behind the scenes that play out with banks responding so quickly. Not least of which is the requirement to have cash on hand in relation to loan values. This is one of the reasons the banks responded so quickly.
But in all the fluff and turmoil generated by an announcement, how will this play out for you, and are investors as evil as they are being portrayed.
Let’s clarify some facts:
- Sydney is in Australia and not the whole of Australia. Just because a certain market is booming, does not mean the whole country is or will.
- Some areas have an accommodation, shortage some don’t.
- Rents are payed by tenants, and set by the market.
- The majority of investors buy based on return.
Why are these points important to the APRA announcement?
APRA wants to slow the ‘booming’ market and sites investors as the cause. I think this is misguided and incorrect. All the investors I work with, ask a simple question, what is the yield? If investors buy on yield, then how can they be the ones pushing the prices up?
If prices for investors are based closely to rental returns in a certain area, then surely it is the tenants that are really responsible for the price increases. Let’s face it, if the tenants were not paying the rental amount, then investors would not pay the asking price and the property would be worth less.
Hang on; tenants are paying high rents due to most areas having a rental shortage. So if investors are operating in that area and buying property (existing or new) and then putting it up for rent, surely this will create a larger rental pool and give the tenant more choice, lowering the demand and therefore the price.
If that is the case then investors are actually keeping rents and their own prices (based on the rental yield) lower.
So if investors are not pushing the prices up who is?
Owner occupiers don’t buy on yield they buy on emotion. APRA is saying, investors cannot use a 5% deposit to buy a house but an owner occupier can. From where I sit, APRA’s decisions will not make any difference to my investor clients as they either have a 20% deposit or other property for security.
If owner occupiers were not bidding so high at auctions, and paying over the asking price for properties, maybe more people could move from renting to owning. If we had fewer renters, rental yields will drop; investors will become uninterested and stop buying rental properties. Less investors will be active in the property market if there are less tenants to pay rent.
So as you can see the net effect is really nil. The market greatly dictates the supply and costs associated with it. Any excessive regulation will be just that, excessive, and not have a beneficial net effect other than to hurt renters and owner occupiers.
We need to remember that in the property market, investors are the only OPTIONAL players. If the market is not favorable to them they don’t need to be there.
Owners and tenants NEED to be in the market and without investors they actually play a harder game.
APRA has painted investors as the evil players when in reality, human nature makes up the property market, and that is much more difficult to legislate.
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The information contained in this article if the opinion of Scott Northcott and does not constitute financial advice or recommendations for your personal situation.
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