The investor lending crackdown may have unpredictable consequences

In all the talk about the effect that APRA’s restrictions may have on the property market, there are a few things that strike me.

First

There is a real danger in applying a national remedy to a problem that is not national.

Everything is not same-same across Australia. There is no boom evident in most places outside Sydney and Melbourne – and, even within those markets, it’s not in all suburbs.

There should be more engagement with financial and real estate industries before decisions are reached.

Look what happened in New Zealand when its Reserve Bank introduced lending restrictions on people buying houses in Auckland. It didn't really have an impact where they wanted it to, but it did cruel the first home buyer market.

Don’t strangle a market when and where you don’t need to. Markets in Brisbane, Adelaide, Perth and Canberra, let alone Australia’s provincial and regional centres, are not in the same ball park as those Sydney and Melbourne markets that many commentators focus on.

The majority of markets don’t need to slow down. Some are already deflated.

In CoreLogic’s September 2015 Housing Market & Economic Update, I see:

  • Sydney, where home values are consistently trending higher, the median house price is $900,000 and median apartment price is $670,000
  • Melbourne having the strongest quarter of any capital city, a median house price of $620,000 and median apartment price of $475,000
  • Brisbane with moderate capital growth, a median house price of $482,400 and median apartment price of $382,200
  • Adelaide with a slowdown in annual rate of value growth, a median house price is $430,000 and median apartment price of $350,000
  • Perth with declining home values, a median house price of $520,000 and median apartment price of $415,500
  • Hobart with values lower than five years ago though on the rise, a median house price of $330,200 and median apartment price of $280,000
  • Darwin with a sharp decline in home values, a median house price of $580,000 and median apartment price of $450,000
  • And Canberra with falling values year-on-year, a median house price of $587,800 and median apartment price of $415,000

Look at the market differences – the different stages they are in their property cycles – and these are just the capital cities!

APRA’s mid-August data demonstrated strong and accelerating growth in investor and interest-only lending, but its latest banking statistics released at the end of the month showed some suggestion that investment lending growth was cooling.

Property market activity – anywhere – is underpinned by supply and demand. This is effectively what moves markets through their property cycles.

Undoubtedly there will have to be a shift, with some markets moving past their peak. Others will be on the upswing – that’s the way things work. The danger is in taking a statement like ‘Property prices to fall’ and thinking it applies to every market, every micro-market, in Australia.

Second

It is not unusual to see stock market corrections.

What occurred in August was a well-timed caution that things are not set in concrete.

Will there be a shift in where the investor puts their money? The options are investing in a nervous stock market, restructuring superannuation investments, putting cash in the bank or buying property.

While the stock market investor will be looking warily around to see what and when the correction is going to be, and the cash investor today is not having a good time of it with very low interest rates, the real estate investor needs to keep in mind that in order to gain you need to be able to sit.

If you can invest in property, be in it for the long haul.

Property market growth is something we are likely to see in most parts of Australia.

The volatility in the stock market right now is making property a much safer investment strategy.

There will be no major collapse in the next few years, especially while interest rates are low, employment prospects are good, there is a backlog in construction of new property and our dollar is attracting foreign buyers.

Third

Banks don’t make money by keeping money in the bank, they make money by loaning money to investors.

Banks are in the business of making a profit. When something threatens the profit margin, one of the things they can do is pass on their losses to consumers.

With the APRA measures, the big lenders’ exposure – their need to hold capital – has almost doubled. Because they have to hold more, they can’t make as much money; they need more money so they can continue to lend. What are the options? They can increase the cost to the investor in order to meet their targets; they can raise capital from their investors by issuing additional shares, as the Commonwealth Bank is doing; or they can pull out of the investor market altogether, like we saw AMP do.

The heat in the inner-Sydney and inner-Melbourne markets led to APRA’s involvement in limiting investor lending, with the flow-on effects on banks and the strategies they subsequently employ.

There is still no guarantee that this will have an impact on the Sydney and Melbourne market heat, but it could mean there is less available for lending into other markets. So it's possible we will see a widening of the gap between Sydney/Melbourne and the rest of the Australian markets.

Fourth

As diverse as property markets are across Australia, property consumers are equally diverse. How might different groups of people be affected?

There are some areas where first-time buyers can’t afford to buy a property where they want or need to live, so they become investors to enter the property market. These people may be caught out, or caught short, by having to come up with a greater deposit.

Lending restrictions will have little effect on the massive influences of the Asian market because these buyers usually don’t fall into the lower-deposit category.

APRA’s rulings may produce opportunities for some.

Cashed-up property owners who can draw on good equity may buy up investment property. APRA’s June quarter figures suggested an increase in the number of borrowers using deposits of between 20 per cent and 40 per cent, accounting for half the new housing loans for that quarter.

If we do see a slow-down in the rate of property price growth in some Sydney and Melbourne suburbs, financially able buyers may make a move upwards and free up more affordable property for first home buyers.

With the pricing differential between the heated markets in Sydney and Melbourne, the traditional swell of migratory property buyers may be even more apparent.

The south to north trend takes property buyers to markets such as northern New South Wales, the Gold Coast and Sunshine Coast, and up to North Queensland where property prices are more moderate, yield is good, and capital growth predictions are healthy, which frees up investor capital to put into superannuation or more property.

The rules haven’t changed, though, when it comes to buying well-located property close to transport, good job availability and having a growing population. And buying for investment potential rather than because you would want to live in yourself.

Where under supply is a recognisable problem, perhaps giving more support to developers and builders would better control pricing than would curbing investor borrowing.

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Michael Davoren

Michael Davoren

Michael Davoren has been in real estate for around four decades and held senior management positions and directorships with major real estate groups in Australia and New Zealand. Michael has also held leadership positions in the industry, having been president of both the Real Estate Institute of Queensland and the Real Estate Institute of Australia. He was an executive board member of the Chicago-based International Consortium of Real Estate Associations for five years.

Michael is an Australian Property Finance (APF) director, a New Zealand Property Finance (NZPF) director and a director of SQUIIZ.com.au.

He co-owns RE/MAX Australia and RE/MAX New Zealand.

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