Is the new lending criteria proposed by APRA a viable solution for investors?

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Is the new lending criteria proposed by APRA a viable solution for investors?

There is much talk in the property investment sphere on the new changes proposed by the APRA (Australian Prudential Regulation Authority) to cool the overheated property market in Sydney. Although the changes are widespread across all capital city markets, Sydney is singled out as the culprit with its recent  double digit growth two years running versus most of the other cap cities who have performed at stable rates. In the case of Hobart and Darwin dwelling values have fallen 1% & 2% respectively however investment criteria has been tightened across the country effectively putting a strain on all investors with the goal that property prices move south and stabilise.

APRA is tasked with overseeing a number of lending institutions within the financial sector to ensure stability, efficiency and competition within the financial system. The decision to tighten restriction on investor loans was evidently to cool housing market conditions which have run into overdrive as interest rates have fallen over the past few months to record lows amidst an uncertain global and domestic economy.

The changes to lending criteria do vary across the country with NSW investors particularly targeted with a limit of 80 percent of the property’s value being the cap of the mortgage. Elsewhere the limit is 90 percent which is clearly aimed at stunting the growth seen in Sydney. The case is different for owner occupier loans as the new loan to value maximum has been re-set to 95%. Other changes include a reduced discount for new investors as well as removing other incentives from each of the big four banks. The following changes are to be implemented by each of the big four banks:

ANZ

– No interest rate discount for new property investors without an ANZ owner-occupier loan

COMMONWEALTH BANK

– 80pct loan-to-valuation cap for investor loans (Bankwest)

– Reduced rate discount for new investors

– Removed $1,000 rebate for new investors

NAB

– Reduced rate discount for new investors

– Exited investment lending to self-managed super funds

WESTPAC

– Reduced rate discount for new investors

– Stricter loan criteria for ‘non-resident’ home lending

While it may be harder to secure a loan for investment there are a few advantages with interest rates likely to stay down, property prices to stabilise and the risk of any downturns being less severe, at least that’s what APRA hopes. However the strategy does face many criticisms particularly from a number of real estate industry bodies such as Property Investments Professionals of Australia (PIPA) and the Property Council of Australia (PCA). The criticism mainly stems from the notion that the strategy does not provide any long term solutions and simply acts as a “Band-Aid” across the entire market rather than address the issues occurring in Sydney and Melbourne. PPI Advice director Josh Atherton also provided comments on the decisions by APRA. “The issue is not simply with the level of investment within the market but more so the level of speculation and poor decisions on the part of investors.

Care needs to be taken when investing in such volatile markets and what we are seeing in Sydney and Melbourne especially, is a high level of speculation where many uneducated investors are taking advantage of booming conditions and literally taking a gamble with their money banking on the idea that the property market will not fail. Of course the market will not continue at its current growth rates and will eventually come back. Its those key decisions that will define their ability to benefit or fail with their investing in terms of what they have purchased, where and over what timeframe”.  He noted that many investors may look to step back (especially in Sydney) and be more strategic in their next investment decision so as to try and have some science predicting where the the market cycle is at. He goes on to say “I have personally seen investors gravitating up to Brisbane for more affordable and safe investments, but still paying more than $100,000 over the market prices”.

This is due mainly to their lack of knowledge or time to educate themselves on the subtle nuances of each property market. This bubble mentality that we see often, seems to be sporn by the average Sydney investor who can be insulated in their bubble and not fully understanding what sits outside of their own market. “Many investors will experience some huge losses with this sort of mentality…… but we believe, when done correctly, there are many ways investors can continue to experience huge windfalls” he said.

“The most important move for the APRA, is to not simply restrict investment loans but to work together with other authorities such as the RBA, ASIC and government bodies to ensure investors have the education necessary to make decisions which will benefit both them and the market. Property advice needs to be regulated and scrutinized with the appropriate education and qualifications put in place to avoid the unscrupulous behaviour of many individuals claiming to give investment advice when they are simply taking advantage of uneducated, overexcited amateur investors.”

While restricting lending criteria may have some noticeable effects on the numbers of investors transacting, particularly smaller scale investors, little is likely to change in the scheme of property prices. A more long term sustainable solution should be to continue to refine and regulate advice that is given without the appropriate licenses, qualifications, experience and agendas.

(Source for Big 4 bank lending changes: Moody’s)

By | 2017-04-07T14:38:32+00:00 June 24th, 2015|From the CEO, Market Updates|Comments Off on Is the new lending criteria proposed by APRA a viable solution for investors?

About the Author:

Josh Atherton is the founding director of PPI Advice and one of the countries leading property investment experts. He holds a full real estate licence in VIC, NSW, QLD, WA and NT and is constantly sought after to provide expert commentary when it comes to anything relating to residential property investment. An avid, experienced and sophisticated property developer himself, he specialises in helping investors realise their financial independence using property as the main asset class.