Lender tightening effect on the Australian Property Market

[albanga]

Hi All,

There is a lot of discussion and several threads about the general lender tightening but I am keen to explore this from a big picture outlook on the Australian Property Market. What are peoples thoughts on how this will effect the different markets in the short and long term (3>24 months).

Some questions I have:
How long until this will have an effect on property prices? I can see Sydney and Melbourne coming to a halt which could see other markets benefiting. Question is how long?

How can investors best position themselves to capitilise on these changes?

 

[datto]

This govt has created a credit squeeze because they don't want the average Joe to make easy money. Afterall everyone cannot be rich, it's not good for business.

It's like when you go to the carnival and before going onto a ride you have to stand next to the height chart......sorry bud, you're too short, come back next year.

Well, banks now have a set standard and property investment by the small players is being choked. With less players I can only see rents going up.

 

[Beanie Girl]

With the tightening in lending - I think investors will still want to play in the property markets - there may be a resurgence of interest in the cheaper markets of every capital city or regional areas - money has to go somewhere - banks still have to/want to lend

As renters find it harder to get into the market as first home buyers, more renters will stay in the rental market joined by new renters, coupled with the reduction of investment properties for rent - rents will rise across the board

We may see 'rent auctions' taking place

I don't think Sydney and Melbourne will come to a grinding halt, the focus in the areas to invest may change to the cheaper suburbs rather than the more expensive suburbs

Hmmm, another prediction could be that one and two bedroom units and bedsitters become popular to invest in - in the capital cities and suburbs

Okay, that's all for my crystal ball gazing tonight!

 

[JameZ]

We may see 'rent auctions' taking place

I'd love to see this happen hahaha

 

[Ed Barton]

***** and wind!!

 

[mugen]

As renters find it harder to get into the market as first home buyers, more renters will stay in the rental market joined by new renters, coupled with the reduction of investment properties for rent - rents will rise across the board

We may see 'rent auctions' taking place

My personal thoughts are the opposite. The changes to lending standards now favor PPOR loans which will make it easier for the fhob/OO

In effect, I think there are less renters, not new renters.

There is a thread about rent dropping - http://somersoft.com/forums/showthread.php?t=108815

In the recent times when I was eyeing for the rental market on realestate.com.au advertised rents decrement between $5-$30 within days and still no takers.

 

[HiEquity]

I can't see much impact on rents. The major impact is going to be on prices in areas with a high proportion of investors, which are predominantly the cheaper suburbs and some regionals. Having said that, the proportion of investor sales is up to 50% now across Australia so I expect this to have a fairly widespread impact - wherever there were lots of investors buying there will now be quite a lot fewer.

Can OOs pick up where the investors will leave off? I suspect in many of the nicer areas they can and will courtesy of the combination of lower IRs and the lending balance being tipped in their direction. In the cheaper suburbs the required deposits etc (eg WA have just reduced FHB concessions for existing stock) will keep many FHBs out of the market anyway, so it's hard to see much saving those markets - with both FHBs and investors being curtailed the result isn't hard to predict!

I suspect there will also be some relatively minor impact on CIPs as a lot of small scale CIP investors rely on redrawing equity from RIPs, which just got a lot harder. But most CIP investors have excess cash they don't know what to do with in super or elsewhere and CIP lending has always been more conservative anyway. There may be a resurgence of interest in CIPs now that RIP lending terms aren't looking much better? Hard to tell...

We live in interesting times! Should push yields up a bit but only as a result of prices dropping - not a bad thing for the cashed up investor. Pretty crappy for the young upstart though....

 

[hugh72]

Biggest effect will be on otp units in our capital cities CBDs IMO. The current high level of building activity is likely to subdue rents until an equilibrium is reached

 

[Rolf Latham]

sustainability

ta

rolf

 

[tobe]

Most 'investors' the banks do are actually upgraders who don't want to sell their old place yet, or want to keep it as a rental.

All of these new rules wont effect these people at all. In the end there isn't anything stopping these people from changing their mind and renting out their new purchase anyway.

I don't think the recent changes will have any effect on the market. The vast majority of investors own 1 property each, these changes wont make any difference to them.

 

[Peter_Tersteeg]

Some questions I have:
How long until this will have an effect on property prices? I can see Sydney and Melbourne coming to a halt which could see other markets benefiting. Question is how long?

How can investors best position themselves to capitilise on these changes?

Interesting questions.

The real question to ask here is, as a result of new lending restrictions, how many of your own properties will you be selling and at what discount?

For myself the answer is I won't be selling any of my portfolio and I certainly wouldn't offer discounts. I imagine that most people are in the same position. As a result I don't see that this will contribute to affordability in any significant way.

These changes may create a pause in some markets, it could even create a period of stagnation, but this is going to happen eventually anyway. This could be the trigger, but if not the lending changes, eventually it would be something else.

The best way to capitalise on this is to apply the saying, "Cash is king". In any uncertain markets opportunities will present themselves. If you're cashed up, you're in a better position to take advantage of opportunities.

 

[Beanie Girl]

The real question to ask here is, as a result of new lending restrictions, how many of your own properties will you be selling and at what discount?

Peter, I thought the new lending restrictions applied to new/future investment buys? Why would the new lending restrictions affect current investment properties being held? Unless you're saying banks are going to do a type of 'margin call' on current properties being held. Are any of the banks going to be asking investors to do cash top-ups on current properties held?

 

[mugen]

Correct me if I'm wrong but I think what Peter saying is that:

1.) If you think you will be selling then it's likely many others will do the same = drop in property price
2.) If you think you're going to hold then it's likely many others will do the same = price stagnation/slow growth

If banks starts messing within existing investment loans, it's only going to be create more panic and it won't be in the interest for the banks to do so.

 

[unloadmymind]

This will provide more scope for the RBA to cut rates.

And it's only appropriate to bring back risk to manageable levels. In another GFC our banks collapsing will have to be bailed out by taxpayers not just property investors.

 

[Peter_Tersteeg]

Peter, I thought the new lending restrictions applied to new/future investment buys? Why would the new lending restrictions affect current investment properties being held? Unless you're saying banks are going to do a type of 'margin call' on current properties being held. Are any of the banks going to be asking investors to do cash top-ups on current properties held?

My question is rhetorical. The restrictions aren't being applied retrospectively and I can't imagine that lenders would actually be able to implement that. If applied retrospectively, Australia would very quickly no longer be able to classify itself as a first world country. The GFC would look like a small blip compared to the economic disaster that would ensue.

I then stated that I'm not selling and I'm not going to discount the values of my property simply because of someone else's wishful thinking.

The point was, if people aren't intending to sell, why would someone else expect the market to drop? These changes effect less than 5% of the market and even then only in a limited manner.


Frankly I think this forum is making more of this than it really is. Regulators want investment lending growth to stay below 10%, currently over a dozen lenders are exceeding that figure which is why policies are being changed. If investment lending becomes more subdued, the banks will adjust their policies to win more of that market share and lending policies will ease.

The same thing happened during the GFC. Policies got tight and over time they eased again. Property markets have cycles, so do lender policies. Things will get tight for a time but eventually it will improved. Certain property markets are reaching peak/bubble levels. They'll likely correct, stagnate and eventually there will again be upwards moving and then another boom.

The timing of all this might not suit peoples personal timetables or expectations, but all this is simply another market cycle at work.

 

[albanga]

Thanks Peter, great response like always.
You make many valid points in regards to how this will likely effect or more so NOT effect housing prices.

I do personally believe the only exception to that being new stock. Agreed why would someone sell thier property now with all time low interest rates and likely lower on the horizon resulting in greater cashflow BUT developers do not have the luxury of holding when there stock is ready for release.

Being in Melbourne it is already scary how many vacant apartments sit in the docklands and southbank and there is a huge amount of new stock being built. So what happens if a big portion of the market who buys this cannot longer do this? The only option is for developers to reduce prices as they simply cannot afford to hold and ride it out.
So my thoughts are this may not happen immediately but as soon as 1-2 towers gets released and if lending is still tight in the investment space then it will surely have a big effect on the inner city market.

 

[KangaBanga]

with the 80% LVR lockdown, does that mean investors/speculators won't be able to get anymore leverage?

100k equity and 95% LVR = 2 million purchase power.

100k equity and 90% LVR = 1 million

100k equity and 80% LVR = 500k.

so for a FHB or investor starting out with 100k in equity in Sydney, wouldn't these people be priced completely out of many suburbs in Sydney?

 

[Peter_Tersteeg]

Being in Melbourne it is already scary how many vacant apartments sit in the docklands and southbank and there is a huge amount of new stock being built. So what happens if a big portion of the market who buys this cannot longer do this? The only option is for developers to reduce prices as they simply cannot afford to hold and ride it out.
So my thoughts are this may not happen immediately but as soon as 1-2 towers gets released and if lending is still tight in the investment space then it will surely have a big effect on the inner city market.

I agree. There'll always be market segments that will be more or less affected than others by any change, but on the whole, I don't see this creating a property crash. OTP is always going to be one of the more vulnerable market segments.

These changes could be the catalyst for an end to the current property boom. The boom will end, if this doesn't do that, then something else will.

with the 80% LVR lockdown, does that mean investors/speculators won't be able to get anymore leverage?
100k equity and 95% LVR = 2 million purchase power.
100k equity and 90% LVR = 1 million
100k equity and 80% LVR = 500k.
so for a FHB or investor starting out with 100k in equity in Sydney, wouldn't these people be priced completely out of many suburbs in Sydney?

That's exactly what it means. Your figures aren't very realistic though, they completely ignore stamp duty and in some cases LMI. The stamp duty alone for $2M of property is over $100k.

 

[see_change]

with the 80% LVR lockdown, does that mean investors/speculators won't be able to get anymore leverage?

100k equity and 95% LVR = 2 million purchase power.

100k equity and 90% LVR = 1 million

100k equity and 80% LVR = 500k.

so for a FHB or investor starting out with 100k in equity in Sydney, wouldn't these people be priced completely out of many suburbs in Sydney?

My understanding is it's only bank west who cut to 80 % with most banks still happy to do 90 % and that was because they were the preferred lender at 95 % so they attracted a lot of those loans .

Cliff

 

[Jamie M]

My understanding is it's only bank west who cut to 80 % with most banks still happy to do 90 % and that was because they were the preferred lender at 95 % so they attracted a lot of those loans .

Cliff

Pretty much - only BWA that I know of (or out of the lenders on my panel).

They would have been carrying a lot of high LVR IP loans.

Cheers

Jamie