What sort of impact will all this tightening of serviceability have on the market?

[jerrybee]

There's nothing more powerful than access to cheap capital.

We have cheap capital, but now access is being tightened.

What will this do to the market? For example, has the Brisbane "catchup" been cut off at its knees? Will this have as much of an impact to the Sydney market as the vendor tax back in 2003(?)? Will this encourage investors to sell down particular types of properties? Or does this only really affect hardcore investors, which potentially make up an almost insignificant portion of the market?

Would be curious to hear what you guys think about this.

 

[BayView]

Once Banks shift the goal posts on serviceability and LVR criteria and tighten them, a lot of folks won't be able to borrow even though the finance is cheaper...

Less buyers around and the boom will end.

 

[j_p]

Once Banks shift the goal posts on serviceability and LVR criteria and tighten them, a lot of folks won't be able to borrow even though the finance is cheaper...

Less buyers around and the boom will end.

Do you see prices falling or stagnating? While serviceability isn't a problem due to low interest rates I would think stagnation the likely outcome.

I guess either would mean the end of the boom, but in two different ways.

P.S. I have no idea just seeking thoughts

 

[danwatto]

I think it will hit Sydney and Melbourne the most.

Brisbane and others will be considered by investors when they see proof the Sydney party is over, and when Sydney property prices don't fit in the servicability range anymore. If they can't afford a $1m investment property in Sydney, they can still buy a $250k townhouse in Brisbane and get 6.5% yield at the same time.

CG investors may start to appreciate yield investments now, especially if there are negative gearing tweaks..

 

[BayView]

Do you see prices falling or stagnating? While serviceability isn't a problem due to low interest rates I would think stagnation the likely outcome.

I guess either would mean the end of the boom, but in two different ways.

P.S. I have no idea just seeking thoughts

The normal process is a stagnation of prices.

Falling prices would most likely occur if for some reason the interest rates started to rise again, and the over-leveraged have to offload in a hurry.

It's ironic; this problem applies to the minority of purchasers (bought too late and have to sell too early), but their actions affect everyone - if my neighbor sells their recently bought home for a loss in 12 months; it affects all our houses around them...

 

[ChrisA1]

I'm wondering if they will put postcode filter on the rules (eg if the postcode where you're proposing to buy starts with a 20 or 30, then this is your criteria, otherwise these are the rules....).

It will also be interesting to see if/when they lift the rules or whether these rules will become the norm going forward.

Will be interested to hear comments.

 

[mugen]

The normal process is a stagnation of prices.

Falling prices would most likely occur if for some reason the interest rates started to rise again, and the over-leveraged have to offload in a hurry.

It's ironic; this problem applies to the minority of purchasers (bought too late and have to sell too early), but their actions affect everyone - if my neighbor sells their recently bought home for a loss in 12 months; it affects all our houses around them...

what sort of number is considered over-leveraged? 80% and over?

 

[Peter_Tersteeg]

I'm wondering if they will put postcode filter on the rules (eg if the postcode where you're proposing to buy starts with a 20 or 30, then this is your criteria, otherwise these are the rules....).

They won't apply these types of filters to any particular rules. Policies tend to apply to everyone everywhere.

Most lenders (and the mortgage insurers) do assign risk ratings to post codes in their credit scoring systems. If the accumulated risk is to high on a given deal, they simply won't fund it.

If it is a really strong deal, lenders may be willing to make exceptions to certain policies. This isn't something you want to rely on.

 

[BayView]

what sort of number is considered over-leveraged? 80% and over?

I don't know, but traditionally the Banks would only lend on 80% of value, and a P&I loan only, and only m35% of income for repayments.

If you use that as the criteria, then anything over 80% would be deemed more risky.

Nowadays we hear of 90% and higher, LMI, 50% of income for repayments - this cocktail would be (in my opinion) high risk.

 

[Shahin_Afarin]

Its going to impact the market but the question is how much?

There will be restrictions on cash outs, IO loans and high LVR loans.

Plenty of people (even on SS) who are doing 90% LVR loans and pulling out equity at 90%.

There are lots of other concerns - APRA basically doesn't want to see IO loans on owner occupied residences but are generally ok with IO's on IPs. Crap rule designed for the masses and but negatively affects the people who are using it as part of a well planned strategy.

 

[danwatto]

There are lots of other concerns - APRA basically doesn't want to see IO loans on owner occupied residences but are generally ok with IO's on IPs. Crap rule designed for the masses and but negatively affects the people who are using it as part of a well planned strategy.

Too bad for all those people who want to keep the money in the offset instead of paying contracted principal, or those who plan to turn their PPOR into an IP one day..

Changes to LVR and Serviceability make sense, but why mess with IO when it doesn't affect risk in a positive way. To limit people's access to IO only increases risk.

Interest-only is a totally misunderstood concept, even to most borrowers.

Why sign a contract that allows the bank to take your house if you have trouble paying the principal say during an unemployment period; instead you could easily sign an IO contract, pay the principal voluntarily, and take a break from payments during unemployment or hardship. You can even use the voluntary principal payments from redraw/offset to pay your interest bill during that hardship period. When people say IO is risky it just pissed me off

 

[see_change]

The reality is the majority of investors don't buy multiple properties , somim not convinced it will dramatically impact the market .

My sister who would be financially capable of buying many properties , is thinking about buying 1, maybe 2 .

Somersoft is a bit of an exception .

I talked to an agent I've know for over ten years yesterday in Brisbane . His comment was the main people he's seeing buying are Sydney and to a lesser extent Melbourne investors .

Is that a bad thing ?

Don't think so . Certainly in the last cycle , when we were buying ( Brisbane , rocky and Hobart ) we had comments about all the Sydney investors buying there .

We're cashed up , have seen big gains and think it will continue , for the moment I think it's a self fulfilling event .

Cliff

 

[Redom]

Interesting thread, some thoughts from my time as a regulator:

1. Geographic based policy - while completely unusual, it is talked about and being investigated by the regulators. The problems were arising in Sydney. I'd assume it was just background analysis and talk (just like Treasury model Negative Gearing removal every year!). Nonetheless, if it did apply, i think it'd feed through via targeting of Sydney valuations, rather than Sydney investors. The risk that Sydney has that no other market really has is in relation to asset quality/asset valuations. Given the strong rise in market prices, regulators are very aware that valuations may be inflated as a result of low rate cycle.

Chances: I rate the chance of this happening as quite slim - but definitely not impossible. It was unexpected to see it part of discussion though.

2. 'LVR restrictions' - Regulators never liked this in Aus. Doesn't target the specific risks that are built in our financial system. The stats never showed much here, at least as at this time last year. Quite ironic, our regulators played a pretty instrumental role in the Kiwi LVR restrictions 18-24 months ago.

Chances: This ones the media's favourite as its easily understood and very transparent, but not popular amongst those in charge. Slim until data points otherwise.

3. 'Interest only' - interesting comments Dan. Applying the regulator hat on, they don't like excessive speculation in property markets. That is, purchasing based on the expectation of continued price growth. The regulators are fully aware that prices can move backwards and HAVE done so all around the world plenty of times before. Interest only means people are purchasing properties without ever intending to pay down that debt. Thats not a healthy position to be in in terms of financial system regulation. If prices don't rise, stagnate, or even fall - people will be holding negative equity.

The incentives of the tax system mean that I/O set ups are very much part of the system. Add to it the impact on borrowing power calculators and you have a pretty unhealthy combination from a financial system oversight point of view.

4. 'Serviceability calculators' - now this is the real kicker. Regulators talk about how there is a sensitivity to interest rate rises in calculators. This is definitely true with a 'soft' floor set at 7% P&I repayments. This captures the majority of the market.

However, investors can 'slip' through this regulation oversight by simply switching lenders to those that take your actual repayment with debt that you hold with other financial institutions.

So a borrower may have $5m in existing debt, they then walk into a new lender and ask for another $500k. That new lender will only apply that buffer to that $500k, and leave the $5m without a buffer.

This assessment in current calculators, when well utilised, is a potent way to grow a very large portfolio. I've talked about it a lot on the forums, with average income households being able to borrow multiple millions in todays low rate environment.

Will APRA change this? They've made AMP move to the opposite end of the borrowing power spectrum. If they do so to the other lenders, then i'd guess there'd be a massive impact on the investor market and a slowdown in price growth.

If you're on 80k p.a. you'll go from being able to grow a $3m+ portfolio to under $1m very quickly.

Chances of this happening: even with AMP moving, this would be a big move. Putting my regulator hat back on, this is what i'd do if i wanted to slow down investors while continuing to grow the economy. Will definitely impact house prices. If the boom gets out of hand, this may be deployed over time.

Cheers,
Redom

 

[jerrybee]

Excellent analysis Redom, I really enjoy reading your posts.

You forgot to add "Chances of this happening" to the end of the "Interest Only" section. Of all the things they could do, I think this would hit me the hardest so I would be very interested in your thoughts on this. What are the chances? And if they do change things, would they be more inclined to get rid of it altogether or limit it in some way, like make it available only to low LVR loans, or investors with very high servicing buffers etc? Or perhaps they could apply a completely different servicing calc to I/O loans (or maybe they already do this?).

 

[tobe]

What effect will investor controls have on the market?

None, because most investors in Australia only own one or two properties. Making them pay P&I, or restricting the LVR for investment purchases wont make a great deal of difference to the vast majority of mum and dad investors who use the equity in their PPOR to purchase an investment property. They most likely elect to pay P&I anyway, and aren't anywhere near the limits to their borrowing capacity.

There isn't an easy way to dissuade property investors with a stick, it needs to be a significant alternative asset class that can outperform property in terms of risk and return.

 

[keithj]

2. 'LVR restrictions' - Regulators never liked this in Aus. Doesn't target the specific risks that are built in our financial system. The stats never showed much here, at least as at this time last year. Quite ironic, our regulators played a pretty instrumental role in the Kiwi LVR restrictions 18-24 months ago.

In this mornings news from NZ

RBNZ announced plans for residential property investors in Auckland to be required to deposit at least 30 per cent on bank loans beginning in October, while restrictions on high loan-to-value mortgages in the rest of the country would be loosened.

This is targeted at investors in Auckland only. Could this happen to Sydney ?

 

[jerrybee]

In this mornings news from NZ


This is targeted at investors in Auckland only. Could this happen to Sydney ?

He's already answered this:

"Chances: This ones the media's favourite as its easily understood and very transparent, but not popular amongst those in charge. Slim until data points otherwise."

Also didn't they do this in NZ ages ago? I remember reading about it a while back...or did it only get implemented recently?

 

[keithj]

He's already answered this:

"Chances: This ones the media's favourite as its easily understood and very transparent, but not popular amongst those in charge. Slim until data points otherwise."

Also didn't they do this in NZ ages ago? I remember reading about it a while back...or did it only get implemented recently?

It was a blanket implementation in NZ about 18 months ago. Todays news is that it is targeted at Aukland & loosened elsewhere. I thought the targeting aspect was an interesting twist.

http://www.reuters.com/article/2015/05/12/newzealand-economy-stability-idUSL5N0Y308R20150512

 

[jerrybee]

It was a blanket implementation in NZ about 18 months ago. Todays news is that it is targeted at Aukland & loosened elsewhere. I thought the targeting aspect was an interesting twist.

http://www.reuters.com/article/2015/05/12/newzealand-economy-stability-idUSL5N0Y308R20150512

As per Scenario 1 on Redom's list....interesting....

 

[Zos]

I bought a PPOR last year and elected interest only with offset account. Why would anyone pay P&I never understood that?

I mean the offset account acts like you are paying off principal anyway and you still have access to the money if you need it to buy another IP or reno or what ever.

IO repayments are like paying rent with the added benefit that you get that little extra CG where with renting you would not.

If you are good with money and put those savings into the offset account as opposed to spending it, I think you can't go wrong.

Or am I missing something fundamental here?


I have had people tell me that what I am doing is not so good as opposed to P&I. But I have a feeling these people don't understand how the offset account works.