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Do we have a property bubble in Australia? It’s a topic that has numerous sides to the debate; from supply, demand, debt levels and affordability. However, perhaps the best view of the state of Australia’s property market has rather silently and with little fanfare come straight from the prudential regulator of the Australian financial services industry.

The Australian Prudential Regulation Authority (APRA) oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies and most members of the superannuation industry. Their role is to ensure that these institutions keep their financial promises; that is, that they will remain financially sound and able to meet their obligations to depositors, fund members and policy holders.

So when you see them make wholesale changes to the way banks carry out investment lending, such as they have recently, you have to ask yourself – why?

In recent weeks, on top of forcing the major banks to restrict investment lending growth to 10 per cent, banks have also had to hold significantly more capital for every housing investment loan they make. This move is designed to not only ensure a larger buffer is held by the banks but also to reduce the level of profitability each loan will generate.

As a summary, if you were today to try and obtain a loan to buy an investment property then you might notice the following;

  • Where previously you could get 95 per cent loan to valuation ratios, you will likely need a minimum deposit of 20 per cent before your application would be considered.
  • Further, the days of getting a discount on your loan now appear to be over. Most banks are now going to give you the rate they advertise which in recent weeks have moved materially higher.
  • Some banks have gone further and completely removed the negative gearing benefit from initial loan assessments. This has the impact of drastically reducing borrowing capacities. Finally;
  • A number of banks are now only allowing 60 per cent of the properties rental income stream from the investment property when assessing low repayment affordability. Again, this reduces borrowing capacity.

We believe this is a clear sign that ARPA has seen unsustainable market growth and has instructed the banks to toughen the qualifying criteria for investment loans. The question is; have they done enough?

We suspect more is to come. Whilst investor loans have been the lions share of the market, owner-occupied housing still makes up a significant share and hence its natural for one to assume that once the above changes take effect, APRA will move to tighten the rules right across the board.

Watch this space.

Russell Muldoon is the Portfolio Manager of The Montgomery [Private] Fund. To invest with Montgomery domestically and globally, find out more.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.


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  1. I feel it is going to be a concerning time for the property developers out there, and if the building industry (especially in Syd, Mel) is holding up the economy after the mining boom, how will APRA recommendations affect the broader economy?

    • You’re on top of it Luke. Historically there’s never been a large enough bounce in any other sector to fill the unprecedented gap left by the demise of the recent resources boom

    • Hi peter, Give people a $14,000 first share portfolio buyers grant and shares will go up. Do it in property along with cheap money and tax incentives, and guess what, property prices go up too.

  2. Regarding rents

    Here is the conventional narrative about rents and housing valuations:

    1. Rents have soared because people can’t afford to buy a house and have to rent

    2. Based on soaring rents, housing is fairly valued

    In other words, rents and housing are tautological: rents are rational because housing values are rational, and housing values are rational because rents are rational.

    Nice, but wrong: rents and housing are self-reinforcing bubbles:

    rents are soaring because housing is unaffordable, i.e. echo-bubble valuations. Soaring rents then justify bubblicious home prices.

    • Russell Muldoon

      The biggest risk to property is people loosing their jobs – people not only being able to pay off their mortgages, but also those who cant afford to buy their own home and who instead need to rent off one of the newly minted ‘property investor’. In both cases, it appears to me that APRA is being extremely cautious in positioning any further credit lines to those that can afford a shock.

      Unfortunately my crystal ball when it comes to macro-economic events has proven many times in the past not to be relied upon. What I can say is that its clear that Australia has large and accelerating headwinds which could push unemployment rates higher despite further cuts to official cash and interest rates.

  3. Great post Russell. Having worked in the industry for 18 years in risk/credit roles it is also worth noting a number of (smaller) institutions have also exited lending to SMSF’s in recent months which is no doubt due to APRA.

    • Russell Muldoon

      Thats interesting. Looks like that’s a separate move to the ones announced (rather quietly) in recent days / weeks. Lots of brake tapping occurring so the inference is, clearly the watchdog has concerns. Thanks Stuart.

  4. Bahay Ozcakmak

    Thanks Russell, this a great article. It appears APRA is doing its job with little fanfare, which is encouraging. The last thing Australia needs is the perception of robust market-intervention as this could jolt markets, however, this does not preclude APRA from tightening lending requirements, in order to provide a more sustainable marketplace.

    • Russell Muldoon

      Very well said Bahay. Its been very well managed and Im sure given the love affair with bricks and mortar in this country, that’s unsurprising!

  5. What I found interesting with the APRA changes was the requirement for 20% down for investor loans, I think this will have the biggest impact.

    The majors have been approving large volumes of construction loans for developers.

    Typically banks require 100% pre sales for these types of transactions, however the majority of these pre-sales are based on 10% deposits not 20%.

    With construction lead times of 12, 18 or 24 months these investors will have to stump up a further 10% equity. This equity contribution at completion could be rubbery given the potential for declines in real estate asset prices.

    We could see an increase in land and or house and land packages come onto the market in the near term. Great for buyers and potentially REA, not so good for developers or banks.

    The writer owns shares in REA.

    • Russell Muldoon

      Have always enjoyed your views from the ‘inside’ Lloyd. Agree with you about the level of deposits going up, that will be quite restrictive and in combination with the other changes, should see lower but higher quality loans being made. In the end APRA is doing their job, but have they done enough?

    • Good point for developer loans Lloyd. A slightly different point is there are still a number of smaller institutions that are offering loans with an LVR of 95% (if you search Mozo you can find these quite easily) so it would appear APRA are being very targeted in their approach here. Cheers.

  6. tahereh talebi

    Very nice article. I was wondering what will be next for house prices? Will it decrease significantly?

    • Russell Muldoon

      Hi Tahereh, I think APRA’s moves are largely designed to take out the speculative end of our current market. For Real Estate prices to fall dramatically, you would need to see significantly higher unemployment levels I think.

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