Over the past 48 hours both ANZ and CBA have increased interest rates for property investors, not owner-occupiers, by 0.27%. Westpac and NAB are expected to follow shortly (25 July 2015).
Although analysts forecast these rate rises will add about $800 million in combined profits to the big four, they are not intended as a profit grab. They are in response to the 10% growth cap on investor lending put in place last December by the regulator (APRA), to cool the housing market.
The rate rises follow a raft of other measures recently imposed by the banks for this same purpose:
- Lower Loan to Value Ratios (LVRs) — resulting in larger equity/deposit obligations for investors
- Lower interest rate discounts to investors
- More stringent loan servicing requirements — by not counting expected income bonuses or cash flow benefits from negative gearing, and by using higher interest rates to stress-test a loan applicant’s ability to service the loan; and
- Cut backs in riskier mortgage products like interest-only loans
Data from AFG, Australia’s largest mortgage aggregator, suggests the cumulative impact of these changes is having the desired effect. Figures for the June quarter show the proportion of AFG investor loans to home loans fell from 50%, where it has been for the past twelve months, to 42%.
So as the banks tighten the screws on investment lending, could this be a signal that house prices will start falling now as well?
House prices are a function of supply and demand, so all else equal falling investor demand will lower house price growth.
The impact is expected to be most prevalent in the sectors of the market where property investors are most active. Perhaps most at risk are the investment markets where there is a lot of new supply — inner city Melbourne and Sydney apartments and the outer suburban housing estates. The risks are higher for Melbourne because there are more dwelling approvals and they are in more concentrated areas (there’s no shortage of apartments in Melbourne’s CBD, Southbank or Docklands!).
However everyday mum and dad homebuyers and first homebuyers may be protected, at least from the rate rises. When ANZ lifted investor rates on Thursday they also announced that their rates to owner-occupiers may be reduced by 30-40 basis points in the near future. The Reserve Bank of Australia wants this group protected because failing to do so is more likely to negatively impact consumer spending and the economy at large.
As a property investor now would be a good time to at least consider the impact of falling house prices on your personal situation.
How much equity do you hold in your property investments to keep them above water? What’s your investment horizon and are you in a position to hold onto your assets if your gains slow? As with any investment, never risk more than you can afford to lose.
Perhaps the opportunity now for property investors are in areas like Brisbane, Adelaide and Hobart which haven’t grown as quickly in recent times as Melbourne and Sydney.
Also if you’re still bullish on investing now may be a good time to consider the non-bank lenders for funding. These providers are beginning to fill gaps for investors where the big banks are winding down.
