In 2016, when the first round of APRA changes came into play, I believe it had the desired effect, which was an almost immediate softening of the investor market.
There were a raft of changes that were implemented very quickly, which made people take a step back, perhaps be a little more conservative in their investment approach and put their hands in their pockets instead. Some of the changes were also quite drastic which meant that investors who were previously able to get access to funds, all of a sudden couldn’t secure any more funding, thereby achieving APRA’s first desired step which was just to restrict any potential “at risk” investors who were pushing beyond their means.
I think this made perfect sense as with “hot” housing markets, particularly in Melbourne and Sydney, often rationale is thrown out the window and a frenzy ensues just secure debt. This is bad and has long term detrimental effects to both the investors and potentially the markets.
We all want a balanced growth cycle and not booms and busts!
Investors appear to be a little more comfortable in early 2017 because we still have continued low interest rates, a strong housing market, plus if you have a stable job and a good income you can still access money because the banks remain open for business.
So what’s going to happen in the lending landscape in 2017?
In my opinion, APRA will continue to focus on a number of concerning areas. One of its biggest worries are monthly household expenses, because most people don’t have a clue what they spend every month. I agree that this remains a major concern both with people borrowing as well as the larger community.
Personally I believe that there needs to be a drill-down into what is actually required expenses on a monthly basis i.e. basic needs of food, utilities, clothing, mortgage payments or rent etc. and what is discretionary spending such as going out for dinner or holidays because as you earn more you do have the ability to spend more.
The reason I say this is because I am yet to see an Australian who will continue to go on holidays or eat out every night if their house is “at risk”. We simply don’t do it.
The other major concern for APRA is the amount of interest-only lending out there, inparticular interest-only home loans where there is no valid reason or justification for that to be the case other than someone who just wants to borrow more money.
I believe we’ll see a real contraction in the ability to secure interest-only home loans and investment interest-only loans, such as shorter loan periods and changes to servicing requirements. This lending space is likely to change significantly.
In fact, regulators may put in place some measures to underpin investor lending. For example, if you took a 30-year loan 10 years ago, you may have to start paying principal and interest (P & I) from the 10-year point onwards. That is, there is a maximum interest-only period within the total life of the loan. At present, these can generally be negotiated to further interest terms subject to people being able to meet the current (or new) lenders criteria.
If that does happen (and some lenders have always had such a provision in their loan criteria), there could be a dramatic softening in investor lending. That’s because if every investor knew that their interest-only loans were coming to an end and they had to start paying P & I, well, that is probably going to have an obvious impact on serviceability.
So, in 2017, it’s vitally important that investors seek out experts because they need to ensure they’re working with people who are professionals within the property investment space.
They should also consider having their properties re-valued to access their equity so they can use that money under the current lending rules. So, if they’ve got serviceability, they should withdraw their equity before any lending changes come into force.
One of the biggest bumps in the road this year is likely to be around the amount of unit development coming into maturity – in parts of Melbourne and Brisbane in particular. Some of those developments have been significantly sold to foreign investors who won’t be able to access money here, which will result in an increase in defaults and an impact on those markets generally.
Throughout this year, there is also probably going to be a natural cleanse in some markets, such as in Perth at the moment due to the mining downturn.
This year’s lending landscape is likely to be harder for investors but that doesn’t mean that they should sit on their hands and passively watch the world go by.
The thing is, there will likely be lending changes this year which over the short-term might not seem like a good thing for investors.
But over the long-term, we don’t want massive peaks and troughs, we want a steady market, so the property investment future still looks very sound to me.