Are there tough times ahead for property investors?
After much debate - and cynicism - following the Australian Prudential Regulation Authority's (APRA) announcement of measures to slow bank lending to property investors back in December, it is now clear these measures are really starting to bite.
Bank lending standards for investors have clearly been toughened with lower loan to valuation ratios and tougher income tests and now mortgage rates from most of the major banks have gone up.
While most banks have only targeted investors, one has jacked up rates on all interest only loans (possibly reflecting difficulties in distinguishing between investors and owner occupiers), which will mainly affect investors but may also affect some owner occupiers.
It's also perhaps no coincidence that the rate hikes have come just after APRA announced that the major banks will be required to have higher capital ratios for property loans and so one way to recoup the higher cost of capital implied by such a move is via higher mortgage rates.
This is the first hike in mortgage rates since 2010, so it's quite a change in direction for the property market to digest. So what will all this mean for the property market?
First, expect property investor demand to at last slow. To be sure the rate hikes are modest at just 0.27% to 0.29%. But coming with a raft of other measures to slow growth in property investor lending it's likely that it will start to impact and make life tougher for property investors. And of course in the unlikely event that there is no discernible impact APRA will likely come down even harder on the banks.
Second, coming at a time when national average property market momentum is already showing signs of rolling over expect average home price gains over the year ahead to slow - maybe to around 5%. Sydney may come in a bit above this, but some cities like Perth will likely see further price falls.
Third, it's good news for owner occupiers who now seem to be being favoured by the banks (as long as they don't have an interest only loan!) and may find the competition to buy a property less frantic with investors now weakened. APRA's higher capital requirements for the big banks may also lead to a more competitive lending market which could help. However, it's doubtful that owner occupiers will simply fill the gap left by investors so average price gains are still likely to slow.
Finally, there is also a risk that the crackdown on property investors leads to overkill and as such macro prudential moves are invariably hard to apply with precision with a high risk of unforeseen consequences. In particular, the tougher loan to valuation ratios could hit first home buyer investors the hardest, as they usually have less capital for a deposit, and knock property markets that are already soft - which in fact includes all the capital cities except Sydney and Melbourne. Perhaps the banks should be focussing their efforts to slow property investors mainly on Sydney and Melbourne.
The bottom line is that it all means we have now entered a more uncertain environment for the residential property market. Those investors who can still get finance need to be a lot more cautious as capital growth is likely to slow. This is critical as net rental yields are already very low, meaning that investors are dependent on decent capital growth to make an investment in residential property stack up. But it will also be a better environment for owner occupiers.
More broadly, APRA's intervention adds to the case for another interest rate cut. A slowing in property investor demand and price gains particularly in Sydney is something that the RBA has been looking to achieve. And at this point in the cycle the RBA certainly wouldn't want to see banks raise mortgage rates for all borrowers in response to the higher cost of funding that will flow from APRA's requirement that they boost their capital ratios against housing loans over the year ahead. Another RBA rate cut with the banks not passing it on in full is one way to avoid this.
So coming at a time when the economy remains sluggish and inflation benign, the upshot of all this is that the chance of another RBA interest rate cut has been given a boost. This in turn means that it's perhaps still too early to expect a decline in average nationwide home prices, albeit this is already happening in some cities.