MP tipping point for eastern house prices

Cross-posted from Martin North and I agree:

Following the disclosures in the recent bank results that many were above the APRA target of 10% portfolio growth, and their statements they would work to fall within the guideline, we have seen a litany of changes from the banks, which marks an important change in tempo for investment home lending. Regulatory pressure is beginning to strangle investment lending growth.  Better late then never.

In the past few days, ANZ has stated it would no longer offer interest rate discounts to new property investor borrowers who did not also have an owner-occupied home loan with the bank; Westpac is cutting discounts to new investment property borrowers according to the AFR; and Bankwest has imposed a loan-to-valuation ratio cap of 80 per cent on investor Mortgages.Changes that took effect on Friday will mean Macquarie customers taking out fixed-rate investor or interest-only loans will pay higher rates than owner occupied borrowers. Recently the Commonwealth Bank, scrapped its $1,000 investment home-loan rebate offer and reduced pricing discounts for investment home loans. In addition more broadly, Bank Of Queensland has changed its underwriting practices. NAB has also changed its instructions brokers, and as of May 13, NAB would only consider pricing below advertised rates for owner-occupiers or personal loans. “Investment loans will not be eligible for any pricing discretions. Advertised rates will apply to investment loans,” the note said. Suncorp plans to pare down discounts for investor property loans while boosting incentives for homeowner lending, in reaction to a regulatory crackdown on housing markets.

Last week we showed that currently discounts are at their peak, so will we see overall discounts cut, or reinvigorated discounts on selected owner-occupied lending? Banks need home loan lending growth to make their business work. We think the focus will be on a drive to accelerate refinancing of existing loans, so expect to see some amazing offers in coming weeks to try and fill the gap.

We know from our surveys there is still significant demand for housing finance out there. We also know that some of the non-ADI players are playing an increasing role in the investment lending sector, and these players are of course not regulated by APRA. Securitisation of Australian home loans was up last quarter, and most were purchased by Australian investors.

Mortgage brokers, who have been enjoying the recent growth ride may suddenly be finding their world just changed.

Whilst its a change in tempo, its not necessarily the end of the mortgage lending boom. It may however be the tipping point on house prices in Sydney and Melbourne, where investment loans have been responsible for much of the rise.

David Llewellyn-Smith
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  1. Agree too. Prices are set at the margin, the Aussie rent seeker is now less equipped to outbid genuine home owners and each other. Won’t brake the foreign funds though who may fill the void.

  2. So now, rather than owner occupier buyers masquerading as “investors” to get the best deal on debt, we will have “investors” masquerading as owner occupiers.

    Has anything changed?

    • @Peachy
      No real investor wants to masquerade as a Owner Occupier. Sure they may get a bit of interest discount, but the main thing is they miss out on significant larger loan size. Some investor loans are low doc anyway and high LVR, so there might not be any discount for them to begin with. However to lose $100k – $200k in loan amount would turn anyone away from owner occupier loans.

      • @JayBone

        Not quite true, even if you get an Owner Occupier loan, there is nothing to stop you from renting it out afterwards and claim NG.

        Of course getting Owner Occupier loan would put a stopper on your purchase to begin with because you would have $100k – $200k less to spend.

        However there is one advantage in that Owner Occupier pay no CGT, however investor loan holders can get no CGT too because all they have to do is live in the property for 12 month in the first 6(?) years (ask your accountant for the exact rule).

        Remember the type of loan doesn’t dictate how you can use the property.

      • I thought that if you changed from an Owner Occupier to an ‘Investor’ you had to declare that to the lender? If there were additional capital requirements and higher interest due from Investors, the lender would want it from you, right?

        Surely there is somewhere in the system of Negative Gearing, where a person must prove that they don’t live there??

        I don’t know much about these things in Australia, its Different here 😉

      • Just some anecdotal evidence – difference between investor mortgage and owner occupier for me was over $300k
        (before last weeks clampdown)

      • @Karen

        Obviously I assumed the borrower have lower income & rent than you. Anyway, you may still have the same borrowing capacity if they didn’t change the assessment rate.

        Except some banks have tightened up LVR, but if you have enough cash for deposit + stamp duty + other fees, then I don’t see why you wouldn’t still get $300k loan.

      • Don’t owner occupier and investment loans have the same loan amount and interest rates (up until now)?

        Investor loans can be interest only, I assume owner occupiers also have this? Where is your 100-200k coming from?

      • @ronald

        Not at all. There were no distinction between investor loans and occupier loans. The only difference is if you declare rental income, and suddenly you have more income, which means you have better serviceability, which equates to bigger loans. Typically it can be between $100k- $200k, or more depending on your income plus expected rent.

  3. Havent yet heard an analysis on non bank lenders….will they simply be subject to market making from the big banks ? Alternatively, we might see the investors starting to look harder at some non bank i and more scenario like “ gave me a loan when the others didnt and a much better tter rate..cant hold me down from being an invwsting genuis !”

  4. Can the foreign investors make up the difference I wonder? Will we see smaller volumes, but still higher prices?

    • A few auctioneers in the east were saying last week they can’t believe the Asian buying. Moving into point piper etc. His view was that no one is complaining as they are paying overs, even though neighbors are not impressed.

  5. Most of these changes have been announced prior to this weekend. Given the very high clearance rates in Melb & Syd this w/end, what evidence is there of any kind of ‘tipping point’???

    • The Patrician

      Who needs evidence?…lol…. another tipping point…more crashnik doomsaying.. same as last year …..and the year before…and the year before that…pity about that inconvenient recurring double-digit house price inflation…don’t you hate it when Comical Andy is right

  6. If this isn’t the tipping point for the eastern states then certainly it is for WA.

    Im kinda amazed at how many people have lost their jobs in suburbia WA recently.

    • Im amazed when i read on the weekend FIFO’s earning 130k+ for the last 5 years are now homeless. Living in company accommodation even, then cant afford a home when let go. Where does all that money go ?. Ex mining workers couch surfing with mates. its insane.

      • They’re probably paying mortgages on half a dozen properties that may or may not currently have tenants.

      • drsmithyMEMBER

        Im amazed when i read on the weekend FIFO’s earning 130k+ for the last 5 years are now homeless. Living in company accommodation even, then cant afford a home when let go. Where does all that money go ?

        New cars every year, Harleys, Jetskis, boats, half a dozen overseas holidays every year, mind-boggling levels of drinking and drugs ?

        As I’ve said elsewhere, people who think the “ice epidemic” is bad now, ain’t seen nothing yet.

      • Squandered mate, it’s simple. These are not the sort of people who put money away for bad times. Why would you when the good times keep on rolling?

        It’s like the lottery winner who worked in a factory and was back within 3 months. Or as George best put it, I spent a lot of money on flash cars, women and drugs, the rest I just squandered. 🙂

  7. Just wondering, are the banks changing assessment rates or just the final rate the mortgage holder pays?

    If assessment rate has not changed, it makes no difference to the borrowing capacity of the borrower.

    assessment rate: 7%
    real interest paid: 4.5%
    borrowing capacity is based on 7%

    assessment rate: 7% (assume they haven’t changed it)
    real interest paid: 5%
    borrowing capacity is still based on 7%. So borrowing capacity remains the same, only monthly interest is higher, but that matters little to a purchaser because all they care about is securing the property initially, not whether they could pay it off later.

    • flyingfoxMEMBER

      The assessment rate is now to be enforced although strictly speaking I doubt it will be. See Lindsay David’s analysis on this for why not.

  8. this won’t change a thing, just more fluffing around the edges, hardly constitutes a ‘tipping point’. So the banks no longer such a large ‘discount’ on investor mortgages. Big whoop.

  9. What are eatern house prices? Are that when the housing market gets so out of hand it has eatern the productive economy?

    • It is a typo – the article refers to housing around Eton, Berkshire, England (near Windsor) which attracts investors trying to secure property close to a well known high school in the area.

  10. How does 10% growth stack up against other business growth? Can’t do that investigation atm but I suspect is the outlier it sounds like. If so we are well and try rooned.

    • Ahh, didn’t see the later post ‘Low interest rates aren’t spurring businesses’ answers this, though I just looked at the RBA financial aggregates to see the components of the 5.3 annual business growth rate – there’re not there. I guess that’s why they are call aggregates!

  11. The true pop comes when volumes drop (not Auction volumes but total sales volumes) which will be followed by a drop in prices.

    • Not true. Transaction volumes are currently flat because of a lack of listings. When listings spike, thats when prices will drop. Listings will spike if macroprudential gets serious or if costs of borrowing go up

      • BubbleyMEMBER

        Yup DB, its all about supply and demand. Which is why the constant statement around here is “Build it!”

        The other factors are confidence and unemployment. 7.5% official unemployment is my marker for the bubble bursting.

  12. “Recently the Commonwealth Bank, scrapped its $1,000 investment home-loan rebate offer and reduced pricing discounts for investment home loans.”

    Wow.. you think this will be a tipping point for investor exuberance? This was just an offer by comm bank that was in place and they decided to end it. Big deal. How is that going to stop die hard gamblers from playing in the RE casino??

    • flyingfoxMEMBER

      More tightening too. the major one is LVR. >90% is pretty much no go. Most will be under 80%.

    • And this slice from the above article

      “Banks need home loan lending growth to make their business work”

      My interpretation is that this is a smoke and mirrors exercise to make APRA look like they are on the job, instead of part of the problem.

      The first of many such strategies to deceive and vex the masses

  13. And in NZ the chill winds of a withholding tax on all properties sold within 2 years that aren’t PPR looms from 1/10/15. After that date…the vendors will have to prove they weren’t just speculators, and so liable to pay income tax on any gain ( we don’t have CGT). That is levied at the vendors progressive tax rate, and is likely to be 30% in many cases….Income tax has always been liable if a property is held for any period if the purpose was to make a capital gain. But most people lie about their intentions to avoid that income tax. What a integrity based society we have created with all this ‘property always goes up!’ philosophy….

  14. Random PunterMEMBER

    Fingers crossed for meaningful reductions in LVR. Let me spell it out for the maths challenged somersoft folk out there: A reduction in LVR from 90% to 80%, will, for any given deposit, HALVE your borrowing power.

    Prices to the moon! or something….

    • BubbleyMEMBER

      As a dog box three bedroom apartment is $500k here, it will make it interesting for the investors. Not many people have a lazy $100k sitting in the bank.

    • i just did the math and its correct.. it comes as a shock to me!!! (i dont own AUS-property nor intend to buy any in the immediate future)