New APRA regulations - what impact do you think they'll have?

New regs here: APRA has announced tighter restrictions on Australian home loan lenders Looks to mostly be a crackdown on interest-only lending.

Also requires banks to cut new lending to investors from its current level of 50% of new loans to no more than 30%.

 

It means that the few lenders who do easy roll overs for IO periods will stop doing it (CBA & Westpac) and require a full assessment.

Lenders will use it as a reason to further increase interest only rates.

Some lenders will restrict IO lending to investment only at 80% LVR or lower.

Private funders will get more business and increase their rates as well.

In the current market, investors need to start to accept that they're going to have to make P&I repayments at some point.

 

Rents will try to be pushed up.. if unsuccessful, many holding too many highly negatively geared properties who are holding purely for capital gains will start selling in large numbers as they can no longer manage the repayments. This will affect markets with the lowest yields first.

 

Are these APRA measures effective immediately?

 

Been calling this for a loooong time... need to start paying down debt or face the reality of P&I , or sell if thats all too much too handle.

It's time for investors who will find this challenging ( which means anyone with a PPOR mortgage and relying on I/O and neg gearing to keep their head above water) , to take action to save their portfolio from fading into oblivion...

Draw out whatever equity you have available - right now - before it becomes impossible

Use that equity to pay for deposit + costs for cash cow or two or - right now - before it becomes impossible

Purchase cash cow or two.

Use the surpluses from the cash cow or two to reduce debt...so that 1. further investment remains possible in the future or 2. you can handle your repayments when you are forced onto P&I

Otherwise, learn to love P&I because thats how its going to be..... Im not sure how many signs people need to finally accept this. Rates are going up for I/O and will continue to do so. LVR's will now start coming down. Extending I/O terms will become extremely difficult. One way or another you will be paying P&I at some point - most likely 5 years I/O is about the best most investors will be able to hope for now.

#cashcowskilldebt #decadetodeleverage

 

Decent response from the regulator IMO.

Again they've chosen actively not to go prescriptive on how banks should conduct their business. They could easily have chosen a far more direct approach in this situation. Instead they've found some risk factors their not too happy with (probably rightly so, but debatable) and told banks to find a way to reduce those risk factors (rather than tell them how to do it).

In terms of impact, this will obviously tighten I/O lending growth. Price is the most obvious way to do this. Have a 1% price differential between P&I and I/O and i'm confident many investors will simply chose to swap over to P&I and save that 1%. Should naturally cause some deleveraging too.

Impact on property investing strategies:

IMO people have a more finite purchasing ability now. Adding in marginal rental increases stretches this out further, but can't really extend it nearly as far as in the past.

3 years ago, average income earners who continue to purchase at 7% yields and you have a near 5mill+ borrowing capacity by simply circulating lenders. Essentially yield created massive portfolios (stories of 27 properties, etc) + loose lending standards.

Today adding in an extra 1% in yield on $1mill in property gives you an extra $55-70k in borrowing power.

Noting this relatively marginal portfolio size impact of yield, IMO a far better strategy is to work within your limits, find suitable growth led properties that will get you to where you want to go. For most, you really need asset growth to get there. Small cash flow surpluses will take a very very long time to achieve most wealth creation objectives.

Focus on quality assets and ensure your more limited asset bases grow for you. An extra 8k p.a. won't take you very far. An 3% growth differential in asset growth over a 5 year period can be though.

From a property investment strategy, I do question the wisdom of purchasing more cash flow positive assets. 'Decadetodevelerage' makes sense. Its no longer really possible to keep buying positive cash flow assets and build large portfolios and accept slightly lower growth rates. The portfolio size impact is too limited.

 

What will it mean for rentvestors who are looking to buy a PPoR?

 

Good advice - I definitely agree with the focus on quality assets too. Now is definitely the time for quality over quantity. I feel many inexperienced investors fall into the trap of collecting multiple shoddy assets as quickly as possible, over accumulating a few good assets much more slowly. I cringe whenever I see "This 19-year-old has 47 properties!" articles (because they're usually all identical CBD apartments and half-built fringe suburban houses an hour from anywhere, all interest only and all leveraged by minimal equity).

 

Raise your rents the corresponding amount....simple. Government meddling in business only drives up prices. As long as demand is strong (and it is) then any interest rate hike you receive can be passed on to your tenants at next lease expiry.

 

This isn't a solution. Rents are set by market demand, especially in many sectors of the market where oversupply is becoming an issue. This new regulation is more likely to generate fierce competition for tenants than it is to generate competition for rentals, especially if we see any downward price movements in the short term (if recession were to hit in the event of a correction, we might see the opposite for certain assets like detached houses, but that's a long way off).

According to BIS Oxford Economics the other day 40% of apartments in Brisbane and 60% of apartments in Melbourne have sold at a loss (since 2011), and the rate of price growth is slowing in all cities except Sydney (which is due to enter oversupply later this year, according to BIS OE and next year according to most other sources). If an investor in Melbourne's CBD tried raising rents right now they'd risk driving away their tenants for good. An excess of would-be landlords unfortunately doesn't make jacking up rents a good plan.

 

It hurts those who still have a PPOR debt. The strategy of having everything IO and the PPOR with an offset takes the hardest hit and it will see years added to being able to pay off the home. The cash goes to the higher IO interest rate, and then paying off the principle of IP's once it converts back to PI.

Paying down debt is a good thing and I can see why we have reached this point with APRA, however investors have lost the choice of where their extra cash is allocated, essentially being forced to pay down investments before the home is debt free. Would be great if they balanced this out with rate drops on OO, help all the struggling family's pay off their home quicker and have extra cash to spend for the economy.

 

Does anyone think that all of this tightening will ever loosen up again? Or should we assume for at least the next 5 years it will be like this?

 

I think they will sure, though maybe not in five years - I'd say more like ten. Ireland is back to 100% mortgages now.

 

Hmmm...dont agree. An extra 8K per annum will pay off a PPOR mortgage 15 years sooner . That delivers compounding benefits. You create equity even where there is no growth happening, you create borrowing capacity without having to sell, and you retain the INV property income because you need not sell.

This may deliver a larger one off dollar value profit, but you forfeit the investment property income because the profit can only be realised if you sell the INV property. This also assumes that growth will be consistent as it has been in the past. I have doubts that will be the case as more and more investors hit peak capacity , have not accounted for debt reduction or P&I repayments and cannot repeat purchase- or worse still, cannot even hold on to what they've got.

In the end, dividend reinvestment strategies consistently outperform speculative strategies in every asset class - except resi property ( and by a very thin margin ) ... until now. That anomaly was caused by the credit environment which is now being regulated. Moving forward, with those constraints in place its very difficult to see speculation outperforming dividend reinvestment/debt reduction under the new credit regime.

All I'm saying is, like any balanced approach... get some cash flow into your portfolio. Chasing growth only will leave you without the ability to borrow, unless you are willing to sell. Adding some cash cows will allow you to hold the growth properties for longer, and deleverage as well. With such low rental yield growth and wage growth, interest rates rising and P&I being increasingly forced upon investors as I/O periods mature, some extra income in the portfolio can only be a good thing

 

To be fair, the banks have placed the burden on I/O not on P&I. You have seen most lenders either leave P&I alone altogether, or lift rates a very modest 5-10bpts.

 

Modest... far from it. Jump on the banks website to check out the latest interest rate, say ANZ. SVR home loan 5.25%, with SVR investment loan 5.85% that's 60bpts yeah?

 

You said O/Occ, P&I rates, yeah? The banks have not raised O/Occ P&I by 60 bpts, in these last rate rises announced across the past 2 weeks. if you were to look at the last several rises, they have overwhelmingly apportioned I/O borrowers with far greater increases than O/Occ P&I borrowers .

I dont need to jump on the banks websites to know this. Im a licensed broker with 15 + years lending experience, and I have access to the lenders broker sites. I'm acutely aware of how the rate rises have been apportioned O/Occ P&I borrowers are most definitely not paying the same rates as I/O borrowers

 

What APRA is doing now will likely be a part of the new Basel regulation any way so it will be worldwide at some point.

The impact wont be the same across everywhere.

You have to understand the buyer that spends 1.5+ mil buys for a different reason than the buyer that wants to spend 500k on an investment property.

So you have to ask if an investor cant afford repayments (if the monthly repayments increased) what would they be doing lurking around the multi million dollar properties or how he/she would even be able to get funds to purchase them under the current financial regime. I mean the banks are going off 7% interest rates to assess investor loans right now. So it will be ironic to think that its really the principal payment addition that will break the camels back.

I have found that many multi-million dollar properties are being purchased largely by cashed up buyers / foreign investors seeking safer havens and/or a big portion of those loans are already paid up (against the asset).

So the question beckons that if a buyer has the means to spend 1.5+ million (as an example) , will it impact him or her to ask them to shell out a few hundred dollars or thousands more per month to cover off the principle part of their loan?

On the other hand, its much easier to get a loan for 500k as the amount is lower and more investors exist in this bracket. So it will be much easier to slip udner the radar spending 500k and then not being able to pay back due to increase in monthly repayments.

 

The Basel stuff hasnt even started yet. Capital raising. changes to RMBS .... both items will create further increases to banks cost of funds. ie further rate rises to come .

Then there's the US Fed rises which we know are coming. Also going to create increases to banks costs of funds. ie further rate rises to come.

 

@euro73 I was talking about the gap between O/Occ and Investment, both on PI is a 60bpts difference which is near triple what it was a year or so ago. Misread your post sorry. Am aware PI for O/Occ is unchanged and it is all the IO and IP borrowers taking the hit with the increases.