Post-APRA - is it possible to start building a sizeable portfolio on a PAYG salary?

yep, very true @York.
digressing a little but do you see any advantage of going direct rather than through a MB?
Or is it simply because 'this' lender doesn't have a broker channel?

 

Thanks @euro73. Im still finding it difficult to understand why APRA had to put restrictions in place indefinitely. Australia as a whole has one of the safest solid housing markets in the world and was doing just fine for decades on end. I get that they had to cool down the housing market in Sydney and Melbourne, but from all accounts this boom that we have experienced in the last three yrs is a standard occurrence and growth pattern of every market cycle we have experienced to date.
Why wouldn't APRA and ASIC put things back to normal after Sydney and Melbourne has cooled off?

 

I'd say there is no benefit in going direct that I know of. Unless like you say, there is no broker channel. In which case, you don't have much choice if you must borrow now and that is the only lender willing to lend. But I'd add that going this route would be for those whom require a niche product with a favourable policy and unique servicability assessment criteria.
In addition, I think the percentage of people who would actually really need to go direct is minute. I'd much rather use a broker everytime to ensure all my bases are covered for future buys. Going direct at the wrong time or to the wrong lender at the wrong time can really make a mess of things if you don't know what you're doing, which is usually the case for most people.

 

Start with something reasonable, 50 properties isn't. If you had an income of $220k pa I can put together a plan to own 10 properties over a 5-10 year period, but 50 properties isn't something you can simply map out. For a portfolio this kind of size, go back to my original suggestion - start a business.

APRA hasn't made these changes to cool the Melbourne and Sydney markets, that's just a fringe benefit. It's about regulating lending so it doesn't become a runaway train. It's about sustainable growth. Previous market cycles haven't occured in the same environment or culture.

 

Thanks for the comments @Peter_Tersteeg. Can you please explain what you mean by the above statement?

 

You know, as soon as the minnows start building wealth and make a better life for themselves, the government comes along and throws in a road block ie APRA regulations.

The investors on low wages now have buckleys of building wealth through property. OK not buckleys but not far from it.

These APRA changes are hitting the low wage earner much harder than the top end.

Looks like I'm stuck to investing in the lowest socio-economic areas. Feel like jumping in my car and smoking the tyres in front of the local APRA office as a sign of protest.

 

The BASEL Committee has been pushing for regulatory change since after the GFC. They have driven a series of regulatory changes, which are complex and detailed so I'll make this is simple as possible for you.

They have asked all banking regulators in all G20 economies to work with banks to lift Tier 1 capital , because the GFC taught them that the existing capital provisions were inadequate in the event of such a calamitous financial system collapse. many lenders around the world required a bail out. Australia forms part of the G20 so is playing ball. Australian banks used to keep @ 1.50 capital per $100 lent . They were asked to move to $2.50 per hundred lent . This required capital raising, which they did last year. The capital raising meant banks return on equity fell. They lifted rates to restore that return on equity. This is why you saw lenders move rates UP over the last 12 months or so.... but set that point to the side just for a moment

At the same time, APRA - whose sole responsibility is to regulate banks - not the property market - became extremely concerned that far too much lending in Australia was being done on an I/O basis. The traditional market percentages of 70% P&I, and 30% I/O, had skewered aggressively, and quickly, in just 3 years to a point where over 53% of all lending was being done I/O. So - APRA placed "speed limits" on I/O lending. And they gave all banks until June 30 2016 to get under that speed limit - or they'd be penalised with even heavier capital requirements . But there are ZERO speed limits for P&I lending.

And this is why you saw such craziness for the last 12 months. Rates went up for I/O, but no so much for P&I . Depending on how much work you had to do to get under the speed limits, some lenders made savage policy changes and cuts to LVR's and servicing calcs to assist in getting below the targets. Others didnt have to change much... they were already conservative enough that they didnt attract a lot of I/O business. Those were pretty well 12 month measures to gte them to today - June 2016. Job done, many lenders are restoring LVR's now- Westpac an its babies are a point in case.

And to varying degrees all lenders are using investors to recover their margins and protect their return on equity, and to pay for the loss leading P&I products they are almost giving away in an effort to win market share- 'cos thats the side of the loan book that has no speed limits - and every now and then, like we have just seen with Suncorp in March, STG and Westpac in June - a lender will have a little room to move under their 10% targets, and throw out a sharp I/O deal. But it will be quick...it will get jumped on by brokers , the lender will hit their 10% I/O speed limit again and it will then disappear as quickly as it appeared.

Separately you have ASIC pushing " responsible lending " much harder. This is where the higher sensitised assessment rates, household expenditure measures, cash out restrictions, etc- come from.

Ive written this quickly as I have a wife who is giving me the evil eye to get offline... so I may have missed some detail, but the key message is this - NONE of this is directly targeted at housing prices. It is all directly targeted at ensuring Australian banks have more buffers in place for a GFC2. But the indirect side effects are - less money will be available I/O and far stricter responsible lending guidelines will remain in place , so the speed at which price growth can occur will be naturally subdued. This is quite literally the first time since banking deregulation that cuts to interest rates dont improve borrowing capacity. Affordability? YES, perhaps. Serviceability? NO.

There is more to come by 2018, although it will be relatively modest compared to what has already occurred.

 

Not really. They are rewarding, or "incentivising", those who reduce debt through P &I repayments. They are disincentivising those who carry too much I/O debt.

 

* When I started my business 12 years ago we submitted applications using a fax machine, today I can put together a loan application without ever printing a physical piece of paper.
* 25 years ago if you wanted a loan you needed a good relationship with the bank manager and they made an individual assessment, today it's a highly defined process with little room for individual decisions (at least in the mainstream).
* 40 years ago some people might own a rental property or two, but people didn't really talk about it much. 20 years ago you could find a few books about it, 15 years ago internet forums about property investment started, today investment is a highly active part of the 24 hour news cycle, reducing it to trivial sound-bytes.

* Australia has been in a 20 year growth cycle. There are people investing today who weren't alive in the last real recession in Australia (the GFC wasn't really a recession in this country).
* Forget the new investors, about 30% of mortgage brokers have not experienced a falling market (including several on this forum). Many of the first and second time investors I meet seem to have unrealistic expectations of the growth in their properties.
* International trade has created unprecidented demand for property, goods and services worldwide.

Access to information means that we have different cultural attitudes to proprety investment to what we had only a few years ago. The digital age has been around a while now, but it's only starting to become mainstream in the last few years.

All of the above contributes to an exponetially volatile marketplace. The GFC gave the world a reminder of what can occur when speculation gets out of control. APRA, ASIC, the RBA and other bodies are trying to prevent this. If they take their hands of the wheel in the future, human and corporate nature will drive the more speculation and create the same problems again.

 

Yes. Also servicing has taken a hit.

But debt is how we make money, be it I/O or otherwise.

Debt is the bread and butter of property investing.

APRA should be more lenient on investors who earn less than $100K p.a.

 

Really appreciate the concise explanation @euro73 and thanks for taking the time to write it. good lesson in APRA/ASIC 101.
Could you please explain what you mean by the above sentence?

Not looking forward to more restrictions in 2018. Also, apologies for getting you the evil eyes from the wife haha..

 

Thanks for the comments @Peter_Tersteeg. I get what you were saying now. Yes, I believe digital disruption will create a more volatile and rapid market.

I must say though - thank god for the internet forums about property investment

 

Euro is not allowed to play anymore tonight it seems. So in the meantime see
Capital requirement - Wikipedia, the free encyclopedia

 

This all seems a bit academic since 50 doesn't seem like a realistic number. Even if it was doable, why? Getting 50 for the sake of it seems silly.

 

Thanks @Terry_w. "For example, it has been reported that Australia's Commonwealth Bank is measured as having 7.6% Tier 1 capital under the rules of the Australian Prudential Regulation Authority, but this would be measured as 10.1% if the bank was under the jurisdiction of the UK's Financial Services Authority. This demonstrates that international differences in implementation of the rule can vary considerably in their level of strictness."

 

The increased tier 1 requirements (of which there are likely more coming by 2018) are only affecting banks ROE. In simple, laymans terms the banks restored that ROE by lifting rates @ 40-45 bpts over the past year. So in the end, they still make the same ROE they were making when they held less tier 1 capital. But of itself, the increased tier 1 capital requirement has had pretty much zero impact on anyone's borrowing capacity. It only impacts the actual rates you and I pay.

The reason it doesn't impact borrowing capacity is because the regulators have now delinked the rate we actually pay from the way banks assess our capacity to pay. We now get assessed at a sensitised rate instead of an actual rate, at all but very few lenders, and we now have much higher living expenses applied to us than we used to.

So the only actual game changers to borrowing capacity relate to the introduction of sensitised assessment rates and the introduction of the stricter HEM's... end of story. Those two levers are the only things that have a mathematical impact on anyone's borrowing capacity in a meaningful way.

Now, you can't do anything about the make up of your household in order to reduce your HEM category - unless you're going to put children up for adoption or get divorced or banks suddenly start accepting polygamous families and incomes.... we all know thats just me being facetious, so that just leaves the amount of debt you carry and it's sensitised treatment as the areas to focus on. And that in turn leaves debt reduction or income increases ( or both) as the only tools that will work.

All the other fluffy suggestions posted on the forums is just that. Fluff. Sorry sorry sorry, but when you reach your ceilings, you cant develop, you cant renovate, you cant JV. You cant get MONEY, so you cant do those things. That's just the way that's gonna be, and that's not going to be solved by ridiculous ideas that cant be realised. So the time to generate extra income is well before you reach your ceilings , while you can.

Now, you can probably look at doing that 3 main ways. If you're lucky enough to get large enough salary increases to improve your capacity without the need for debt reduction - great. And for some, that will be the case. Or, if you're lucky enough to be the beneficiary of a large windfall that you can use to reduce debt - great. For even fewer, that will be the case. Otherwise - whether you've hit the ceiling yet or will do so after 1 or 2 or 3 more purchases, improving your future ( not current) servicing needs to be on your radar now, because whether now or later, debt reduction facilitated by cash flow will be necessary for you to progress. OK, maybe you can find the 11 or 12% yielding properties that may also assist with improving servicing - and if so, great. Otherwise, you need to do something else besides hoping equity will solve your problem. It wont. NRAS is the tool that will do the job for my clients and I. If you dont like NRAS ( I cant help people who cant see the forest from the bleedingly obvious regulatory trees) then consider dual occupancy, or commercial ( if you can afford it)

It's been 12 months now since posts related to this subject started, and there have been countless numbers of very experienced brokers telling the forums the same things - the regulators arent relaxing the two core levers that slow borrowing capacity - sensitised assessment rates and HEM's - in any significant way, any time soon. Rates may fall - yes, but unless actuals and reduced living expenses are reintroduced, this is going to be what it's going to be...and it isnt looking like changing.

These were the two ingredients that allowed such large portfolio's to be accumulated by many here in the past, but they will not be available to those seeking to build one in the future. By now, anyone reading these forums really should fully comprehend that fact, and they should be planning around it and recognising that they need some sort of cash flow /debt reduction strategy introduced to grow their existing or future portfolio, because the lending that underpinned and drove a CG only methodology has been UBER'd ....

 

This is great content once again @euro73. thanks for the insight. I'm yet to devise any form of debt reduction through CF strategy as of yet as I'm in accumulation phase but it's certainly food for thought. I'll have to continue to increase income yr after yr also - certainly can't get complacent with this piece.

 

The crazy thing in all this is that experienced investors with multiple IPs are arguably ( and perhaps generally ) much less risky than many and perhaps most high-LVR P+I lends for PPORs ( provided the investors have adequate strategies in place to reduce their risk ).

What input did the broader finance industry ( other than senior positions in the banks/lenders ) actually have into the regulatory process? ( including the specific constraints that factor into serviceability assessment ). Or is it all just up to the senior figures in the banks to determine how they will control the finance in a way that meets the APRA guidelines?

Also - How much input has the finance industry actually *tried* to put into the process? ( e.g. through the FBAA )

 

I can tell you that APRA repeatedly asked the banks to cool their jets over the 12 - 18 months leading up to the intervention. Repeatedly. There were many shots across the bow of the banks, asking them to pull I/O lending back and asking them to get more serious about assessing investors capacity to repay using more realistic living costs to do so. They were all ignored.

If investors with multiple IP do have adequate strategies in place to reduce risk - and by that I will assume you mean significant buffers and strong enough yields to be able to manage rates of 7 -8% on a P&I basis, then they can certainly continue to borrow at 80% very easily, using the last couple of lenders who take "actuals"

But if they are relying on quite skinny yields, never ending I/O terms and don't have significant buffers in place, they represent significant risk should rates return to 7 or 8% and P&I.

I suspect most investors definitions of "adequate" may differ from the regulators definition of adequate, which would be the foolish thinking of those who still been believe the uninterrupted wage growth and falling interest rates Australia has enjoyed over the past 30 years won't or can't ever end, when in fact it has already ended. Stress test a portfolio at 7% - 8% P&I and see if that holds up. If it does, it's probably somewhere in the "adequate" range the regulators would like all borrowers to be. The regulators role is to ensure our banking sector is prepared for that scenario, not for a 4% I/O scenario.

 

So.... what you're really saying is that every sub 100K earner with a big juicy PPOR mortgage being able to load up on rates of 4% I/O and serviced based on concessional HEM's and "actuals" is a good thing which should be encouraged ? what happens to them when I/O terms expire? or when rates hit 7 or 8%? Or when a recession comes?

I'm going to assume you were out driving yellow cabs until very late and you typed that in jest!

The easy peasy gravy train of wealth growth via resi property , driven by easy credit - is over as you knew it. Still there for the taking, but going to have to work a little harder and a little smarter to make it happen, now. Going to have to learn to manage servicing far better than was ever required in the past 30 years, which means far more attention has to be paid to debt reduction for the first time.