When you read about the high property auction clearance rates, our historically low interest rates and people buying apartments for their children, it seems like borrowing to buy property is a one way street to wealth – but the risks are increasing.
A recent article in the Weekend Australian Financial Review (8-9th August 2015) has highlighted how the investment lending landscape in Australia is rapidly changing. Many investors are being caught out by recent bank loan changes and in the case of off the plan apartments, some are also being hit with valuation shortfalls and lower than promised rental income upon completion.
According to data released by the ABS, Multi-unit dwellings (mainly apartments) accounted for a record 47.0 per cent of total dwelling commencements in the year to May 2015, up from 30.0 per cent in the mid 2000’s. Multi-unit dwelling approvals have risen strongly in most major cities in recent years with Melbourne and Sydney the standouts
Apartments are now a key part of the market due to:
- Lifestyle changes – people are more accepting of apartment living and want to live closer to work and entertainment;
- Demographic changes – more people are downsizing given the ageing population and the number of single households is increasing;
- Affordability – apartments are cheaper. The median apartment price in Sydney is 28 per cent lower than a house and in Melbourne they are 22 per cent cheaper; and
- Planning changes – state and local governments are recognising the need for higher density living, particularly around transport and employment nodes to accommodate the growing population.
The Australian Prudential Regulation Authority’s (APRA) recently moved to increase the capital requirements on the big four banks (ANZ, CBA, Westpac & NAB) plus Macquarie. The result of this move has been a significant tightening of credit in investment and commercial lending across the whole industry (i.e., not restricted to the five banks mentioned by APRA) to provide a buffer against defaults
As a result of increased capital holdings, some banks are capping loan to value ratios to 80%, as well as increasing interest rates on new and existing investment loans. Some lenders are completely pulling out of the investment lending market altogether
Mortgage brokers estimate there are 90,000 apartments currently being constructed in Australia that have been sold off the plan but not yet settled .According to statistics from CoreLogic , the buyers of about 20% of these properties have paid a deposit of just 10% of the full purchase price .These buyers typically arrange finance closer to when the apartment nears completion . Given the changes in the investment lending landscape mentioned above, many investors are finding are finding loans are becoming more expensive and harder to get when they seek the financing for the balance of the purchase price upon settlement. This issue becomes even more of a problem if the apartment is revalued at a lower price by the lender
Whilst residential property ( owner occupied or investment ) can have a role to play in any portfolio of assets , the priority for all investors should be to have a clear understanding of their most important goals ,the values upon which they are based and their current financial reality . In our opinion wealth is neither created or preserved by merely entering into “one off” transactions – it is created by an ongoing process of developing and implementing a personalised strategy that will give you the highest probability of achieving your goals in the timeframes you have set
For those people contemplating borrowing to buy investment property the risks are increasing so it may make sense to explore a broader range of suitable strategies before committing to this singular approach