I’ve had many clients ask me about recent changes to banking policy in regards to Investment Loans. The APRA decisions are interesting. In my view they're trying to find a way to counteract the property heating effect that the RBA rate cuts are having in Sydney.
The government is trying to bring down the dollar to make exports more competitive and imports less so, in an attempt to insulate the effects of China's lessening demand for Australian minerals, amongst other things. The cash rate is a complex decision making process designed as a mechanism to control inflation and unemployment. We're very much running in a two-speed economy with mining propping up the country as retail sales continue to struggle. By cutting the cash rate, the hope is to stimulate both these parts of economy in the domestic and foreign spheres. Traditionally, when home loan rates drop, domestic spending in the retail sector increases. Also our dollar falls and foreign spending in the Australian economy increases through export demand.
However, an unwanted side-effect is that with home loan rates at historic lows, the Sydney property market continues to heat up to the point that it is increasingly unaffordable for locals. A big contributor is investment buying and SMSF buying. So APRA moves in to make lending more difficult in these areas. By doing so, the hope is that the economy will be stimulated in the areas outlined above but the heat taken out of the Sydney market.
APRA regularly reviews the risk profiles of Australian lenders to ensure that they're not too top heavy with risky loans. The sweet spot is an 80% LVR to PAYG employees. So by re-evaluating the risk profiles of lenders' books to fall into alignment with this, they force lenders to change their lending policies. Hence, the recent changes to banks' policies in regards to LVRs, income to be considered, types of ownership etc..
The Sydney market shows clear signs of a market in the process of ‘busting’. Rents haven’t increased, demand for new, off the plan apartments is softening. Lending policy is an ever changing process and there is a good chance that as the market continues to fall, policies will again change.
So, if Sydney is no longer the darling of the Australian property market, find out where is. Stay ahead of the curve and invest wisely with advice based on solid independent research.
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