The Australian Prudential Regulatory Authority (APRA), which oversees banks, credit unions, building societies and other financial, insurance and superannuation institutions, has called for banks to tighten lending to investors.
This is a move designed to ensure the sustainability of the market going forward. Like any policy, even a small change such as this, can have a big impact.
It’s interesting that the APRA has targeted investor lending because that is where the current perceived risk is, in the system.
In comparison to owner-occupiers, investors will be hit with the equivalent of an interest rate rise going forward.
In anticipating the market reaction in Sydney, most commentators believe that any slack caused by investors dropping off will be easily absorbed by the true owner-occupier buyer market.
A largely unreported aspect of housing finance is the percentage of owner-occupier buyers who gain finance approval as an ‘investor’ and then become an ‘owner occupier’ on settlement, or shortly thereafter.
These ‘investors’ structure their loans as investments with the promise of rental income to support their ownership. The way the system is currently structured, there is no great deterrent for accessing investment finance this way. Even though it may be a breach of their loan agreement.
The short term advantage to this structure, is they can obtain additional finance they would otherwise not have been approved for. But this is now about to change.
Meriton Apartments boss Harry Triguboff recently told the Australian Financial Review that he was totally unconcerned by the changes. Mr Triguboff was quoted as saying that
‘If the banks tighten their lending, yes, that will stop investor demand. But I am not worried. Chinese investors will not stop. I will keep building. Don’t worry, the Chinese will come’.
These comments from Mr Triguboff are interesting for a few reasons. First, he believes that ‘investor demand will stop’ in reference to local investors.
He did not say slow, he said stop!
Secondly, he implied that Meriton’s sales will be unaffected by any change in the local domestic demand for housing. As a big developer selling new construction products, Meriton are legally entitled to sell real estate to overseas investors who he says ‘will continue to come’.
If the changes by the APRA and retail banks do impact local demand, developers may well have that white knight in overseas investors that the broader market does not enjoy.
Sellers of existing housing do not have that same luxury because overseas investors are prohibited from purchasing existing housing.
Just what effect this APRA policy change will have on the Sydney housing market will be interesting to see.