Monthly Archives: June 2015

Will the new lending rules impact the market? Lending to investors to be tightened.

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.

At last!!! Guidelines to protect buyers from underquoting

In welcome news for home buyers, real estate agents are now more accountable for the price they quote than ever before.

For years, many agents’ preferred trick has been to entice the home seller with the promise of a high price and at the same time lure the buyers into bidding with the hope of a low price.

The intention was to engineer a sale between the misled parties and then blame ‘the market’ for any discrepancies.

In a soft market, the agent blamed the lower than expected price on ‘the market’ to the seller.

In a strong market, the agent explained the high price away on ‘the market strength’ to the aggrieved under bidders.

There will still be instances where properties do genuinely exceed expectations. But the genuine cases will be fewer now as a result of the new guidelines.

Updated price guides

In a welcome move, agents must now increase the price guide when, or if, an offer is made above the agent’s price guide. The agent is forbidden, by law, to continue marketing the property at a lower price than what has already been offered.

This ensures that potential buyers are given an insight into the current price levels at all times of the sales campaign.

Collectively, this measure will save home buyers thousands of dollars in due diligence. Protecting frustrated and misled under bidders who were spending thousands of dollars on due diligence has been a catalyst to these new guidelines. Some buyers may be frustrated by the market’s strength going forward, but instances where they are blatantly misled by under quoting will diminish.

We have already seen many instances where price guides have been increased mid-campaign to be in line with the offers and buyer feedback. This ensures that those buyers who are unable to win the bidding, do not enter the bidding on false pretences.

As a result of these guidelines, you can expect fewer bidders at each auction, as the buyers who are unable to win the bidding, are priced out of the bidding, prior to the auction.

The rising market has seen bidding and buyer feedback exceed many agents’ price guides very early in their campaigns. Some agents may have deliberately left prices artificially low to entice more bidders, creating the illusion of frenzy at their auctions.

It’s been reported that somewhere between 25 and 30 percent of all properties scheduled for auction have sold prior to the big day. Given these guidelines force agents into increasing the price guide in line with market feedback, you can expect even more properties to sell prior to auction.

The guidelines on underquoting are pragmatic, balanced and fair.

Buyers (and sellers) should also note the following extract from the Fair Trading Underquoting Property Prices Guidelines – “When a price range is given, NSW Fair Trading considers the lowest price is the agent’s representation to prospective purchasers of a realistic potential selling price. For example, a range statement of either ‘$500,000 +’ or ‘offers above $500,000’ will be taken to be a price estimate of equal to or above $500,000.”

This particular aspect of the guidelines will protect buyers in a strong market and sellers in a soft market. It’s essentially the equivalent of advertising the seller’s reserve price. It beggars belief that Fair Trading have had to be so firm in getting agents to tell buyers the price that sellers ‘really’ want.

Bidding below the reserve price

The current market conditions (and tight stock levels) are resulting in multiple bidders on each property. But these guidelines will last longer than the market conditions.

In a soft market, agents often promote properties below owners’ reserves. When some owners question the merit of such a strategy, their agent assures them that it is simply to create buyer competition to drive the price higher.

The real reason the agent was so determined to promote the property below the seller’s reserve price is because he or she knows the reserve is too high, even though it was the agent that originally quoted such a high price. If this seems unbelievable conduct in a professional industry, rest assured, many agree with you.

Such tactics are not happening as much at present due to the buoyant nature of the market. But when it settles down again (which it always does) the guidelines will protect both buyers and sellers.

Coming back to the current market conditions, buyers should note that the market is still setting new highs. Therefore, prices will continue to exceed expectations and sales evidence in some instances. Being outbid does not mean the agent has deliberately underquoted. In most instances, it simply means that there was another buyer prepared to bid higher. If this is an unacceptable reality, then it may be better to wait until the boom passes over.

When it is all said and done, an agent’s role is to maximise the selling price for the owner, by fair means. And these guidelines ensure that there will be fairness in the agents pricing strategy. From there, it’s up to the open market to decide….