It’s unlikely that many were holding their breath awaiting today’s RBA’s monthly board meeting announcement. As expected, there was no change to the official cash rate of 2.0 per cent. The rate sits at a record low for the third consecutive month.
The RBA might be taking a wait-and-see approach to cash rate changes. Recent changes to investor borrowing policy imposed by APRA (Australian Prudential Regulation Authority) and seasonal adjustments might take some of the heat out of the Sydney and Melbourne markets reducing the need for the RBA to act.
We asked Zac Peteh about the recent changes and how they might impact the investor market.
Do you expect to see a slowdown in investor borrowing?
Yes. The changes the major banks have made in line with APRA recommendations to remove discounting and tighten lending policy will result in reduced borrowing capacity and tighter yields for investors. Qualification is more difficult. This is ultimately going to lead to reduced borrowing power for investors. For example, rental income for serviceability with a couple of majors is now assessed at 65% of gross rental, whereas previously this was assessed at 80%. Stressed repayments are calculated at a higher buffer than prior for investors. Also, valuers are adopting a more conservative outlook on the property market in the short term and factoring in a minor correction when valuing for equity to leverage for investor borrowings.
Do you think the adoption of tighter policies by the major banks make non-bank lenders more attractive?
Yes, I believe non-bank investor lending will become a viable lending option in the short-term. Currently the non-bank lenders have demonstrated a strong appetite for this segment but it won't be too long before they are also constrained by APRA requirements.
What should investors do to prepare for further changes to investor borrowing?
There are still good rates, discounts and fairer policies available with non-bank lenders. Even if buyers aren’t ready to buy today, securing pre-approved finance with non-bank lenders means if new restrictions are put in place they won’t affect pre-approved arrangements. Last month, we saw a mad rush for clients to secure pre-approval prior to the APRA restrictions taking affect. Pre-approvals are usually valid for up to 3 months, so if you’re planning to invest in the near future, it’s a good idea to get the pre-approvals done now.
Do you think less people will purchase property via their SMSF (Self Managed Super Fund)?
No, because there is no discounting whatsoever for SMSF loans currently. The assessment criteria is much simpler however borrowing capacity will change marginally as the lenders modify how they assess rental income.
Do you think the changes will take the heat out of the Sydney property market?
Yes. As the investor market represents a large percentage of the activity to date, by restricting this segment the outcome is inevitable. However, our real estate contacts tell me that stock is low with demand still quite high, offset this with seasonal adjustment for winter, I think the impact may be exaggerated somewhat.