Connect with us

Finance

RBA Warns an Increase Level of Property Investment Risk

Published

on

Reserve Bank of Australia

The RBA deputy governor Philip Lowe says recent measures from banking regulator, the Australian Prudential Regulation Authority (APRA) were having a “positive, albeit modest, effect”.

“In the past couple of weeks you’ve seen a number of banks say they’re requiring larger deposits for investor loans, they’re offering smaller discounts on interest rates and smaller rebates, they’re requiring higher serviceability levels,” Dr Lowe said at yesterday’s Thomson Reuters regulatory summit in Sydney.

Reserve Bank of Australia

But he added that the use of macroprudential tools can only be pushed so far.

“This is an issue that’s very clearly on our radar screen. How far can you push the tighter regulation of the banking system without causing the same volume of loans to be made but just through a different financial intermediary,” Dr Lowe said.

“In the ’70s and the ’60s we had a lot of the tools that are currently in vogue and we ended up getting rid of them was because what happened was that institutions found out ways of getting around the rules.

“Finance is very flexible and people are very good at moving the money from the people who have it to the people who want it.”

He said Australia has not experienced rapid growth in non-bank loans yet, but any tougher regulations would make that far more likely.

“Maybe a few more loans are being made through non-bank lenders than through the banking system as a result of the tougher requirements, but it’s very much at the margins,” he said.

“But it’s a margin that we do need to watch very carefully, and history tells us that if you make the incentive too misaligned between the banks and the non-banks then the funding will follow to the non-banks.”

“My conversations with a number of banks around the country [suggest] the various APRA measures are having an effect,” he said.

“The measures so far seem to be having a positive albeit modest effect and it is worthwhile seeing how those play out.

“My subjective assessment would be the level of risk in bank mortgage portfolios has risen over the past couple of years.”

Dr Lowe said the RBA was watching the steps taken in New Zealand.

“We follow these issues very carefully. Of course New Zealand’s not the only country that’s implemented some type of macroprudential regulation,” he said.

“The number of countries that have done that over recent times is very large and so we watch, study the experience of other countries carefully.”

“It is entirely appropriate that (Australian) households are careful as well because the level of risk there, while I don’t think it is extreme, it has picked up and both financial institutions and households need to respond to that,” he told the conference in Sydney.

“Household debt is high, property prices are very high, household income growth is slow, the unemployment rate has drifted up – all those things would suggest there has been an increase in the level of risk, particularly as people have bought property for investment purposes.

“In that environment, it is entirely appropriate [the banking regulator] APRA has a very close dialogue with financial institutions about the risks in those portfolios, and makes sure there are plenty of buffers there in case things don’t turn out so well.”

Source: Property Observer

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Finance

New postcode restrictions for home loans

Published

on

New postcode restrictions for home loans

THE nation’s largest lender is tightening its belt and making it even tougher for potential borrowers to successfully get a loan.

In a notice issued to mortgage brokers today the CBA announced it will roll out a range of changes including restrictions on lending in some postcodes.

This includes forcing customers to stump up fatter deposits in order to get a home loan.

It will impact all types of properties including homes and apartments and also borrowers regardless of whether they are owner occupiers or investors.

Commbank is rolling out a range of changing which will make it tougher for customers to successfully get a loan.

Commbank is rolling out a range of changing which will make it tougher for customers to successfully get a loan.

In the notice it said from Monday, December 4 the key changes will include:

– Reducing the maximum loan-to-value ratio from 80 to 70 per cent for customers without Lenders Mortgage Insurance (an insurance the customer pays and protects the lender not the borrower.) This means borrowers with a deposit less than 30 per cent must pay expensive LMI costs.

– Reducing the amount of rental income and negative gearing eligible for servicing which will impact investors.

– Change eligibility for Lenders Mortgage Insurance waivers and LMI offers for customers in some postcodes.

Home loan lending with the nation’s largest bank is about to get harder.

Home loan lending with the nation’s largest bank is about to get harder.

CBA said the new Postcode Lookup tool which will start from Monday will allow the bank and brokers to determine whether a borrower can successfully borrow in a particularly region or postcode and it will reduce customers wasting time applying where they are likely to get knocked back on a loan.

CBA has not released the postcodes and regions these changes will impact.

The move is a result of the responsible lending restrictions put on lenders by regulators to cool the red-hot lending market.

Home Loan Experts’ managing director Otto Dargan said these changes are significant and will impact many borrowers.

Home Loan Experts managing director Otto Dargan encourages borrowers to get unconditional approval before buying a property.

Home Loan Experts managing director Otto Dargan encourages borrowers to get unconditional approval before buying a property.

“Lenders keep an eye on the economy and their exposure to different property markets and adjust their lending policies to manage their risks,” he said.

“We strongly recommend that home buyers don’t commit to buy a property until they have an unconditional approval from a bank.

“You could win an auction and then find out that your pre-approval is worthless, and then what are you going to do?”

Unconditional approval is when your loan application has been fully approved and is not subject to any terms or conditions.

Originally Published: brisbaneinvestor.com.au

Continue Reading

Finance

One in five homeowners will struggle with rate rise of less than 0.5%

Published

on

ONE in five Australians are walking such a fine mortgage tightrope that they could lose their homes if interest rates rise by even 0.5 per cent.

Our love affair with property has pushed Australia’s residential housing market to an eye-watering value of $6.2 trillion.

But as we scramble over each other to snap up property while interest rates are at historic lows, we have gotten ourselves into a bit of a pickle. We might not actually be able to afford funding our affair.

An analysis, based on extensive surveys of 26,000 Australian households, compiled by Digital Finance Analytics, examined how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. And the results are distressing.

It showed that around 20 per cent — that’s one in five homeowners — would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less. An additional 4 per cent would be troubled by a rise between 0.5 per cent and one per cent.

Almost half of homeowners (42 per cent) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote.

The major banks have already started increasing their home loan rates this year, despite the market broadly expecting the Reserve Bank to keep the cash rate steady at 1.5 per cent this year.

Just this week NAB upped a number of its owner-occupied and investment fixed rate loans.

“There are a range of factors that influence the funding that NAB — and all Australian banks — source, so we can provide home loans to our customers,” NAB Chief Operating Officer, Antony Cahill, said of the announcement.

“The cost of providing our fixed rate home loans has increased over recent months.”

So as interest rates rise and leave mortgage holders in its dust, it leaves a huge section of society, and our economy, exposed and at risk.

NOT TERRIBLY SURPRISING

Martin North, Principal of Digital Finance Analytics, said the results are concerning, albeit not surprising.

“If you look at what people have been doing, people have been buying into property because they really believe that it is the best investment. Property prices are rising and interest rates are very low, which means they are prepared to stretch as far as they can to get into the market,” Mr North told news.com.au.

But the widespread assumption that interest rates will remain at historic lows is a disaster waiting to happen, especially in an environment where wage growth is stagnant.

“If you go back to 2005, before the GFC, people got out of jail because their incomes grew a lot faster than house prices, and therefore mortgage costs. But the trouble is that this time around we are not seeing any evidence of real momentum in income growth,” Mr North said.

“My concern is a lot of households are quite close to the edge now — they are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does … There has already been movement up.”

Australia’s wages grew at the slowest pace on record in the three months to September 2016, according to the latest Wage Price Index released by the Australian Bureau of Statistics (ABS).

And as a result Australia’s debt-to-income ratio is astronomical. The ratio of household debt to disposable income has almost tripled since 1988, from 64 per cent to 185 per cent, according to the latest AMP. NATSEM Income and Wealth report.

What this means is that many Australian households are highly indebted, thanks in large part to the property market, without the income growth to pay it down.

“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed,” Mr North said.

THE YOUNG AND RICH MOST AT RISK

This finding will come as a surprise: young affluent homeowners are the most at risk — it is not just a problem with struggling families on the urban fringe. When it comes to this segment of the market, around 70 per cent would be in difficulty with a 0.5 per cent or less rise. If rates were to hike 3 per cent, bringing them to around the long term average of 7 per cent, nine in ten young affluent homeowners would feel the pressure.

“It is not necessarily the ones you think would be caught. And that’s because they are actually more able to get the bigger mortgage because they’ve got the bigger income to support it.

“They have actually extended themselves very significantly to get that mortgage — they have bought in an area where the property prices are high, they have got a bigger mortgage, they have got a higher LVR [loan-to-valuation ratio] mortgage and they have also got lot of other commitments. They are usually the ones with high credit card debts and a lifestyle that is relatively affluent. They are not used to handling tight budgets and watching every dollar.”

And while the younger wealthy segment of the market being most at risk might not be of that much importance compared to other segments, Mr North said what is concerning is the intense focus on this market.

“Any household group that is under pressure is a problem for the broader economy because if these people are under pressure they are not going to be spending money on retail and the broader economy,” Mr North told news.com.au.

“The banks tend to focus in on what they feel are the lower risk segments and the young affluent sector has actually been quite a target for the lending community in the last 18 months. Be that investment properties or first time owner-occupied properties, my point is there is more risk in that particular sector than perhaps the industry recognises.”

TOUGHER HOME LOAN RESTRICTIONS NEEDED

Now an argument is mounting that Australian banks need to toughen up their approach to home lending.

“I think we have got a situation where the information that is being captured by the lenders is still not robust enough. I am seeing quite often lenders willing to lend what I would regard as relatively sporty bets … I’m questioning whether the underwriting standards are tight enough,” Mr North said.

This includes accepting financial help from relatives for a deposit, a growing trend among first home buyers.

“The other thing that I have discovered in my default analysis is that those who have got help from the ‘Bank of Mum and Dad’ to buy their first property are nearly twice as likely to end up in difficulty … It potentially opens them to more risk later because they haven’t had the discipline of saving.”

News.com.au contacted several banks for comment on whether they think a rethink of their underwriting standards is needed. Only one lender, Commonwealth Bank, agreed to comment, but remained vague on the topic.

“In line with our responsible lending commitments, we constantly review and monitor our loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. Buffers and minimum floor rates are used when assessing loan serviceability so it is affordable for customers,” a CBA spokesman said in an emailed statement.

But Mr North said something needs to be done before we find ourselves in a property and economic downturn.

“I’m assuming that with the capital growth we have seen in the property market, it will allow people who get into significant difficulty to be able to get out, however, it’s the feedback concern that I’ve got.

“If you have got a lot of people in the one area struggling with the same situation, you might see property prices begin to slip. If we get the property price slip, and we get unemployment rising and interest rates rising at the same time, we have that perfect storm which would create quite a significant wave of difficulty.

“We need to be thinking now about how to deal with higher interest rates down the track. We can’t just say it will be fine because it won’t be,” he told news.com.au.

Originally Published: http://www.goldcoastbulletin.com.au/

Continue Reading

Finance

Latest Numbers Show Lift In New Home Lending

Published

on

moreton investor

The Housing Industry Association revealed in total, there were 34,349 loans to owner occupiers purchasing homes (excl. re-financing) during August 2016, which is down by 1.3 per cent on July’s result and is 7.4 per cent lower than the number recorded in the corresponding month last year.

Lending to households building or purchasing new homes fared a little better during the month. The number of loans for construction increased by 3.7 per cent in August, but was still 1.7 per cent down on the level recorded year ago.

The number of loans for the purchase of new homes was essentially unchanged in the month (-0.3 per cent) at a level 5.7 per cent higher than a year earlier.

“It is pleasing to see lending in the new home market holding up in an environment where we are seeing the number of loans to home buyers easing across the housing market more broadly,” said HIA Economist Geordan Murray.

screen-shot-2016-10-11-at-1-22-02-pm

“Looking more closely at lending for new homes, the number of loans for construction has been gradually trending down since late 2014.

“This segment of housing finance is closely aligned with the detached house building market and lending activity has been generally consistent with expectations given the level of detached house activity,” he said.

“In contrast, the number of loans to those purchasing newly built homes has been steadily trending higher. It is in this segment of housing finance that we will see evidence of the lending activity related to the boom in apartment building, but the figures are yet to fully reflect the record level of construction activity.

“As the large numbers of apartments purchased in projects that are currently under construction reach completion over the next year, we should anticipate the number of loans in the segment of the market to increase quite significantly – particularly in New South Wales and Victoria,” Mr Murray said.

Original article published at www.theurbandeveloper.com  by Staff Writer 11/10/16

Continue Reading

Make Your Super Work

smsf property investment smsf borrowing

Positive Cashflow Property

duplex designs, dual occupancy homes

Property Investment Advice

investment property calculator successin property

Trending