Interest rates: must read: Property Finance Made Simple

What is in store for borrowers: Anyone with an interest only loan, whether on an investment property or their own home, a high level of debt against a property they own, or any investment loan will start to face climbing interest rates. The risk is obvious, many people have foolishly taken on too much debt, especially having bought in Sydney or Melbourne in blue chip suburbs recently. They think they can afford the debt now, but if rates go up by another 2-3% there could be a bloodbath.

 

There are a couple of things people can do to reduce their level of exposure to rising rates, and exposure to cost of debt, it may not be too late for some people.

 

Speaking at a conference in Sydney on Monday, Wayne Byres, chairman of the Australian Prudential Regulation Authority (APRA), made it clear that tighter restrictions on Australian property investors may be on the way.

Byres told Bloomberg that a combination of rapidly rising property prices in major cities (particularly the southeastern capitals), record household debt, anemic wages growth, and competitive pressures among the lenders was creating an “environment of heightened risk”.

Byres singled out Sydney, the nation’s largest and most expensive housing market, as being particularly high risk—an assessment that aligns with recent data from CoreLogic, which shows that the median dwelling price in Sydney had risen by close to 19% over the past 12 months.

Many analysts believe the growth of investor activity in Sydney, and to a lesser degree in Melbourne, were partially responsible for the sharp increase in house prices.

Rather alarmingly, lending for housing investment rose by 4.2% to $13.7bn in January this year, the largest monthly increase since May 2015, according to data from the Australian Bureau of Statistics. January 2017’s figures were 27.5% higher than the levels of a year earlier, and had the strongest growth since January 2015, the month after APRA imposed its 10% annual cap on investor borrowing.

Separate data from the Reserve Bank of Australia said that housing investor credit rose by 6.6% in the year to January. While this is below APRA’s annual 10% cap on investor lending, it is still a significant acceleration on the levels reported in mid-2016.

In response to the lift in investor activity over the second half of 2016 and in early 2017, Byres said APRA’s role was “to make sure the banking system is resilient and that lending standards are sensible in an environment of heightened risk”.

When asked what form a potential crackdown on banks would take, Byres referenced his 2014 letter to lenders, which identified investment loans, interest-only mortgages, and buyers with high loan-to-value-ratio loans as potential targets.

APRA: Tighter Restrictions On Property Investors May Be On The Way

By Michael Mata

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