The lowdown on the banks’ changes to investor lending rules

There are obvious concerns in regards to the level of house prices in Australia. Investors are paying over the odds in auctions while interest rates remain at record lows.

RBA governor Glenn Stevens has been very vocal about his concerns about the rising prices in areas like Sydney and Melbourne. The Reserve Bank of New Zealand introduced macroprudential measures to try and restrict lending and curb rising house prices in Auckland, and APRA are becoming increasingly vigilant on the lending that the banks are doing. The big four banks have all talked about prudent approaches and best practice guidelines in this sector.

This expression of vigilance from APRA has made a difference. Some banks are starting to implement tougher policies and are looking at deposit rates required. Whether this will create a period of stability for the housing market though, I’m not sure. The sheer volume of overseas investment at present seems to be overwhelming. It may take an interest rate hike to really make a difference in this investor market, and that’s not likely to come until 2016 at the earliest.

After receiving big pressure from regulators, the largest banks in the country are finally tightening up their lending to housing investors. This has come about as a result of the currently booming housing market, and is a real attempt to cool things down for a while.

But how do banks plan to do this exactly? Currently, banks offer lucrative discounts in interest rates for property investors. However, they will now scale these discounts back, or in some cases, scrap them entirely, thus effectively raising interest rates for investors.

Potential further changes

So, the wheels are in motion, but is this all the change we can expect to see? In short, no.

The industry is also currently considering tackling deposits in a further attempt to settle the booming housing market. Mortgages for investors could be set at a maximum of 80 per cent of the property’s value should the proposed changes come into action.

The remaining 20 percent would be used as a buffer, to protect the lending bank from the possibility of a property crash.

Why are these changes necessary?

To put the booming property market into perspective, in the last year alone, house prices in Sydney have risen by a strikingly large amount – almost 15 per cent. Across the country, the average house price rose by 10 per cent.

The hope is that these changes will result in a period of less rapid growth of house prices, or in an ideal world, no increases in house prices at all.

All in all, it will now be more challenging for property investors to get the loans that they desire, hopefully allowing the competition for investment properties to die down a little. If house prices do indeed cool or even come to a complete standstill, this will be the measure of the success of these changes.

Kara Ordway is a market strategist at City Index Australia’s Sydney office and focuses on both FX and Asian indices. More of her posts can be found here.