Housing Affordability Part 2

Dark clouds looming for "Off the Plan" property investors

Property investors who purchased "off the plan" in 2014 or 2015 may run into serious problems completing their purchases when construction finishes later this year.  Many will have approached their bank last year and received indicative approval that they could finance their purchase when it completes.  But so much has changed:

• bank lending rules have tightened
• investment loan interest rates have been increased
• lending ratios have been wound back

Prudent investors should not be too troubled by a 50 basis point increase in interest rates but those with small deposits or with large existing loan portfolios may have difficulty obtaining finance approval.  Indicative approvals provided in 2015 are not worth the paper they may have been printed on.  They are not a commitment by the lender to provide funds to that same investor in 2016.

Effect on Investors

To gauge the potential size of the problem Loanscape has made an analysis of the borrowing capacity of a typical investor based on the lending rules of several banks in January 2016 compared with January 2015.  In each case the difference is quite dramatic.

Copyright:  Loanscape 2016

Effect on Owner Occupiers

For owner occupiers the story is somewhat more benign.  While in some cases lending rules have tightened marginally, they are still likely to reap the benefits of lenders trying to woo them with favourable interest rates as they continue to re-balance their lending books away from investment lending. The chart below shows that borrowing capacity for owner occupiers has even increased with some lenders.

Copyright:  Loanscape 2016

What is the Likely Outcome?

We could be in for some interesting times ahead.  There will be some investor borrowers who will run into difficulties in having their loans approved when their projects complete.  Some of the shortfall will be taken up by non-bank lenders which have not been subjected to the same level of scrutiny or regulation by APRA and ASIC.  But there will be some borrowers who will not be able to obtain finance and will be effectively forced to sell down their stake in OTP purchases so that they do not forfeit their deposit.

Developers which have relied too heavily on the investor market may be left with a serious problem if too many clients cannot complete their purchases, potentially exacerbating localised surpluses in the supply of units in some suburbs or precincts.  It may take the market several months or even years to absorb this oversupply.  In this environment there is the strong possibility that their will be localised falls in property prices. Heavily exposed developers may run into financial difficulties and some might even go into liquidation. 

Doomsaying?  Well it has happened before.  The market rarely accommodates every optimist.

For owner occupiers and first home buyers perhaps there will be some opportunities to pick up a relative bargain from a "motivated vendor".  But these potential buyers also need to take care that the price they are asked to pay is realistic compared with the local second hand market.  A distressed sale is not necessarily a bargain.  And they should avoid the superficial attraction of short term Vendor Finance which is often a convenient way for developers to lock in a buyer and let the market provide the reality dose a few years later.

Disclaimer

This article contains general commentary only and does not constitute investment or credit advice.  It may not be suitable or relevant to you because it contains general advice that has not been tailored to your personal circumstances. Please seek professional financial, credit and taxation advice prior to acting on any information in this article.