Saturday, 5 August 2017
Bull run: A man jogs in front of newly-constructed residential and commercial projects in Sydney. Demand from property investors has contributed to a bull run that has catapulted the city into the ranks of the world’s priciest property markets. — AFP
Curbs taking effect and home prices are starting to cool
ONE of the key engines of Australia’s five year housing boom is losing steam.
Property investors, who have helped stoke soaring home prices in Australia, are being squeezed as regulators impose restrictions to rein in lending.
The nation’s biggest banks have this year raised minimum deposits, tightened eligibility requirements and increased rates on interest only mortgages a form of financing favoured by people buying homes to rent out or hold as an investment.
Australia’s generous tax breaks for landlords, combined with record-low borrowing costs, have made the nation home to more than two million property investors. Demand from those buyers has contributed to a bull run that has catapulted Sydney and Melbourne into the ranks of the world’s priciest property markets. Now, signs are emerging that the curbs are starting to deter speculators and home prices are finally starting to cool.
Take the case of 29-year-old Taku Ekanayake, a former IT salesman who owns six investment properties in cities including Adelaide and Brisbane. He shelved plans to add a Melbourne apartment to his portfolio after rising rates increased his annual mortgage bill by A$14,400 (US$11,360). The biggest banks have hiked rates on interest-only mortgages by an average of 55 basis points this year, according to Citigroup Inc.
“With the rate hikes I don’t think it is a very viable option for me to invest there now,” he said.
In other signs the market is cooling, property auction clearance rates in Sydney have held below 70% in seven of the past eight weeks, compared to as high as 81% in March before the curbs were imposed. And investor loans accounted for 37% of new mortgages in May, down from this year’s peak of 41% in January.
That’s helping take the heat out of property prices, particularly in Sydney, the world’s second-most expensive housing market. Price growth in the city slowed to 2.2 percent in the three months through July, down from a peak of 5% earlier this year, CoreLogic Inc said on Tuesday. In Melbourne, rolling quarterly price growth has eased to 4.2%.
“There have been some signs that conditions in the Sydney and Melbourne markets have eased a little of late,” the Reserve Bank of Australia said on Friday.
While the regulatory curbs are aimed at ensuring the financial system could weather any downturn in the property cycle, they may also make it easier for first-time buyers to break into the market.
Housing has become a popular investment for Australians, who can claim the cost of an investment property including interest payments as a deduction against other income, such as salary, and get a capital gains tax discount if they hold the property for more than 12 months.
The favourable tax treatment for investors has become a hot political issue, with young first-time buyers protesting they are being priced out of the market. The opposition Labour party has pledged to wind back the concessions if elected to office, while the government announced a range of policies in its May budget aimed at addressing housing affordability.
Now, with costs increasing, and price growth slowing, property may lose some of its luster as an investment asset.
The changes “reduce investors’ ability to pay, and means they have to pay owneroccupier values rather than investor values,” said Angie Zigomanis, senior manager, residential property, at BIS Oxford Economics in Melbourne.
The restrictions will take “some of the bubble and froth” out of the market, he said, forecasting median Sydney house prices will decline 5% by the end of mid-2019 as investors retreat.
To be sure, investors aren’t exiting the market entirely. Ekanayake, who recently quit his job to start a mortgage broking company, is now focusing on cities such as Brisbane and Adelaide where houses are cheaper, but haven’t enjoyed the price growth of Sydney or Melbourne.
He says many of his clients are now looking for properties where they can still make a profit with a principal-and-interest loan.
Even so, banks may need to get even tougher on lending standards in order to to meet the regulator’s order to restrict interest-only loans to 30% of new residential loans by September.
Interest-only loans are seen as more risky because borrowers aren’t paying down any principal and may look to sell en masse if property prices decline. Moody’s Investor Services in June cut the credit ratings of Australia’s big four banks, citing interest-only and investment loans as an indicator of rising risk.
“We’ve already seen developers start to shift their efforts and focus more on owneroccupiers and less on investors,” said Sophie Chick, head of residential research at Savills Australia. “The restrictions have really made investors think twice.” — Bloomberg
Read more at http://www.thestar.com.my/business/business-news/2017/08/05/australia-slams-brake-on-property-investors/#tIFGMsUVdSiTMCr6.99
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