In our last update, we talked about increased capital requirements and costs and how this affected the availability and cost of property funding. Since then, a number of other factors have also started to restrict funding for property. Some of these factors will have a short term effect, but others are likely to last longer.
Banks manage their loan exposures by a number of ratios and limits. A couple of key ones which affect property lending are (1) the ratio of development to investment limits and (2) the ratio of property to non-property limits.
APRA, which oversees the Australian banks, monitors these ratios closely.11
A number of banks are close to their limits for development lending. For some, this is due to capital ratio issues which are being caused, in part, by capital tied up in Sydney and Melbourne apartments which are still to be completed.
Combined with concerns as to potential oversupply, this has resulted in restricted availability of development funding. Available funds are being allocated to existing customers but on much more conservative terms. The other ratio which is becoming relevant is the overall ratio of non-property to property lending. Property is being affected as much by its own growth as a lack of growth in the denominator, non-property lending.
In the non-property sector, there are few sectors which are growing, becoming relevant, or are expected to grow significantly. Lending to the resources sector is reducing and the outlook and loss provisioning is actually reducing capital availability. Tourism, whilst it is doing well as a sector, is not a big user of capital and rural lending is stable.
One of the biggest areas of non-property limits is residential mortgages. Over the past few years, APRA has intensified its scrutiny of the mortgage lending practices and risk profiles of bank’s exposures. Last week saw Westpac announce it was halting lending to non-residents.
The increased scrutiny from APRA may limit growth in residential mortgage lending. As a key part of the non-property limits, this could limit growth in property limits for Australian banks.
Banks go through cycles where the focus is either revenue growth or return on equity (ROE). When revenue is in focus property lending is a way of generating quick revenue growth. We are now in a cycle where the focus is on ROE’s. As a result property lending is restricted as capital is deployed to higher returning parts of the Banks and costs come under more scrutiny. The banks’ focus on cost reductions is starting to affect a number of property teams through staffing freezes or reductions. At the same time, banks are facing resource constraints and frontline staff are being required to do more in terms of analysis of new applications and existing exposures.
What Does This Mean For Borrowers?
In this environment, loans generally get allocated by funders into the good, the bad, and the ugly baskets. The good loans continue to get done at reasonable margins and with reasonable appetite from funders. The bad, that is, anything a higher degree of risk, can get done but take a lot more work and time to set with more limited demand, higher pricing, and/or increased covenanting. The ugly simply aren’t getting funding.
There is no doubt it is getting tougher to get finance. However, the groups who are willing to put in the upfront work – and present their proposals the right way – will continue to get funding and do so at a time when the base rates are at historically low levels. CBRE believes these groups will be rewarded for their efforts as they will face less competition on acquisitions. CBRE assists borrowers by delivering a broader range of funding options from both banks and non-banks.
For vendors, more complete due diligence packages, provision of indicative funding terms, and a detailed understanding of the buyer’s funding options and how to assist them in obtaining funding can dramatically improve sales outcomes.
Originally Published On: http://www.theurbandeveloper.com/
RateCity predict June and then August rate cut
Home loan comparison website RateCity.com.au expects the Reserve Bank to cut rates at the June meeting, and then again as early as August.
RateCity’s research director Sally Tindall said cutting rates was no longer an “if’, but “when” scenario for the RBA.
“Governor Lowe has been extremely hesitant to cut the cash rate, but he’s working against a backdrop of rising unemployment, falling inflation and less than impressive wages growth,” she said.
“If he doesn’t cut tomorrow, he’ll catch much of the nation by surprise.
“The decision seems close to a foregone conclusion. The one thing that could hold him back is the fact that he only has a few trump cards left in his hand before he bottoms out, but he’s made it very clear he’s prepared to play.”
RateCity’s forecast for two cuts would take the official interest rate down to 1 percent.
If the cash rate is cut to 1 percent, owner occupier variable home loan interest rates are set to drop below 3 per cent, while investor rates could fall as low as 3.24 per cent.
“If a rate cut does happen, there will be pressure on the banks to pass it on in full.
“Banks have been hiking rates since 2017 due to the high cost of funding, but this pressure has dissipated, so the next RBA cut should, in theory, be passed on in full.
“That said, it’s been a tough year for the banks in a slowing home loan market, so some lenders may choose to hold part of the cut back,” she said.
APRA Moves to Scrap 7pc Loan Buffer
In a move that is most likely to benefit owner-occupiers and the wider property market, the Australian Prudential Regulation Authority is proposing the 7 per cent serviceability buffer on home loans be removed.
With housing prices continuing to fall sharply in Sydney and Melbourne, APRA’s unwinding of its restrictions is part of a coordinated action by the prudential regulator, central bank and government.
The decision, in the wake of the weekend’s federal election, will provide banks with credit growth and reduce pressure on margins by lessening the need for rate cuts.
This may be more good news for the banks, following their big rise in the markets on Monday, but the news could also have negative implications on Australian household debt levels.
The banking regulator said it was putting its 7 per cent minimum interest rate “floor” under review, because the policy may have reached its use-by date after reviewing its “appropriateness”.
APRA first introduced the serviceability guidance in December 2014 as part of its efforts to reinforce sound residential lending standards in an attempt to temper ballooning house prices and surging housing investor loan growth.
They required the banks to assess all home loans against a floor of 7 per cent or 2 per cent above the rate paid by the borrower, whichever was higher.
Banks have typically added a further 25 basis points to the 7 per cent threshold taking it to 7.25 per cent and a buffer of 2.25 per cent.
If the changes were to go ahead, authorised deposit-taking institutions (ADIs) would “be permitted to review and set their own minimum interest rate floor for use in serviceability assessments”.
“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” APRA chairman Wayne Byres said.
“Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.
“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards.
“Rather, it is simply recognition that the current interest rate environment does not warrant a uniform mandated interest rate floor of 7 per cent across all products.”
The proposed revision comes as financial markets are anticipating the Reserve Bank will lower official interest rates to 1.25 per cent in the coming months.
In an attempt to rebound lending growth, APRA has been quick to support the banking sector, removing its 10 per cent growth cap on investor lending and 30 per cent limit on interest-only lending.
Lowering the floor could also provide some welcome support for the stricken housing market, following a 10 per cent slide in national house prices.
APRA has set a four-week consultation period on the proposals, closing on 18 June, but they are expected to be confirmed.
Luxury Noosa home fetches $8m as buyers rush to cash in
INTERSTATE buyers lusting after the Noosa lifestyle are forking out millions for waterfront properties, as they rush to cash out of Sydney and Melbourne’s flagging housing markets.
INTERSTATE buyers lusting after the idyllic Noosa lifestyle are forking out millions for waterfront estates, as they rush to cash out of Sydney and Melbourne’s flagging housing markets.
The ink has just dried on the purchase of an ultra luxurious, waterfront home in Noosa Heads for a cool $8 million in one of the biggest settlements in the resort town so far this year.
Selling agent Adam Watts of Century 21 Conolly Hay Group said the four-bedroom, four-bathroom Hamptons style property, with its own private jetty, at 45 Witta Circlehad just settled after selling to an expat to use as a holiday home.
Mr Watts said interstate and international inquiry for Noosa’s prestige market was strong, with many people wanting to move there for the lifestyle — not just to buy a holiday home.
A luxurious house on the waterways of Noosa Sound has also just sold for $5.75 million to a Melbourne buyer planning to retire in the sunshine state.
Selling agent Nic Hunter of Tom Offermann Real Estate said another two, older-style properties had gone under contract in the same street at the weekend for around the $4 million mark each.
And down the road in Sunrise Beach, another four bedder on the beachfront has just been signed for $4.2 million.
Mr Hunter said the buyer of 27 Mossman Court had previously owned a holiday villa in Noosa, but decided it was time to move there for good.
“There are five bedrooms, so plenty of room for all the family to come and visit,” Mr Hunter said.
“He wants to enjoy fishing out on the jetty with the grandkids.”
Mr Hunter said the increase in interstate migration to Queensland was being felt strongly in the Noosa region, with buyers snapping up properties on the water with proximity to Hastings Street and room to park a boat.
“It’s a big trend going on here at the moment,” he said.
“The higher-end, lifestyle seekers are fuelling the market — mostly from interstate.”
The latest Herron Todd White property market outlook reveals expat buyers benefiting from the weaker Australian dollar are looking to the Sunshine Coast as Sydney and Melbourne investors feel the effects of a softening market.
The report cites proximity to the beach as a driving factor for purchasers, which was expected to continue in 2019.
HTW expects the prestige markets in Noosa to continue to see “some good activity this year on the back of some record sales in 2018, but it may be impacted by the slowdown in confidence in the Sydney and Melbourne markets.
Originally published as Cool $8m for Noosa dream home
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