HAVE THE LENDING RESTRICTIONS WORKED?

A photo by Jason Briscoe. unsplash.com/photos/sfze-8LfCXI

 

 

 

It is now a year since the banking regulator, APRA, forced the banking industry to implement a range of measures to restrict lending.

A range of measures were introduced by the banks including:
1. Limits on lending for investment purposes.
2. Higher interest rates for investment loans.
3. Changes to suburbs where banks would lend.
4. Limits on lending to foreign residents buying property in Australia.

All these changes were aimed at reducing lending for people buying investment properties.

These measures were applied across the board with very little flexibility. The aim was to slow down the real estate markets in Sydney and Melbourne but the policies were applied across Australia. These changes had an immediate chilling effect on both borrowers and the real estate industry across the country.

It is now fair to ask the question; have these restrictions worked?

I think the answer to that question is that they have but at a high cost and with unintended consequences. It appears that these measures have slowed the markets in Sydney and Melbourne to a limited extent. Property values in both cities are still going up albeit at a slightly slower pace than was the case in July 2015.

Where these restrictions have created problems is in two areas. They are; every capital city except Sydney and Melbourne and in the apartment market.

Every capital city besides Sydney and Melbourne has seen significant price falls. Perth, Brisbane and Darwin have had the extra problem of the construction phase of the “mining boom” coming to an end. This has meant a lot of people in those cities have lost their jobs which has impacted the local real estate markets. Add to this restrictions in lending and these cities are facing a double whammy of declining demand for local real estate mixed with difficulties borrowing from the banks.

The second problem area is in the huge number of apartments that have been built in Sydney, Melbourne, Brisbane and Perth. A significant number of these apartments have been sold to overseas (i.e Chinese) investors. These restrictions have now made it a lot harder for these overseas investors to borrow locally so as to complete the purchase of these units.

If these investors do not complete the purchase of the units then we will see some developers suffer financial problems and significant price drops in the value of these apartments. There are a large number of these developments due to be completed in the next two years so it will be very interesting to see how this plays out.

Finally, with many banks will no longer willing lend to overseas based investors which could have a major effect on the local construction industry. Apartments are usually sold off the plan and the construction does not actually commence until at least 50% of the units in a development are pre-sold. If investors fear that they cannot get finance to purchase the apartments then they will not buy them. This could cause a downturn in one of Australia’s major industries which employ large numbers of people.

So after 12 months of lending restrictions by the banks it appears that real estate across Australia has been significantly impacted. There have been large falls in property values in all capital city markets except Sydney and Melbourne and the apartment market appears to be headed for trouble. If these restrictions are maintained or even increased then the next 12 months could be very interesting indeed.

Speak Your Mind

*

css.php