The biggest risk to the off the plan property market currently – is not construction prices.
It is not a lack of interest from buyers.
It is not even valuations.
Would you believe it – its finance? …
Writes Lachlan Walker of Place Projects Brisbane
Finance – the limitations and the constraints our lending institutions are placing on purchasers who are now approaching settlement, without warning, threatens the property market and those who have invested in the industry through the past few years.
In recent months APRA, the independent body which oversees banks and credit unions and whose mandate is to ensure Australian financial markets are stable, efficient and competitive, has driven the major banks to substantially restrict lending to buyers who in many cases are ready, willing and capable of settling and servicing the loans in question.
Our destiny is now in the hands of the banks.
They have funded major residential developments based on the fact that qualifying presale levels have been met, but they are now not willing to finance the end purchaser.
This suggests that there still remains a major disconnect between commercial lending divisions and residential credit – with no relativity across the various state borders.
Tightening of Foreign Lending
As it stands, Commonwealth Bank, NAB, ANZ, Westpac, St George Bank, Bank of Melbourne, Bank SA and Citibank have all tightened foreign lending – either ceasing to do it completely or making the application process more stringent by only lending on low LVR’s of 60%.
The Mortgage and Finance Association of Australia describes these policies as “a prudent decision for a more balanced portfolio… and reduced exposure for the bank.”
And that’s what these new policies come down to in the end: exposure.
There has been a substantial lift in purchases of Australian residential property by foreigners over the past few years.
In 2015, there were 36,841 residential real estate proposals approved by the FIRB.
This figure was 23,054 in 2014 and 9,768 in 2012.
This means that there has been an annual increase of 39% in the number of FIRB approvals for residential real estate purchases over the past four years.
Chart: FIRB Approvals for Residential Real Estate
Prepared by Place Advisory. Source FIRB
Whilst it’s important to note that the data above is for approvals to purchase and not actual purchases, the trend is clear.
These statistics recognise a growth in the level of approvals for off the plan apartment purchases and vacant land to be developed.
The number of these FIRB approvals increased by 88% and 81% respectively over the past year.
Last year, 41% of all Foreign Investment approvals for residential real estate were for investors from China.
A total of 23,349 approvals for Chinese nationals – more than triple the next country (United States).
The reason for this barrage of statistics is to paint a picture.
There has been a massive surge of foreign, mainly (but certainly not solely) Chinese money flowing into one specific sector of the residential real estate market – off the plan apartments and new developments – driven by our legal system and our restriction on what sort of property foreigners can invest in.
Which brings us back to the Australian banking system.
This country has a solid financial system with highly competent oversight.
This is why we were cushioned (to a degree) from the impact of the global financial crisis.
Loans to foreign investors for residential real estate generally make up a very small component of a bank’s loan book.
But as that component increases, the banks’ risk and exposure increases, too.
So, to minimise risk and increase the public’s confidence in the banking sector, measures are taken to decrease risk.
What makes the current case particularly interesting (and has been cause for a more dramatic reaction from some banks) is the allegations of falsified loan documents and the use of Australian real estate as a function to ‘get money out’ of China.
The Australian Financial Review has reported that ANZ and Westpac have potentially found “hundreds” of fraudulent Chinese loans.
In principle the direction taken by APRA and the major banks, whilst prudent, its implementation and the strategy surrounding how it was managed was not.
To turn off the access to funds to all foreign purchasers is not a ‘prudent’ approach.
Each retail loan must be analysed on its own merits, not be black listed purely because the purchasers origins are from offshore – particularly given residential mortgage books to offshore borrowers make up between only 1 and 3 percent of Australia’s banks books – our thoughts are that the overall threat is quite low.
Source: State of Place