Just like a tsunami builds as it races towards land, so too does it appear that current market conditions are escalating.
Now, I’m not talking about the slowdowns in Sydney and Melbourne, because they are normal market cycle downturns.
What I’m talking about is the number of other factors which are concurrently impacting the market and creating plenty of negative media headlines.
As we’ve written about quite a lot over recent years, the intervention of the Australian Prudential Regulation Authority (APRA) is having an impact on the market.
Lending restrictions have been in place for a while now, which limit borrowings to investors via the reduction in interest-only as well as investment loans generally.
In fact, lending to investors has been falling for the best part of three years now due to these changes.
However, there is no doubt that there was an unsustainable number of investors in the market for a period of time, with many of them likely speculative rather than sophisticated.
So, lending to investors is possibly back to historical averages, or slightly below.
On top of this, APRA requires banks to hold more capital reserves, which results in fewer funds available to lend to customers.
One of the biggest changes, however, has been to the calculation of living expenses.
Whereas in the past banks used a formula called a HEM or Household Expenditure Measure, they are now being much more prescriptive when assessing a borrower’s loan serviceability.
In fact, not only are they applying higher living expenses thresholds which is resulting in lower loan sizes, they are sometimes double-checking borrower’s actual bank statements to confirm their monthly spending.
Many believe this a bridge to far as it doesn’t take into account the fact that the vast majority of Australian borrowers never default on their loans, plus their commitment to their home loans means they make sacrifices to ensure they always meet their repayments.
I recently read a story about a Federal Court judge who would not approve a $35 million penalty to one of the major lenders by ASIC as neither entity could articulate what the minimum standard should be when reviewing a borrower’s serviceability.
The judge told them to come back with a model, which is likely to set a new benchmark.
Now, if that wasn’t enough, there is the ongoing Royal Commission into the banking sector which uncovered some less than savoury lending practices.
That has resulted in tighter purse-strings still, plus the reduction in loan products suddenly deemed more risky, like lending to SMSFs, for the time being.
It seems the banks have become “allergic to risk.”
So what should you do?
While there are a confluence of factors dragging the market down at present, like any storm, this too will pass.
Lending might be constrained at present but, as happens every cycle it won’t be too long before it will be moving back towards its long-term equilibrium.
So, for those people who have put in place risk mitigation as well as finance strategies, any potential for pain is greatly reduced.
What this means is if you’ve got the ability to add to your property portfolio while others are sitting on the sidelines waiting to see what happens, you’ll be well placed to take advantage of current market opportunities.
Remember, not all property markets are in a slump and, rather than waiting for the market to do the heavy lifting, this is an ideal time to “manufacture” capital growth through renovations and development.
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