On Tuesday 23rd January I received an email from Newcastle Permanent Building Society advising me that they were reducing their acceptable lending ratio for residential investment loans from 70% to 60% maximum. Obviously this is an indication that ‘’The Perm’’ want to reign in volumes of residential investment home loans but it begs the question as to why, & opens up a broader discussion on the residential property market?
Back in July 2015 the Federal Government’s body responsible for overseeing Australia’s financial institutions made several moves which forced the banks to reprice upwards the cost of their loan rates for investment home loans, as opposed to owner occupied home loans. For several years now there has been growing concern amongst analysts that rising house prices had created a property bubble & at some point it would burst , or perhaps at least , experience an effect of deflating. They were particularly concerned about the value of investment properties which of course often represent part of an asset portfolio for investors. The investor that buys the property direct is doing so in the hope that they will get a reasonable income return on the property & possibly some capital growth as well. But these two are inextricably linked . A rising rate of return (yield) on a property increases the end value of that property. The point of concern is, are rents rising at the same pace as the end value of the property? The answer to that in very general terms is probably not . So to demonstrate via an example, let’s say the investor purchased a residential property in Port Macquarie at 400k & it was tenanted at $400 gross per week . $400 x 52 divided into the 400k = 5.2% gross return / yield . Six months down the track the property value has increased to say 450k due to ‘demand’ but rental remains at $400 p/w . The gross return / yield has now fallen to 4.62%. $400 x 52 divided into 450k as a percentage. A further question then arises. Can property rentals continue to rise? If they cannot, then the value of investment homes cannot also continue to rise in an infinite fashion?
Now turning back to Newcastle Permanent’s decision to reduce their exposure in investment lending volumes you can see that the internal risk assessor for that building society are taking the position that they we may very well soon see property prices having peaked & possibly even slipping back. By limiting their lending ratio to 60% they are allowing for this risk to eventuate. I chose them as an example because of their likely high exposure to property investment here in NSW & more locally stretching north from the Hunter region through the mid north coast of NSW. Other lenders have not been so savage in their approach & we of course still have lenders that are accepting of investment lending at 80% & even say 90% ratios but that’s probably because they have a wider exposure geographically speaking. It is highly likely that we will see all lending institutions more frequently reassessing this investment loan ratio position.