We keep hearing that there is a potential bubble in the market and property prices are overheated.
I am out in the trenches looking at property quite regularly. Weekend after weekend, I am seeing properties that have had multiple offers in a short period of time. These offers have been above the asking price and is an example that people are keen to buy with various levels of emotions.
In a lot of cases, in my humble opinion, some are overspending in particular areas. This means it is going to take some time to recoup on their investment.
The regulators have also seen this and have been concerned for some time.
The Australian Prudential Regulation Authority (APRA) have come out and said they are not comfortable with lenders increasing their overall exposure in their property investment loans books by anything greater than 10% per year. That means their preference is for banks not to have any more of 10% of loans in investment property of all loans they have on their books.
This may not mean anything to a small fry investor but it is very telling.
Two banks in question had double digit growth. AMP had grown its lending to property investors by 13.1% and NAB by 14%.
This in the regulator’s opinion is too high. They feel they are approving too many investment loans which is causing a big demand on property for investment purposes and over-inflating house prices.
The question is, does this mean that at some point a market correction is possible?
In reaction, most of the major banks reacted by increasing their interest rates on investement property loans by 0.27%. Most dramatically, AMP increased its investor loans rate by a solid 0.47 percentage points to deter investors and has put a freeze on new investment property loans for the time being.
This shows that banks are taking APRA’s position seriously.
We have fielded a lot of client questions around this. Most notably, what does this mean in terms property prices?
The reality of the situation is, with interest rates the way they are (the lowest they have ever been), most people still see it as being relatively cheap to go and buy property.
People don’t seem to have been deterred.
They will wear the additional costs, and factor this into their expenses – most of them will rationalise it that the interest costs on these are still tax deductible.
Maybe this goes to the heart of the problem!
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