Reacting to low interest rates as they are supposed to, investors have done a great job of fuelling demand for housing which has resulted in residential building soaring, dwelling approvals running around record highs.
But with the prudential authorities now taking a stick to bank lending for investors, it’s fair to wonder whether house prices be beaten down as well.
On the face of it, the crackdown on investor borrowing has coincided with or resulted in a little of the heat coming out of the housing market.
Auction clearance rates are still high in the key Sydney and Melbourne markets, but their cooling, coming down from their ridiculous bubble levels.
The latest figures show the price rise rocket also steadied nationally in August – up just one per cent in Sydney, flat in Melbourne.
Anecdotally, while there were still big sales in Sydney last weekend, there also were auctions cancelled because of a lack of bidders or achieving less than hopped-for prices because there were only a couple of interested parties.
However, this little steadying is a long way from signalling the Sydney and Melbourne boom might be deflating.
I asked a senior banker if he thought the attempts to hose down investors was having much impact and the short answer was: no.
Keeping investor lending growth down to 10 per cent still means very strong growth from the banks’ point of view – double anything else they’re doing.
Indeed, the move by banks to increase the price of loans for investors looks increasingly cynical as that part of the recent changes will have negligible impact on demand.
As the banker explained it, most investors are relatively well-off people on high tax brackets who are happy to have the negative gearing tax deduction. Increasing the interest rate for an investor loan by 29 points only costs the negatively-geared investor on the top tax rate 15 points – about $30 a week on a $1 million property.
That won’t scare off many who are betting on a fat capital gain with its 50 per cent concessional tax rate.
My banker informant didn’t think much of the banks that had gone a little dramatically further. AMP has stopped all investor residential real estate lending, but that’s apparently because their investor book has been increasing so rapidly the only way to tame it was to close if off for a while.
And it’s alleged that the NAB increased all its interest-only loans mainly because it couldn’t tell which borrowers were investors and which were owner-occupiers, so the scattergun was applied.
(Interesting thing about interest-only loans: on the face of it, they would appear to be bad things if too many people take them out because the borrowers don’t build up the equity buffer principle-and-interest borrowers do as they pay down their mortgage.
But a study by ASIC and APRA found interest-only borrowers tend to be more sophisticated and use interest offset accounts which effectively represent greater equity than the P-and-I brigade.)
So it seems the shot fired across the banks’ bows to make sure they’re not lending irresponsibly won’t of itself deflate the Sydney and Melbourne housing bubble.
At the margin, it will have a slight impact, just as tighter Foreign Investment Review Board enforcement will play a tiny role, but the main thrust of the housing market remains about demand continuing to be stronger than supply.
When investors perceive the market might be coming back into balance, when the odds of a strong capital gain recede, then the reality of lousy rental yields, maintenance costs and tenant issues will come back into perspective.