RBA warns of ‘potential risk’ for property investors

RBA warns of ‘potential risk’ for property investors

20 October 2017

The Reserve Bank has warned of “potential risk” in the property investment market involving the growing number of people with multiple investment properties and an increase in investors aged over 60 who have a mortgage, reports The Sydney Morning Herald.

In its twice-yearly health check on the financial system on Friday, Australia’s central bank indicated that it remained keenly focused on the high levels of household debt, and how borrowers would respond to higher interest rates.

Based on analysis of publicly available tax data, the RBA said there was a “substantial” share of households in lower-income jobs making losses on their rental properties.

“There is also some evidence that changes over time may be increasing risks, namely the rise in the share of households with multiple investment properties and in the share of investors over the age of 60 with mortgage debt, as well as investment across state borders where the investors’ knowledge of the property market can be lower,” the central bank said.

A new report from Citi Research claims that Australia’s housing market sits atop a pile of increasingly vulnerable debt and the glory days for multiple property investors and interest-only borrowers could soon become a nightmare.

Highly leveraged multiple-property investors are at the centre of the report, with 12 per cent of Australian real estate investors said to own six or more properties, a “surprisingly high level of speculation,” according to Citi analysts.

“Tighter lending criteria and rising house prices has meant investors increasingly face net negative cash flows,” report author Craig Williams said.

Many economists believe the Reserve Bank of Australia will begin raising interest rates from record-low levels as soon as mid-next year, meaning those heavily-geared speculators in Sydney and Melbourne markets could be forced to sell as their debt becomes more expensive, reports Fairfax media.

The Australian reports that in March, the Australian Prudential Regulation Authority (APRA) announced strict rules limiting the amount of interest-only loans to 30 per cent of a bank’s new lending.

The warning on top of a 10 per cent annual growth cap on investor lending. Interest-only loans account for more than 40 per cent of loans in the market.

Regulators are increasingly concerned that borrowers with interest-only loans may not be able to pay down the loan at the end of the five-year period, may not be able to refinance their loan with another interest-only loan due to rising interest rates and lending requirements, and may be unaware they are not paying off the principal on the loan.

Lenders are also bracing for a $21 billion blow-out of interest-only loans as the strict new lending criteria threatens to disqualify borrowers from renewing their loans on current terms, says the AFR.

A threefold increase in the number of loans falling outside new underwriting standards is expected over the next three years as lower rate fixed terms expire and loans are renegotiated, according to a comparison of existing loans with new lending terms and conditions by Digital Finance Analytics (DFA).

“This raises systemic risk to a whole new level. The value of loans is significant – and may be understated,” according to Martin North, principal of DFA, which bases the analysis on the experiences of 52,000 households.

Big banks are also set to announce tougher measures to crack down on high rise apartment purchases including blacklisting more than 100 Brisbane suburbs, doubling the minimum apartment to qualify for funding, evidence of rental cash flows and tough new valuation criteria, notes a separate report from the AFR.

Others, such as Suncorp Bank, the nation’s fifth largest mortgage lender, are circulating a confidential list of 39 Brisbane postcodes covering more than 100 city and metropolitan suburbs where the new lending restrictions will apply from next Monday.

“Our settings have been adjusted for postcodes based on recent weakness in the investment unit market in Brisbane, with evidence of a reduction in prices,” a Suncorp Bank spokesman said.

Interest-only loans are considered more risky than other loan types as they are usually held by investors with more tenuous links to their properties than owner-occupiers, or by borrowers who cannot afford to pay off the principal.

In a stark admission of the heightened threat to financial stability amid endless increases in household debt and rampant property prices, the RBA on Friday said it will launch “top down stress tests” of the banking system, which will be carried out on top of the supervision from APRA.