Is it the lack of money or the lack of investors shaking up the market?
In the current property slump, one thing is clear. Investors are nowhere to be seen. But is it investors who have disappeared, running scared, or is it just a case of funding being run dry? Recent evidence confirms that investor loans have shrunk to their lowest level since 2009. There are also some indications that returns on investment have been reduced to GFC levels too. Given these dismal pieces of information, it's understandable to think that investors have gone away, lurking in the corners, ready to pounce with the next boom. But, the truth is far more different.
Put simply, the disappearance of investors is due to a lack of real money in the economy. The first blow appeared after the implementation of new restrictions from APRA. Many investors, especially those that are highly geared, would opt for interest-only loans. But with interest-only loans now capped at 30% and investor growth being curbed at 10% by banks (in response to APRA), investors have found it difficult to get funding. It was only a matter of time before these measures would impact the market.
Not only were interest-only loans capped, but approvals for interest-only loans worth over 80% of the value of the property were also restricted. “What we’re seeing now is a vicious property cycle – the banks won't lend based on equity, and most investors cannot access money because they only have equity”, says Andrew Phanartzis of Property Association. He continues, “the majority of investors just don’t have a deposit of 20%, and are no doubt being rejected by the banks". They want to see real savings and cash flow.
How can investors jump in and take the next step? “Investors will need to accept that 2018/19 will be dominated by a lack of credit and a downturn”, says Andrew. The answer may lie in setting up a long-term strategy or looking at markets outside one’s own city. Returns are low in most cities at the moment, but there are a few gems across the country. The stabilisation of the price drop should also see increased returns, therefore reduced risk for banks. This, together with the relaxing of the investor loan housing cap last month, should open funding once again.
Property investment as wealth creation has been tied into the Australian Dream for decades. Investors, especially sophisticated investors, are always ready to jump in and grab a good opportunity. The relaxing of lending restrictions and a slight correction in prices will see investors jump back to re-invigorate the market in no time.