Property Investors Back in Regulators’ Sights

Home prices in Australia’s biggest cities continue to surge higher. Sydney is leading the way with research firm, CoreLogic claiming prices have risen as much as 5.3 percent since the start of the year. Melbourne residential property prices are reported to have jumped 4.4 per cent since January 1. Perth is the only capital where prices seem to have fallen, with a decline of 1.1 percent so far in 2017.

In a replay of mid-2015, property market regulators and politicians are again targeting house prices in the media. A spokesperson for the Reserve Bank last week warned there had been a build-up of risks associated with the housing market, while the head of ASIC claimed that Sydney and Melbourne home prices are experiencing a property bubble.

Should You Be Worried About a Bubble?

I wouldn’t worry too much about a bubble, not just yet anyway. Property prices are obviously high, and owners of property have had their wealth increase at a far faster pace than the rest of the population, but the underlying fundamentals of short supply in urban centers and demand from population growth remain relatively strong.

In recent years, there’s no doubt that constant low interest rates have inflated house prices. Therefore, if rates increase markedly, there would be a lot of pain in the property market, as many people would struggle with the higher repayments. However, the wider economy is far from strong and the government and its regulators, ASIC, APRA and the RBA are loath to do anything that would prevent economic growth.

Consider, for example, the recent statement by the head of ASIC, Greg Medcraft: “Clearly, the issue with the housing market at the moment is that if you lift rates, that’s a good tool, but you affect the rest of the market.”

What Will Regulators Do Next?

Regulators will do what they always do. They will target property investors by placing further regulations and financial impositions on investment lending.

Treasurer Scott Morrison has recently flagged the possibility of further restrictions on interest-only loans for investment properties ahead of the May federal budget. In mid-March, Michele Bullock, RBA assistant governor suggested the governor and the board would be paying more attention to curbing loans to investors as housing costs keep rising.

According to Greg Medcraft, “We had a meeting and we focused on the housing market …and there we have worked together on the responsible lending.” He is referring to the Council of Financial Regulators (CFR), which is chaired by the Reserve Bank Governor and brings together the RBA, APRA, the Treasury and ASIC. Their job is to maintain the stability of the financial system and ensure the effectiveness and efficiency of regulation.

How Can You Protect Yourself?

In terms of protecting yourself, there is not much you can do about future purchases. You will have to deal with the rules of the game at that time, but there is something you can do now that may put you in a stronger position. 

Should there be further changes to investment lending rules, they will likely come in the form of changes to interest-only loans. This has already been articulated by the government.

I have previously published an article on this site explaining the benefits of using interest only loans for investment properties. Check out “Money Loan Matters: Principal and Interest Vs. Interest-Only Payments.”

In the current economic environment, every investor should consider their loan portfolio and insulate it against any future restrictions. Most loans are interest-only for a maximum of five years. If you don’t want to be forced to start making principle payments on these loans once the interest-only period expires, you should look at options now that would extend the life of the interest-only period.

If you would like some advice on your options, please contact us at PropertyInvestingFinance.com or contact me directly by email.

By Alistair Perry

Alistair and his brother built one of Australia’s leading providers of finance advice and brokerage services to Australian businesses and investors. After selling his stake in early 2015, Alistair took some time away from the industry to spend more time with his young family.He has now partnered with PropertyInvesting.com to provide for the unique finance needs of property investors. Property Investing Finance currently offers its own unique loan product, the Smart Finance loan, which offers one of the lowest rates in the industry. You can email Alistair or contact him at the PropertyInvesting.com office on 03 8892 3800.