Tightening of credit: How it is affecting the Australian property market and why you should still invest

Read anything about the property market at the moment, and it sounds like doom and gloom. House prices are going down; banks are tightening credit. It can be quite confusing for investors, and many will be sitting back waiting to find out what the market is doing, perhaps waiting for the right time and for prices to drop further. This is perpetuated by media commentary; however, we always tell our clients that the market shifts all the time and if you are ready to invest then prepare to invest and don’t wait. Often the best time to invest is when others are sitting on the sidelines, we do need to be aware though that all investments carry a level of risk, therefore the question is not should you be investing, however where should you be investing at that particular time.

Why is credit tightening?

The recent Royal Commission into banking lending practices has brought to the surface the way banks have historically been assessing credit. The recommendations are small changes over time however we have seen lenders make more dramatic changes immediately.

Firstly, banks are scrutinising living expenses and analysing transaction statements to determine incoming vs. outgoing cash flow. Second, lenders are reviewing the way they asses borrower’s ability to maintain ongoing loan repayments. Borrowers need to demonstrate they can maintain an investment loan repayment at 7.25% interest rate over 25 years if they have taken a 5 year interest only option. We would estimate most of our clients have lost approximately 20% of their borrowing capacity. These changes ar restricting investors being able to continue to build their property portfolios.

How is this affecting the property market?

This depends on who you talk to and which market you are referring to. Property prices and markets differ between states and between suburbs within those states. If we take Melbourne as an example, it is the areas that have experienced exponential growth in the last 10 years, suburbs approximately 30 – 45 minutes out of the city, these are the areas that have experienced the largest declines in value given their growth levels were not sustainable.

However, quality inner-city suburbs where there is small supply and decent demand have not been exposed to such declines, in some cases there has been no correction at all. The type and size of the property can also play a role here, we have found properties around the $1 million –  $1.5 million mark are still performing well.

There are many reasons that in certain area’s prices are shifting and why there is a perception of a struggling market, including:

  1. The tightening of credit for buyers reducing the borrowing power and hence purchasing power of purchasers.
  2. The negative media commentary gives borrowers the confidence to be harder negotiators, they believe they can get a better deal if they hold off. This is demonstrated from a reduction in auction clearance rates, properties are not selling at auction, rather the days following the auction as vendors and purchasers further negotiate.
  3. Real Estate agents are starting to price properties more accurately with less over-inflated prices.

What should property investors do?

If you have been preparing to invest, then you should still invest. There is never a perfect time and you can always look outside of your state for investment opportunities. The most important thing is to get some independent advice. An independent investment advisor will research and find the right property and area for you while taking into consideration the current and forecasted market conditions.

It’s also valuable to look at the different types of repayment options, interest-only loans have historically been what most borrows opt for with investment properties to maximise tax benefits. However, long term and with tightening of credit it may not be the best choice. You need to look at investment as a minimum 10-year strategy. Interest only loans are generally only for a five-year term, once this 5 year term expires repayments will revert to principle and interest over 25 years which can result in a 30% increase in your monthly repayment jeopardising an investors ability to hold the property. You may find, despite the tax benefits that a principle and interest repayment plan will be more beneficial in the long run.

Top 5 tips for property investors

  1. Meet with a mortgage broker at least 6-12 months in advance of wanting to invest to find out what preparation is involved in getting yourself in the best possible position to borrow.
  2. Visit your mortgage broker to arrange a pre-approved loan amount for your investment purchase, this will provide you with confidence when negotiating a purchase.
  3. Get independent investment advice to fully understand where and when to buy – this might not be in your home state. Steer clear of investment groups selling new property, anyone affiliated with a property development will have a bias opinion.
  4. Think about your long-term strategy and what repayment options will suit you best long term: we are finding too many people in a tricky situation having to sell their investment property due to not being able to refinance with the tightening of credit.
  5. Once you are ready, show up to auctions and be prepared to negotiate. If possible, look for renovation projects especially in a weaker market and stay away from main roads and B grade locations as these are hit hardest with price drops.


By Nick Reilly

About the author

Nick Reilly is the Co-founder and Managing Director at Inovayt, a financial advisory organisation that provides customers with tailored financial solutions within its two divisions, Inovayt Wealth and Inovayt Finance. He leads a team of highly experienced individuals whose mission is to develop lasting relationships with clients; secured by trust, personalised service and professional advice for financial success.

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