CBA to tighten lending for new homes
Date
August 10, 2015 - 10:08AM
Michael Bleby
Many developers have to pre-sell up to 50 per cent of all lots on a planned site before a bank will lend money needed to start earthworks and install services that make it developable for houses. Photo: Penny Stephens
Commonwealth Bank of Australia plans to curb loans to new housing developments, a decision that will hit first-home buyers and investors in outer suburbs.
A CBA presentation to brokers, marked "confidential", outlines a plan to delay the approval of finance for buyers of lots until the land is ready for development and all preliminary work such as roads has been completed.
Developers said the change will limit land development, putting further pressure on already-surging prices by limiting the supply of houses.
Danni Addison, head of the Victorian Urban Development Institute, says the CBA's plan the move – which will make things harder for smaller players than larger ones – will have wide-ranging consequences.
Danni Addison, head of the Victorian Urban Development Institute, says the CBA's plan the move – which will make things harder for smaller players than larger ones – will have wide-ranging consequences. Photo: Eddie Jim
This policy will restrict pre-sales of houses. Many developers have to pre-sell up to 50 per cent of all lots on a planned site before a bank will lend money needed to start earthworks and install water, sewerage and electricity services that make it developable for houses.
The decision, which is expected to become CBA policy in the next few weeks, will increase the pressure on developers already struggling with slow land release and title processes. It could slash development and send prices up, developers said.
"If it's adopted by all banks, it will make it more difficult for all developers to fund construction of land for first home buyers and second home buyers," said David Payes, the managing director of developer Intrapac Projects and president of lobby group Urban Development Institute of Australia, Victoria. "We need to supply land to keep housing at affordable prices."
Unlike tougher lending policies reported last week, the bank's latest move would not hit apartments but housing developments in the growth corridors of Sydney, Melbourne and Brisbane. New detached home sales rose last financial year to 73,507, a four-year high and more than four times the number of units and apartments sold.
New housing developments carry their own risks, however, and the banks have been burnt by falling land values before. Land values fell 5 per cent in the first half of 2009 after new dwelling commencements dropped 17 per cent from 159,730 to 132,580 the previous year, Housing Industry Association figures show. The tightening by the Commonwealth Bank may be an attempt to pre-empt any loss in land value caused by the building boom.
The change won't just target first home buyers. Investors account for as much as 45 per cent of buyers in new housing developments. While it will constrain supply, the change is consistent with reductions in lending to apartment investors.
'Natural part of cycle'
"This is just a natural part of the cycle," said Rod Fehring, the executive general manager for residential at developer Frasers Australand, one of the country's largest. "It's prudent for banks to be careful of their exposures to different segments of the market."
Many in the market are concerned. "There is no justification for cutting off the credit tap for new residential development," said Harley Dale, HIA's chief economist. "It would be very concerning at this point in time if it became more difficult for people to get into a new home, which is the end issue here."
The move would only worsen a situation in which house prices are already rising faster than incomes, Dr Dale said.
"There are going to be fewer people that can get into a new home in greenfields developments than would otherwise be the case, which does nothing to improve housing affordability," he said.
The bank said the move was simply part of a constant review of its loan policies.
"In line with our responsible lending commitments, we constantly review and monitor our lending standards to ensure we are maintaining our prudent lending standards and meeting our customers' financial needs," the bank, the country's largest mortgage lender, said in a statement.
Crucial step
Under the new policy it will only accept valuations on lots – a crucial step in the mortgage approval process – after an external valuer has physically examined the site.
"We believe a more accurate measurement in getting a valuation on unregistered land at an appropriate time should instead be based on the valuer having access to the estate and being able to physically identify the allotment," it said in the presentation.
Previously, the bank would commit to a loan with an assessment based on the development plan, as early as 12 months before a lot was accessible.
But developers said the move – which will make things harder for smaller players than larger ones – will have wide-ranging consequences.
"This action directly targets the production of new housing stock; jobs, supply, prices and therefore the broader economy will feel the effects of the bank's action," UDIA Victoria chief executive Danni Addison said.
"It is simply neither justifiable nor understandable and could very well lead to a significant contraction in supply and a reduction in new housing options for buyers and renters."
(05-08-2015, 10:56 PM)greengiraffe Wrote: [ -> ]Aug 5 2015 at 3:54 PM Updated Aug 5 2015 at 8:47 PM
Banks in new push into residential property
Major banks are offering refunds on lenders' mortgage insurance and other incentives to encourage lower-risk home buyers. Graham Tidy
by Duncan Hughes
Major banks, which have been clamping down on investors in residential property, are offering mortgage brokers a new range of incentives to encourage lower-risk residential home buyers.
Bank of Melbourne and St Georges Bank, which are part of the Westpac Group, are among those offering refunds on lenders' mortgage insurance, $2000 cash back for refinancing and fixed-rate decreases on owner-occupier home loans by up to 0.3 per cent.
"We remain focused on helping owner-occupiers," a spokesman for Bank of Melbourne claims in a letter to brokers advising of the new rates.
Chris Foster-Ramsay, managing director of Capital Home Loans, said: "As the lending landscape changes there will be more and more competition for the owner-occupier market."
A clamp-down on investment lending by the majors is creating some of the most competitive conditions for borrowers since the beginning of the global financial crisis in 2008, according to mortgage brokers and real estate agents.
Low documentation lenders, building societies and other small lenders are scrambling to build lending books and market share as major lenders' higher rates and tougher conditions push borrowers to look for alternatives, they claim.
Smaller lenders, such as Perth-based Bluebay Home Loans, which describes itself as an alternative to the majors, has written to brokers stating it will maintain a maximum loan-to-value ratio of 90 per cent and maintain competitive rates.
Other lenders, such as Liberty Financial, which has assets valued around $3.5 billion, claims it will take advantage of opportunities created by borrowers seeking an alternative as mainstream banks' tighten lending.
Some lenders offering cheaper rates and lower loan-to-value ratios fear pent-up demand for investment loans could trigger a flood of applications, overwhelming administrative systems and risking a breach of caps.
"Smaller lenders are likely to eventually exhaust their capacity to lend," added Tim Brown, chair of the Mortgage and Finance Association of Australia.
"It is only a matter of time before most will have to stop lending above loan-to-value ratios of 80 per cent," said Mr Brown about lender response to changing market conditions.
(26-07-2015, 09:40 AM)greengiraffe Wrote: [ -> ]Jul 25 2015 at 12:15 AM Updated Jul 25 2015 at 3:47 AM
APRA bank loan changes put the brakes on property investors
The consensus among economists is that the housing boom has peaked, writes Larry Schlesinger.
Banks have turned the screws on property investors. Henry Zwartz
by Larry Schlesinger
The wheels might not have come off yet but the investor demand that has driven Australia's property boom is starting to wobble.
This week's announcement by the Australian Prudential Regulation Authority (APRA) that the big four banks and Macquarie Bank must hold more capital against their gargantuan mortgage books to provide a buffer against defaults will apply further pressure to housing growth. The banks are already increasing home loan rates to meet more expensive funding costs.
Combined with the blizzard of tougher lending policies already introduced by the banks this year, to slow down investor lending growth per bank to less than 10 per cent a year, the consensus among economists is that the housing boom has peaked.
Predictions from respected economic forecaster BIS Shrapnel that Australia will have built too many new homes by 2018 makes the picture a lot gloomier, especially for those looking for quick capital gains.
Property analysts say Sydney and Melbourne, where there has been the greatest acceleration in prices and where investors have dominated, will be hardest hit. House prices in Sydney have surged 20 per cent over the past year, and 10 per cent in Melbourne.
Brisbane, Adelaide, Hobart and Perth, where there has not been the same price growth, will not see the falls, analysts say. Darwin, hit by the slowdown in resources, has had little price growth this year. In Canberra, where house prices have increased by about 5 per cent over the 12 months to June, Domain senior economist Andrew Wilson expects more house buyer activity, although apartment prices are falling thanks to oversupply.
This is how much the banks have turned the screws on investors. All have reduced loan-to-value ratios (LVRs) on investor loans, with Westpac, the nation's biggest lenders to investors, slashing its LVRs earlier this month from 95 per cent to 80 per cent (meaning a $200,000 deposit if you're buying a $1 million dollar home). Investors must be able to service loans at higher than 7 per cent (a 2 per cent buffer), pushing more to the sidelines or requiring them to downsize their buying ambitions.
Banks have also removed mortgage discounts from investor loans and have cut back on offering riskier products such as interest-only loans. Some, such as ANZ Banking Group, have removed the cash-flow benefit of negative gearing from investment lending policies and both Commonwealth Bank of Australia and Westpac have reduced the proportion of rental income they will consider when assessing mortgage serviceability.
"Confidence from investors in markets like Sydney is going to start to wane," says CoreLogic RP Data's head of research, Tim Lawless. "There is a growing acceptance that the market has run its course."
WEAKER GROWTH
Logically, fewer investors out there means less competition for property and less pressure on house price growth, which, according to economists including Paul Bloxham of HSBC and Shane Oliver of AMP Capital, has already peaked.
Both economists anticipate weaker levels of growth for the remainder of the year and into 2016, with expectations that prices will start falling from 2017 when the Reserve Bank of Australia could start raising rates again.
"If mortgage rates rise as a consequence of more stringent capital requirements on housing lending, this is likely to be a drag on housing activity because mortgage rates are still the key driver of activity in the established housing market," Bloxham says.
Oliver, who expects prices to fall by between 5 per cent and 10 per cent in 2017, says it's unclear yet what impact the APRA measures will have on the housing market. But he says the RBA and APRA both want to see a slowdown in lending to investors and more heat coming out of this market.
What the RBA does not want to see, Oliver says, is rising rates for existing mum and dad borrowers. The impact of this would go beyond the housing market into sectors such as retail spending. Were this to happen, both Oliver and Bloxham believe the RBA could cut rates to dampen the effects. "It's a 50-50 call whether there's another rate cut," Oliver says.
The latest data from the country's biggest mortgage broker, Australian Finance Group, which shows investors in NSW quitting the market in droves, suggests the cumulative impact of the changes is having the desired effect.
Its June-quarter figures show that the proportion of investor loans in NSW, consistently at about 50 per cent of all lending over the past 12 months, fell to 42 per cent over a three-month period. This is likely to affect investor buying across the country.
"Investor lending has returned to levels we are more used to," AFG chief financial officer David Bailey says.
Depending on how much lenders increase rates due to the APRA changes, Bailey says it may bounce some people out of the market. "It's very early days, but initial discussions with some lenders suggest increases of between 10 and 20 basis points."
Other analysts, such as CLSA's Brian Johnson, believe the rate rises could be higher but the clear message is that they are going up.
ANZ and CBA have already moved, announcing they will lift interest rates on a range of fixed and variable investment loans by between 10 and 40 basis points from August to ensure investment lending growth does not exceed APRA's ceiling of 10 per cent.
But both banks will also cut rates by between 30 and 40 basis points on fixed-rate loans for owner-occupiers, with ANZ's Australian chief executive, Mike Whelan, telling Fairfax Media there will be a heightened focus on "owner-occupier and first home buyers in the country".
PERIOD OF UNCERTAINTY
Gerald Foley, managing director of National Mortgage Brokers, says first-time investors without the equity and cash flow to satisfy the banks' new requirements will be the ones most affected.
More broadly, the changes are creating an unusual period of uncertainty between lenders and borrowers, particularly for investors who have employed a particular investment strategy.
"In the short term it won't have a significant impact, but if there is a sustained period of continued tightening it will have an impact. It will take confidence out of the marketplace," Foley says.
The winners out of all this, he says, could be first home buyers. "With some investors sitting on the sidelines, there may be better opportunities for first home buyers to acquire property, which is potentially part of the impact regulators want to see," he says. "Banks still have money to lend and are offering sweeteners on the owner-occupier side."
CoreLogic RP Data's Tim Lawless believes there will be a correction, "but it won't be of the magnitude that some commentators are forecasting – 20 to 30 per cent. It will be a gradual moderation."
But certain pockets of the market are at greater risk of correction, he adds. "When you look at areas of the market most susceptible, it's the investment markets where there is a lot of new supply – the inner-city apartment markets and the outer suburban greenfield housing estates."
Among the inner-city investor-dominated apartment markets, Lawless points to Melbourne, where there is much greater geographic concentration around the central business district, Docklands and Southbank.
"The risk is much less in Sydney though, because dwelling approvals for apartments are not as high as Melbourne and the geographic distribution is much broader, spreading out to places like Parramatta, Lane Cove and Chatswood."
Others, such as veteran mortgage market analyst Martin North, expect a "slightly negative impact on mortgage pricing" from the APRA changes, but do not believe there will be much impact on the broader housing market.
"House prices are a factor of supply and demand," North says. "There is rising supply, but also strong demand. Compared to other asset classes housing is doing a lot better, plus there are all the tax concessions like negative gearing and the ability to offset capital gains.
"The supply of investment loans will still be there. Remember that not all banks are growing their investment lending at 10 per cent. Some will see it as a target. And there's also the opportunity for the non-banking sector to fill the gap if the majors disappear from the radar."
Foley says this is already happening: "We are seeing increasing appetite in the broker market for specialist lenders like Pepper, Liberty and LaTrobe who can better tailor deals in the current market."