Careful decisions by state governments, banking regulators and lenders have resulted in the tightest rental market on record. There is no quick or easy way out of this situation.
Back in 2014, investor borrowing increased steadily, as did interest-only loans, a type of mortgage that many investors take.
The value of loans to investors was a record share of mortgage commitments. Investor credit growth has reached its highest annual growth rate since early 2008, and although historical data is not as long as that for interest-only lending, the percentage of borrowers taking out interest-only mortgages was also historically high.
And banking regulators intervened.
The Australian Prudential Regulation Authority (APRA) was so concerned about deteriorating lending practices that in late 2014 it announced the introduction of macroprudential controls for lending.
These early macroprudential policies are:
- Limited credit growth to investors to 10% per annum (up 10.3% per annum).
- Mortgage serviceability buffers are 2% higher than loan product interest rates (currently 3%), and minimum floor valuation ratios are 7% or higher.
- Lenders should limit loans at high loan-to-income ratios, high loan-to-value ratio (LVR) loans, long-term interest-only loans to owners and occupants, and very long-term loans. I am emphasizing something.
As a result of these initial macroprudentials, and continued changes in international banking rules around mid-2015, Australian lenders were charging a mortgage interest rate premium on investor loans and interest-only loans. came to see
These higher interest rates were due to the fact that investor loans were perceived to be more risky, although research has since shown them to be no more risky than owner-occupier loans. It is
A combination of bad ideas has led us to the tightest rental market ever. Photo: Getty
There was further intervention from APRA in March 2017. These interventions are:
- Limit new interest-free lending flows to 30% of new housing lending (36.3%, down from a peak of 45.6% in the June quarter 2015), within which:
- Strict internal limits on the amount of interest-only loans at LVR above 80%.When
- Interest-only loans with an LVR greater than 90% must be subject to rigorous scrutiny and justification.
- Annual growth in investor credit growth remained “well below” 10% growth (it was 4.7% at the time).
- Make sure that utility metrics such as interest rate and net profit buffer are set at appropriate levels for the current situation.
- Continue to moderate lending growth in riskier segments of the portfolio (e.g. high to income loans, high LVR loans and very long term loans).
A further APRA intervention took place in April 2018.
- APRA has removed the Investor Loan Growth Benchmark effective July 1, 2018. But only if the lender’s board of directors can confirm in writing that its policies and practices meet the expectations set out below.
- The interest rate is 2 percentage points above the interest rate on the loan product, with a lower interest rate floor comfortably above 7%.
- Apply these interest rate buffers and floors to both new and existing debt commitments of borrowers, and use sufficiently conservative proxies where appropriate.
- Uncertain and variable income discount with a haircut of at least 20% for most types of non-salary income and expected rental income.
- For interest-only loans, an assessment of the usefulness of the period over which principal and interest repayments apply (that is, excluding the interest-only period).
Then, in December 2018, APRA removed the speed limit on interest-only lending and in late May 2019 removed the 7% serviceability floor rate. However, he increased the conservativeness rating buffer to 2.5%, and then in October 2021 he increased it to 3%.
Tenants across the country are struggling with increased competition, declining supply and rapidly rising prices.Photo: Getty
During this period, we saw many state governments increase land tax rates for investors, leaving properties vacant for foreign investors and investors.
As a by-product of all these changes, it has become much more expensive to invest in real estate, making it less desirable for people to invest in it.
Investors selling properties have been steadily increasing since 2014, exacerbated by the pandemic, with a significant drop in new investors entering the market, the country’s population continuing to grow, and demand for rentals rising. As a result, the supply of rental inventory is declining. Accommodation facilities have increased.
The pandemic has exacerbated these shortages as people have relocated from the capital and acquired second homes either in rural areas or in the capital, which may not be their primary residence but are also not available for long-term rentals.
AirBnb launched in Australia in August 2012 and has become much more popular in recent years despite challenges during the pandemic. What this means for real estate investors is that there is an alternative to simply the long-term rental market offered by short-term rentals such as AirBnb and Stayz.
Over the past few years, the attractiveness of real estate investment has declined, putting downward pressure on housing supply.Photo: Getty
By making it more expensive and more difficult for investors to access funds, and by making it more expensive for investors to hold residential property due to higher land taxes, we have reduced the supply of rental inventory. rice field.
Fewer first-time homebuyers and the cessation of emigration to Australia should further tighten the rental market and keep rents rising. This is especially likely in large cities, and there are no pressing solutions to alleviate these challenges.
The supply of new housing continues to be constrained. Especially in central Tokyo, there are few completed new condominiums. Under-construction shares are sold primarily to owners rather than investors due to the high cost of land acquisition.
The only solution to this situation is to increase the supply of rental inventory or decrease the demand.
Solving the rent crisis is not easy.Photo: Getty
More housing will increase supply, but planning now will take years to complete. Alternatively, supply can be increased by increasing purchases of existing homes by investors. Increasing investor purchases is a challenge in the current environment due to high interest rates and high conservatism hurdles.
The easiest way to curb demand for rental housing is to help more people buy their first home.
In a rapidly rising interest rate environment, this is difficult as property prices are declining while borrowing capacity is declining. Federal and state governments have incentives for first-time homebuyers, but if more could be done, such as eliminating stamp duty for this cohort, as proposed in New South Wales, renters It may also lead to a way to relieve tension.
Decisions made over the past eight years to discourage investment in residential real estate have put us in this situation. It will take some time to solve the current rental market challenges.