Winter is in full swing and despite the cold winds that have blown across New South Wales and the heavy snow as low as 600 metres, this cold doesn’t seem to have slowed the Sydney property market. Domain recently reported a weekend clearance rate at auction of 79.7% – admittedly the lowest clearance rate recorded this year but off the back of record July listings. And then they reported today that Sydney how now reported five consecutive weekends of poor results.
Has the peak passed? Going forward will the changes to investment lending slow the property market like the Reserve Bank of Australia wants?
I will be watching what happens with auctions closely over the next few weeks as the last month has seen huge changes in investor finance credit policy. Over the last month we have seen the introduction of floor assessment rates meaning that for many lenders the assessment rate (which is used by banks to assess if you can afford the repayments) has been increased, which ultimately reduces borrowing capacity.
Changes have also been made to how lenders treat existing debts held with other financial institutions. In the past many lenders accepted the actual repayment amount for these debts, this is no longer the case. And again the effect of this will be to reduce borrowing capacity, especially the borrowing capacity of people looking to purchase for investment.
Other changes include reducing the loan value ratio, and the removal of negative gearing benefits from serviceability calculators both of which will affect borrowing capacity for investors.
These changes will affect those applying for new investment loans as most people will find that their borrowing capacity has been reduced by the changes.
The most significant change that will affect those that have existing investment property loans are announcements by most lenders of increases in their investment property reference rates. As lenders are required to give notice of rate increase many of these will take affect early in September. Increasing the reference rates means that anyone holding a variable investment home loan with the lenders who have annouced rate increases will see their interest rate increase and thus their repayments.
Given in Sydney we are seeing gross rental yields in some suburbs below 3% these changes will add further to the holding costs for those properties. As investors chase better yields and with lower borrowing capacity one would expect that those investors will begin to look further afield to places like Newcastle, the Central Coast and the Illawarra where the yield is still reasonable and the entry price is considerably less and where according to the National Australia Bank housing survey, good capital growth has still been achieved.
The rental vacancy rate in Newcastle and Lake Macquarie is creeping up so I would encourage anybody thinking about buying investments in this area to do their home work and seek the advice of professionals, such as a local buyers agent, if the area is unfamiliar.
Margaret Godfrey is Mortgage Broker in Newcastle helping investors navigate the lending landscape. If you a question in relation to investment lending please feel free to get in contact.