When industry regulators cracked down on investment lending growth, they probably saw what was coming. With property investors taking a back seat, the door was open for the rise of a new kind of investor: the owner occupier.
Last year, APRA put lenders on notice. It instructed banks to limit their lending growth at 10% a year. This was borne out of fear. Fear that investors would push the market beyond breaking point.
Lenders responded by cutting back on investor loan discounts. They introduced an 80% loan to valuation ratio cap for investors. And they cut back on the number of interest only loans they issued. These are loans in which only the interest is repayable.
How has this worked out for lenders?
Investor lending has slowed to 10.8%. That’s still above the recommended level. But it’s moving in the right direction.
Yet every action has a reaction. Cutting the flow of investment lending opened up other opportunities. As investor lending has slowed, owner occupiers became the focus of attention.
You didn’t need much foresight to see this coming. If you limit a lender’s capacity to issue credit, they’ll concentrate their efforts elsewhere. Banks are merely shifting the focus towards areas where growth is possible.
This shift in lending habits is coming from an unfamiliar source. Smaller lenders are most aggressive in pursuing owner occupier lending growth. More so than the big banks. Small lenders have slashed rates on owner occupier mortgage loans.
Credit Union is one that’s taken this to the extreme. Its mortgages loans rate cuts are double that of the Reserve Bank. The RBA slashed interest rates 0.50% to 2% this year. Yet credit Union lowered rates by 1% to as low as 3.99%.
And what of the Big Four banks?
NAB [ASX:NAB] has slashed rates on owner loans by 0.93%, to 4.15%. Westpac [ASX:WBC] lowered rates by 0.89% to 5.08%. The average across the major banks stands at 4.86%.
The gap in home loan rates between smaller lenders and the Big Four banks is widening. Smaller lenders are offering much cheaper deals, up to 1% in some cases.
Keep in mind that these figures are provided by Mozo, which compares home loan rates. The figures are based on owner occupiers with a 20% deposit, borrowing $300,000 over 25 years.
Is this change good for the property market?
The key question for the property market is what this shift means in the long run. Neither APRA, nor the banks, express concerns with owner occupiers. They’re worried about investor led speculation. So this development is a positive step from that perspective.
Without question, the focus on owner occupiers changes the property landscape. That’s bound to happen as the momentum shifts away from investors.
But this could also prompt the rise of a new kind of investor. One that bypasses the need to ‘flip’ homes frequently.
Imagine for a moment you were choosing between an investor and owner occupier loan. From the outset, cheaper owner occupier loans would appeal more. After all, you want cheaper, not costlier, home loans.
The lower cost of borrowing could persuade you to opt for an owner occupier loan. Even if your goal was initially to own an investment property.
Of course, becoming an owner occupier means exactly what it implies. You have to live in that home too. Otherwise you’d just be an investor with an investment loan.
What might all this mean for the market going forward?
I see three things taking place in response to this shift.
The first is that fewer people will become investors. We’re already seeing that. Borrowing costs are prohibitive. Owner occupier interest rates, at 3.99%, are very attractive to homebuyers. We can expect the pace of this to pick up.
Secondly, we could see an uptick in the number of holiday home purchases. A second holiday property qualifies as an owner occupied building. Beachside and rural properties are likely to attract a growing number of ‘owner occupiers’. It’s one of the easiest ways investors can sidestep higher investment interest rates. Especially as vacation homes can be rented out during the year.
The third shift could be a family driven one. Parents may opt to help children buy their first property sooner than expected. It may lead to rising numbers of young people becoming homeowners.
These homes could remain ‘investment’ properties in the eyes of the parents. Or they might just fast track the emptying of the nest. Either way, it’s a workaround for pricier interest rates.
Finally, we’ll see a change in the typical investor’s mindset. Investors may start using investment properties as a ladder of sorts. You could buy a home, live in it for a few years, and then sell it on. It’s a different mindset, because you know you’re not making a long term commitment. It could push investors towards cheaper properties. Places that they otherwise wouldn’t buy as first homes.
This strategy works best for younger investors. And with rental yields falling across the country, it’s an approach that’s more viable than it was even a few months ago. Yet it also depends on house prices continuing their rise.
There’s little point in buying a house with plans to sell if prices aren’t rising. The problem is that house price growth is slowing. Between June and August, dwelling prices rose 5.3%. Yet the housing market grew at just 0.3% during August. This slowdown is happening for a number of reasons. APRA regulations are just one among many.
Nonetheless, the next few years will be interesting.
The likelihood of an investor led market crash is receding. But as we’ve seen there are other ways ‘investor’ lending could grow. The owner occupier of tomorrow might be the investor of today.
Contributor, Markets and Money
PS: Markets and Money’s property expert, Phillip J. Anderson, reckons house prices are set to boom over the next decade.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.
He was right on both accounts.
In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.