In 2015 the Australian Prudential Regulation Authority (APRA) announced that the big banks must hold more capital against their gargantuan mortgage books to provide a buffer against defaults. October 19, 2015 By Scott O. Talbot
Australian banks are now progressively reducing their loan-to-value ratios (LVRs) on investor loans from 95% down to 80%. Overseas investors the hardest hit, slashed from 80% down to 70%, in most cases.
Mortgage rates are likely to rise as a consequence of the more stringent capital requirements however, many economists anticipate weaker off-the-plan sales into 2016. A weaker off-the-plan market translates to valuers down valuing purchase prices in certain precincts with a high level of apartment stocks and over supply risk.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies, and most of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998.
Australia overseas real estate risk assessment
A majority of overseas investors that purchased off-the-plan in the past 12-24 months have made their financial decision to purchase based on obtaining an 80% loan.
For the many uninformed overseas purchasers, the month prior to settlement delivers a shock that their Australian real estate investment is hungry for another 10% in equity from their savings.
The potential settlement risk for property developers will be overseas purchasers caught by surprise, whom cannot afford an additional 10% to cover the 70% LVR. In other words, a typical Melbourne investment of $500,000 will require a minimal of $150,000 in equity directly from the purchasers own savings. (10% deposit + 20% Equity a whopping 30%)
Pair the ‘APRA financing conundrum’ with a ‘weaker off-the-plan market’ there is a high possibility that the bank valuers will provide a valuation for less than the original purchase price.
The market fear is that the valuers assessment at settlement could reduce values 5%-12% lower than the contract price, the 70% loan approval could see the purchaser having to handover savings to cover the further valuation shortfall.
Assuming a 5% reduction in the off-the-plan purchaser price (5% is considered a reasonable buffer on off-the-plan valuations)
10% deposit %50,000 +
20% Equity $150,000 +
5% Value Buffer (Min 5%) $25,000 +
35% Total equity required $175,000
There are market segments and precincts within the real estate market already flagged as high risk due to the over supply of product in the pipe line or currently on the market. Potentially the 5% off-the-plan valuation buffer, could jump to over 12% in these over supplied precincts.
The ‘APRA financing conundrum’ and ‘weaker off-the-plan market’ both translate to settlement risk for property developers and a need for financial planning for overseas real estate investors.
Australia Real Estate Overseas Investor - APAR and Loan to Valuation Ratio Crisis. October 20, 2015
Today an article was published in ‘The Australian’ that touches on the industry concerns of new APRA regulations and impact for overseas investors. A good article and my comments below provide further detail into the APRA and Valuation Conundrum that is now getting attention in the media.
“Property downturn forecast dismissed by industry chiefs" www.theaustralian.com.au
With an unprecedented influx of Asia based property developers raising our cities skylines, many of Australia’s apartment stock has been heavily marketed overseas and Mr McCann’s comment that Lend Lease sales represented about 10 per cent, does not represent a majority of the off-the-plan stock in the market place.
Without any reliable data to support this sentiment, it is common knowledge that many of Melbourne and Sydney’s projects are predominately sold to overseas investors. Switching your Google browser to point to Singapore, Malaysia or Indonesia for example and using common keys words reveals an a variety of Australian investments options for overseas investors.
The statement of a 10 per cent to 15 per cent price increase is fair but, the fear is that the valuers assessment for finance at settlement could reduce values 5%-12% lower than the contract price when they take into account supply and demand and a number of market factors.
Moreover, any market appreciation within a project (sold off-the-plan) cannot be realised many months or a year after completion. True property appreciation can only occur when a property owner places their investment on the market and a sale is made that will be recorded by RPData. Until this data is available with RPData, capital appreciation is purely speculative and valuers will be relying on other comparable resales in the precinct.
As Australian banks are progressively reducing their loan-to-value ratios (LVRs) on investor loans there is a high settlement risk for property developers whom have a large number of off-the-plan sales overseas.