The chatter among economists and the Australia real estate industry is that the tighter LVR credit standards by APRA and higher rates announced by Westpac is not just a speed limit to deter property investors but, has a possible motive to prepare the banks for an economic shock. By Scott O. Talbot
The Linkedin discussion on October 19, 2015 ‘Australian Real Estate Financing Conundrum’ days prior to the Westpac rate rise saw the smoke on the horizon and speculated a possible outcome.
I suspect, hidden inside the matrix of dozens of recent articles and sources reporting the Westpac rate hike, a possible set of triggers to justify Westpac’s unprecedented interest rate hike. That being said, these are my opinions from a property market prospective.
Trending in the media is APRA and the effect of the new policies are having on the banking industry, in particular the Australian real estate investor LVR bondage. Westpac increase is in despite of predictions that the Reserve Bank will further cut official interest rates to a new record low at the next RBA meeting.
Australia real estate credit crunch
Australia's second biggest bank Westpac has raised interest rates, divorced from the official rates set by the Reserve Bank, a move other lenders are predicted to copy.
The real estate market is stunned by this move as throughout history the decisions of the RBA has traditionally depicted whether banks increase or decrease rates.
In direct conflict to the RBA sentiments, the Westpac increase is in despite of predictions that the Reserve Bank will further cut official interest rates to a new record low at the next RBA meeting.
But seriously, on a $500,000 loan, the Westpac interest costs will increase by $63 a month, this is no big deal and frankly, not one investor will give it a second thought after next week.
It is my opinion, that the tighter credit standards (LVRs) has a much greater impact on the real estate market and that maybe, APRA and the Westpac board have had a cognitive vision into the future. Lets face it, they are the demigods of controlling and predicting our economic futures.
The big question is ?, what is going on behind the doors of the banking board rooms and why has Westpac moved to increase its profits, slow investor loans and improve its balance sheet and ROE.
Following is a summary of what Westpac has been reporting to strengthen its balance sheet and better position the bank against the backdrop of continued APRA capital requirements and reform :
- Reported profits rose 3 per cent to $7.8 billion in the year to September and the out-of-cycle rate rise will increase Westpac’s profits by a further 5%;
- Posted a dive in return on equity (ROE) to 15.8%;
- Has raised $6bn of capital (ROE) so far this year;
- Is selling new shares to raise $3.5 billion to bolster its capital buffers;
- The mortgage market is estimated to be $1.3 trillion. Westpac's rate rise will impact approx $342 billion worth of loans;
- Tighter credit standards across the board with loan-to-value ratios (LVRs) on investor loans from 95% down to 80%. Overseas investors, slashed from 80% down to 70%.
Basically, all Australian banks are sitting on the same APRA bus, and are preparing themselves for any future shocks by increasing the capital applied to mortgages, reducing LVR’s and increasing their ROE.
Regulators around the world are also moving their Chess pieces by increasing global bank capital requirements to prevent future carnage seen in the global financial crisis.
We all support a strong banking system, but economic analysis suggests it comes at a cost. Significantly, that the banks and APRA have grave concerns about our economic outlook.
You must include your share of the full amount of rent you earn in your tax return. The following example shows how property depreciation will increase the cash return on an investment property.
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