The APRA’s New Guidelines (And How They Affect Property Prices in Sydney and Melbourne)

The APRA announced new guidelines in March 2017. As well as lowering the number of investor loans taken out, they’ve also affected property prices in Sydney and Melbourne. Here’s the story.

Have you heard of the Australian Prudential Regulation Authority (APRA)?

If you’re interested in property investment, you should know as much about them as possible. The APRA oversees the majority of lenders that provide home loans. This includes all of the major banks and any deposit-taking independent lenders.

A regulatory body, the APRA often issues guidelines for these financial institutions to follow. And it did just that in March 2017.

This article takes a look at those new guidelines. Moreover, it examines the impact they’ve had on property prices in both Melbourne and Sydney.

What Are the New Guidelines?

On the face of it, the APRA’s new guidelines seem quite simple. It has tasked lenders with decreasing their interest-only loan output to 30%. This means that lenders must approve fewer of these types of loans than they have in recent years.

There are several reasons for this. For one, interest-only loans create higher risks than regular home loans. Accessible to both investors and owner-occupiers, they allow you to only pay the interest on your mortgage for a set period. Usually, this is no more than five years. The kicker is that you repay none of your loan’s principal during this period. If you have a $500,000 loan and a five-year interest-only period, you still owe $500,000 after five years.

Those with such loans may get accustomed to lower monthly repayments. When the loan switches back to a principal and interest (P&I) loan, they get a nasty shock. They suddenly have to find thousands more dollars every month to repay the loan. This can lead to borrowers defaulting, which the APRA wants to avoid.

But interest-only loans present another problem. They make it easier for property investors to build their portfolios. Investors access these loans to gain an advantage when bidding on properties. While this works out well for investors, it causes issues for residential buyers. The sheer number of investors in the market creates demand for properties. Sellers can take advantage of this demand and raise their prices. This makes it harder for owner-occupiers to buy.

So, you could say that the cooling of Australian house prices is another major factor behind this decision.

But has it actually happened? Here are the situations in Sydney and Melbourne.

The Situation in Sydney Before the New Guidelines

Sydney has long been a hotbed of discussion when it comes to Australia’s house prices. Some argue that it’s a beacon of the Australian boom period. Sydney’s house prices have increased massively over the course of the last 50 years. Back in 1970, the average home in Sydney cost $18,700. As of 2016, that figure stood at $1.24 million. That’s over 66 times as much as they were in 1970.

Property owners are quite happy with that situation. During this period, sellers have known that buying in Sydney meant they would eventually turn a massive profit. Investors took advantage of the market to make huge capital gains. All of the while, housing stock became less affordable to new buyers.

That’s where the source of contention comes in. Many argue that Sydney’s prices had inflated beyond what they should be. There’s been talk of an Australian housing bubble, with Sydney at the centre. Many make the point that such increases place the market in great risk. Eventually, it will have to readjust. If not, the affordability crisis that has impacted the city in recent years will continue growing.

Simply put, Sydney may have experienced record-breaking growth. But that came with its own issues. Before the new APRA guidelines, it had become one of the least affordable cities in Australia.

he Situation in Sydney After the New Guidelines

So, what’s happened since the APRA created its new guidelines?

The situation in Sydney now looks quite different to how it did before. Six years of continued growth appears to have come to an end.

Property prices dropped by 2.1% between the end of 2017 and the start of 2018. Some analysts believe that this is the start of an extended decline for the city. Many estimate prices will drop by between 3% and 10% over the course of 2018. That’s the first recorded drop in Sydney since 2011. It’s also the largest since 2008.

Now, analysts find themselves arguing over whether this is a market collapse or a market correction. Most agree that Sydney has been due a fall for several years at this point. But it’s the extent of the decrease that’s worrying to some. Time will tell if they continue down this path beyond 2018. For now, it’s likely that the price of property in Sydney will continue to drop during this year.

That leads us to another question. Did the APRA’s new guidelines act as the precursor for this slump? The timing certainly lines up. The APRA introduced the guidelines at the beginning of 2017. Now, at the beginning of 2018, Sydney has experienced massive price drops.

But there are likely other factors at play. As mentioned, the city’s prices may have already been too high.

Investors may have also started to hold off because of the drop. A small drop tells them that Sydney is no longer a growth city. This leads to fewer investors buying, which facilitates an even larger drop. Perhaps lower investment activity has come as a result of the price drops at the end of 2017?

Whatever the case may be, it seems as though the APRA guidelines have had some effect. After all, buying in Sydney is a big risk for all but the richest property investors. The tightening of guidelines may have put the city out of reach of many investors. This lowers demand, which could lead to the price decreases.

The Situation in Melbourne Before the New Guidelines

While not as expensive as in Sydney, Melbourne’s house prices have also rocketed up over the years. Some see it as Australia’s second city, which has historically made it popular for investors and owner-occupiers.

The city has also enjoyed an extended boom period that’s lasted for as long as Sydney’s. In 1970, Melbourne’s average house price stood at $12,800. As of 2016, they were $773,000. That’s 60 times more than they were in 1970. Moreover, the city has only seen declines during five years of the 46 between 1970 and 2016.

Melbourne also has an affordability crisis of its own to contend with. Buyers in 2017 have had to spend 7.5 times their annual income to afford a property in the city. This has gone up from 6.5 times their income in 2012. House prices in the city rose by almost 30%, with income increases trailing behind at 13.2%.

While not on the same level as Sydney, Melbourne certainly finds itself in a situation. Moreover, you can argue that the affordability issues in Sydney have led to many buyers choosing Melbourne instead. This would raise demand further, which again may explain the huge house price increases during this period.

The Situation in Melbourne After the New Guidelines

So, has Melbourne seen a similar decline to Sydney since the introduction of the APRA’s new guidelines?

It certainly appears so. While not as drastic as in Sydney’s case, Melbourne’s house prices cooled towards the end of 2017. The difference between the two is that Melbourne will still see some growth. In fact, house prices grew by 5% during the beginning of 2018.

That may seem like a large increase. But then compare it to the growth seen during September 2017. In that month, prices shot up by over 13%. That’s over double the rate of growth experienced just a few short months later.

Moreover, some analysts predict that this growth will not exist by the end of 2018. Instead, Melbourne may experience a 5% decline along a similar vein to Sydney.

The APRA guidelines seem to have had an impact here as well. Investors are much less likely to buy property in the city now that they’re struggling to access interest-only loans.

But as with Sydney, there are other factors at play. Buyers no longer fear missing out on a prime property in the city. This means that they’re less likely to jump into making a purchase. Instead, they’re waiting on the market to adjust until it suits them. Naturally, this means that sellers have to lower their prices to attract attention from buyers

Increased supply in both cities also seems to be a factor. Melbourne has seen a lot of new homes pop up in recent years. This creates supply to meet the previous demand. Again, this can all lead to lower house prices.

In fact, you can look to Melbourne’s declining auction clearance rates to see the change in buyer action. Many suburbs now struggle to hit the 50% mark, which is another sign of a cooling market.

The Final Word

So, is it fair to say that the APRA’s guidelines have changed the faces of the Sydney and Melbourne property markets?

Yes and no.

There’s no denying that the APRA has created a less favourable situation for investors. Less access to interest-only loans means that many investors will struggle to buy new properties. Lower auction clearance rates seem to indicate that they’re holding off. This creates less demand, which usually means that prices drop.

But there are other factors at play too. Rising construction in both cities has added supply to meet recent demand. Both markets also seemed due a natural cooling period. It may be a coincidence that it has come right after the APRA’s crackdown.

One thing is for certain. Prices have dropped in both cities. Moreover, most agree that they look set to drop further before the end of 2018. A Cohen Handler buyer’s agent may be able to help you take advantage of this situation. Contact us today to find out how.

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