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.
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 not 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 supplies and risk.
The Australian Prudential Regulation Authority (APRA) is the Government agency that oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance and was established on 1 July 1998. http://www.apra.gov.au
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 the a ‘weaker off-the-plan market’ there is a high possibility that the banks valuer 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 a 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.
