Measures already put in place by the major banks have already begun to curb property investor lending is working, and higher interest rates could be coming.
JPMorgan economist Stephen Walters has told The Australian that he expects local banks to lift interest rates on investor lending by at least another 50 basis points (0.5%) over the next 12 months, on top of the existing 0.25% increase already levied on investor loans.
Lending to investors has soared as property values in Sydney and Melbourne rocketed upwards. The Australian Prudential Regulation Authority (APRA) told banks to limit investor loan growth to 10% or face higher capital requirements in December 2014.
As a result the big four Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) recently increased interest rates for investor loans, interest-only loans or lowered the loan to valuation ratio (LVR) limits – forcing investors to kick in more of their own equity.
According to RateCity, the difference between investor and owner-occupier interest rates is now up to 85 basis points (0.85%). In other words, investors are paying close to 1% more on their mortgages.
HSBC has even gone a step further that the big four, refusing to lend to new investors, following a similar move by AMP Limited (ASX: AMP), as we reported here.
Now it seems banks are also taking additional moves to reduce lending to more than 80 'risky' suburbs. NAB has capped LVRs at 70%, meaning borrowers will have to stump up a deposit of at least 30% for some suburbs, while a second group of postcodes have been limited to 80% LVR. The other three majors are expected to follow suit.
Before the new rules were put in place, investors could lend as much as 95% of the property price, kicking in just 5% of their own capital.
As these actions start to take effect, investor lending growth is slowing. In the year to August 2015, growth was 10.7% – still higher than APRA's cap rate, but slower than the 11.1% recorded in the 12 months to June 2015.
But the Reserve Bank has also suggested a large number of loans were reclassified from investor mortgages to owner-occupied loans.
Falling auction rates are another sign that the property market is cooling. Last weekend, Sydney recorded its lowest clearance rate of the year for the third consecutive weekend, falling below the 70% benchmark to 69.6%, according to Domain. That compares to 81.8% reported on the same weekend in 2014 and rates in the 90% range just a few months ago.
Foolish takeaway
The big question is, will this kick off a property price crash?
Unlikely in my opinion, but we could see property prices moderate somewhat. I certainly don't expect to see Sydney house prices crash 14% like they did between September 2008 and March 2009.
