Property investors have every reason to be worried

Credit: The Team

Australia’s main property markets of Sydney and Melbourne continue to roll on as housing prices steadily increase.

Sydney’s year-on-year increase in median house prices has risen 18.4%, while Melbourne’s has risen 13.1% over the same period. Canberra’s in the only other capital city showing similar double-digit growth rates – at 10.4%.

Anyone would think property prices couldn’t fall -unless you own a house in Darwin or Perth, where median property prices continue to sink.

But there are signs that the regulators may impose heavier restrictions on lenders to slow down lending to property buyers, particularly investors.

Last month, RBA governor Phillip Lowe announced that the central bank was keeping a close on investor credit growth, and could tighten measures to further restrict lending to property investors. Assistant governor Michele Bullock has reiterated those views. The bank sees growing risks to Australia’s housing market, given the spectacular rise of house prices, mainly in Sydney and Melbourne over the past few years.

In December 2014, the banking regulator, Australian Prudential Regulation Authority (APRA) introduced a 10% cap on credit growth to property investors. That slowed down lending to investors, but recent data suggests credit growth is soaring again. According to the Australian Bureau of Statistics (ABS), lending to housing investors rose to $13.8 billion in January 2017 – the largest monthly total since May 2015.

Rather than hiking interest rates to cool the property market, the RBA is likely to look to APRA to impose further controls over the banks including 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). The big four banks dominate lending to the housing market, with more than 80% combined.

Some of the controls APRA may ask the banks to impose could include slowing investor lending growth to a rate below 10% – like 5%, increasing interest rates on interest-only loans – typically used by investors, imposing higher restrictions on what types of income can be used to support lending applications and increasing deposit amounts. Bankwest went one step further than other banks earlier this year, when it announced that it would no longer consider tax breaks from negative gearing when investors applied for a loan.

Foolish takeaway

While a housing crash might be unlikely, it’s clear that governments and regulators are concerned enough about rising property values to take steps to crimp that growth. It may only take a small move or two to have a serious impact on Australia’s property markets.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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