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Property investors are in trouble

The residential investment property sector is starting to creak from the numerous changes over the past year.

Property prices in Australia, particularly in Sydney and Melbourne, have soared over the past five years. A number of different factors have been behind the rise. A growing population, overseas investors, record-low interest rates, slow land release by local governments, negative gearing and a generous capital gains discount have all helped boost the property market.

First home buyers are finding it very difficult to get into the market due to the size of the deposit required. A 20% deposit on a $400,000 property is $80,000 excluding all the other purchasing costs such as legal fees.

One of the main groups blamed for the strong rise of property prices is local investors. The founder of one of the country’s biggest property investment clubs says its 20,000 investors can’t afford their mortgage repayments now the banks are being heavy handed with many interest-only investors.

Kevin Young spoke to the AFR saying “How would you manage if your bank told you you had to pay 45 per cent more per month on your mortgage?”. Big banks have changed investors over from interest-only to interest-and-repayment loans earlier than anticipated.

To combat this move Mr Young said that “We’re advising our members to get themselves into conflict with their bank, to say they can’t afford principal and interest repayments without ending up in financial stress. Most of the time, the bank will acquiesce”.

Some of the regulatory changes are only a few months old, yet they’re already having an impact. Mr Young said himself that he’s been forced to sell some properties because of the lending changes.

The moves by Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) should make the banking system more secure in the long-term.

It does no-one any good if property investors are relying on strong property growth to afford the properties they have geared to very high levels.

Foolish takeaway

The increased interest rates and sooner-than-expected repayment of principal loans is difficult for some property owners, but should hopefully reduce the number of defaults in the long-term and bring the property market back to more sane levels over the next couple of years.

I'd much rather buy these top growth shares rather than invest in property today.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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