Thursday, 6 August 2015

Will the banks cause the end of the boom?

The slow-down in the Sydney property market is inevitable like all good things - the boom must come to an end at some stage. There has been much speculation about when and if the property market bubble will burst which has been dismissed, but with greater talk about APRA’s recent pressure on the banks to increase their measures in reducing capital investment percentages under the 10% target… we are paying attention.


So we thought it was the right time to explain the imminent shift in the property market in layman's terms for our readers.


Let’s break it down, What is APRA proposing the banks introduce to avoid penalties?
  • Increase the minimum deposit rate on loans
  • Increase linear expenses to reduce the amount people can borrow
  • Increase interest rates for new and existing customers


Why?

APRA is trying to regulate the high influx of investment in the market which is leaving the banks with limited cash holdings and placing the banks in risky territory. As the cash rate interest rate is at an all time record low of 2.0%, loans are looking more and more attractive to those looking to enter the property market and to investors looking to improve their portfolios.


The demand for finance stimulated by the low interest rate can be explained through the example of our all-time favourite childhood treat, the Cadbury’s Freddo Frog. Back in my day as a millennial, the humble ‘Freddo’ was double in quantity and a margin of the price, making it one of the most popular school fundraiser chocolates. Nowadays we are faced with paying an extra .50c to a $1 more for a thinner ‘Freddo’....neutralising demand. This is the reality we face for loan finance as well as APRA continued pressure on the banks to limit their amounts loaned and for a higher interest rate.

What will this mean for investors and homeowners?

Essentially the pressure on the banks will see investors faced with higher loan interest rates and more stringent borrowing limits- less for more! This shift in economic measures will shake up investor interest in the Sydney property market by making that much harder to grow your portfolio.

Homeowners will also be left with a bad taste in their mouths, with these stringency measures meaning high interest rates could be passed onto existing loan holders. The news doesn't look so good for first home buyers either... increased minimum deposits will mean high barriers to entry into the property game and ultimately more time renting or living at home.



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