A pull-back in finance for residential property projects in Australia represents a sensible strategy and will not cause any massive pull-back in investor activity, a leading commentator in the sector says.
Speaking on the sidelines of the Australia Property Institute’s Victorian Annual Conference, UBS managing director head of real estate Australasia Tim Church AAPI welcomed the tightening of residential finance availability as encouraged by the Australian Prudential Regulation Authority, saying it would help to cool property value increases and represented a sensible measure which would help restore the sector as an area for sustainable investment returns.
“I would say that it’s a sensible approach because there are concerns of a bubble in residential [property],” Church said. “This is probably a Melbourne and Sydney phenomenon as opposed to other states.
“Where we are seeing massive capital appreciation in a short period of time and a strong influx of investor appetite for those and investor loans at levels that are probably north of 70 per cent gearing, then I think it is a very sensible approach because you don’t want bubbles to get too big and get burst by over-leverage."
Church doubts the approach will lead a large pull-back, but said it will have a cooling effect on price increases.
“That’s not a bad thing, particularly given the increases that we’ve had over the past 24 months, so it will get it back to a more sensible level. But importantly, it will get the speculators out," he said.
“Real estate is not about speculation, it’s about owning a great asset class for the medium to long term. I think sensible, prudential measures that actually pull back the level of gearing actually make that a lot more of a sustainable investment class. So I applaud it.”
Church’s comments come as financiers throughout Australia pull back on exposure to residential property amid encouragement by the Australian Prudential Regulatory Authority, which last month announced increased capital adequacy requirements for residential mortgage exposures which will see their equity allocation on residential mortgages used for investment purposes increased from 16 per cent to 25 per cent by July next year.
In response, the AMP has ceased lending to investors for off the plan apartments altogether, while the Australian Financial Review has reported that CBA is requiring pre-sales of at least 100 per cent or more of the debt provided by the bank (up from 80 per cent), will only lend 75 per cent of the overall development cost (down from 80 per cent) and is reported to have had negotiations with developers fall through at the late stages.
Over the past 12 months or so, concern has grown about the extent of heat in the residential property market as house prices in Sydney and Melbourne continue to rise, although the pace of increase in Melbourne has eased.