Aussies Swept by Rental-Home Mania Raising Bank RisksNarayanan Somasundaram
Dharmendra Singh has spent A$1.3 million ($1.2 million) since July on two houses 39 kilometers (24 miles) northwest of Sydney, drawing on an existing mortgage to pay a deposit on one and taking out two new loans.
“Low interest rates and rental yields make it easy,” said Singh, who now has three investment properties with his wife Pranita. “The rental and tax savings can pay off your mortgage. You just sit tight and wait for the property to appreciate.”
Singh, 38, is one of thousands of Australian investors snapping up properties, attracted by the lowest mortgage rates in four years and rising demand for housing. Home prices gained about 5 percent this year in the country’s biggest cities, led by an 8 percent increase in Sydney. With no signs that the central bank will start raising rates, prices will jump as much as 11 percent next year, property researcher SQM Research Pty. said Sept. 17, with Sydney values soaring as much as 20 percent.
Banks have been eager to attract rental investors, with home-loan approvals in the second quarter at the highest in at least five years. That’s provided a boost amid otherwise slow credit growth while exposing lenders to possible house-price declines in the longer-term.
“We see strong earnings-per-share growth for the big four Australian banks in 2014 and 2015 on cost cuts and higher credit growth,” David Ellis, a Sydney-based banking analyst with Morningstar Inc., said in a telephone interview. “Investor appetite for houses or mortgages is good to some degree, but if it pushes house prices into a bubble, it isn’t good in the long term for the Australian economy or for the banks.”
Fueling the strong investor demand is the Reserve Bank of Australia’s record-low 2.5 percent benchmark rate, which has seen the country’s average standard variable home loan rate offered by banks fall 0.9 percentage point from a year earlier to 5.95 percent in August.
In New South Wales, the country’s most populous state, investor housing-loan approvals account for about 40 percent of all approved mortgages by value, the highest since 2004, the RBA said in its semi-annual Financial Stability Review Sept. 25. “It is important that those purchasing property maintain realistic expectations of future dwelling price growth.”
Australian Treasurer Joe Hockey told reporters today that he isn’t concerned about a housing bubble. “Rising house prices help to make marginal property development viable,” he said in Canberra. “There is a shortage of supply out there and what this will do is make supply more readily available.”
Home prices in Australia’s biggest cities rose 5.1 percent in the eight months to Aug. 31, according to the RP Data-Rismark Home Value Index, with prices increasing in the six months to August at the fastest pace in three years.
Singh, who works in the finance sector, drew a 20 percent deposit from his partly repaid mortgage in August to buy a A$660,000 three-bedroom show home on 564 square meters (6,071 square feet) of land in Stanhope Gardens, two months after buying a similar property in the same suburb. He funded the purchases through separate loans from Commonwealth Bank of Australia, the nation’s biggest mortgage lender, and Suncorp Group Ltd.
“It is a good time to buy as the risk is very low,” Singh said.
Australian mortgages are the largest asset class for the country’s four main banks and the biggest profit contributor for three of them. Banks have bolstered their mortgage margins by lowering home-loan rates by less than the RBA’s rate cuts. While the central bank dropped its benchmark rate by 225 basis points, or 2.25 percentage points, since November 2011, the average variable rate on bank mortgages has fallen by only 185 basis points, according RBA data.
Investor loan approvals climbed to A$27.8 billion in the three months to June, the highest since March 2008 when the Australian Prudential Regulatory Authority, known as APRA, started compiling the data.
The banks are “substantially more exposed to investment property loans than peers,” UBS AG analysts, led by Jonathan Mott, said in a research note Sept. 24. Investment property accounts for 32 percent of Australian banks’ mortgage books, compared with 20 percent in New Zealand and 12 percent in the U.K., they said.
“Australia’s large exposure to a very highly leveraged landlord population is a significant systemic risk,” the UBS analysts said, while noting that Australian banks’ mortgage books are generally considered to be very high quality.
Mortgages represent 61 percent of gross loans for Westpac Banking Corp., 60 percent for Commonwealth Bank, 45 percent at National Australia Bank Ltd., and 42 percent at Australia & New Zealand Banking Group Ltd., according to UBS.
“All the data is pointing to the fact that investors are helping to drive the uplift in home loans and we are certainly getting our fair share of that,” said Danny John, a spokesman at Sydney-based Westpac, the second-largest home lender.
Investment property loan demand has picked up, Gavin Slater, the head of Melbourne-based National Australia Bank’s retail bank said in an interview Sept. 12. The bank’s market share has risen 2.5 percentage points to more than 15 percent since August 2009, making it the fastest-growing home lender, data from APRA show.
Commonwealth Bank has seen investors active over the last quarter, Steve Batten, a Sydney-based spokesman said by e-mail. The bank continues to apply a “sound risk management approach,” he said. ANZ, the smallest mortgage lender among the four, has seen an increase in investor appetite and maintains prudent lending standards, Melbourne-based spokesman Stephen Ries said.
The share of banks’ housing loans that were non-performing has remained around 0.7 percent since September 2012 after falling modestly over the previous year and a half, the central bank said.
Mortgage rates are also high relative to other countries, including the U.S., where a 30-year fixed mortgage is 4.32 percent, according to Freddie Mac.
The average rate in Hong Kong in July was about 2.14 percent, up from a low of less than 1 percent in 2010, according to Referral Mortgage Brokerage Services. A fixed 35-year mortgage rate in Japan is 1.9 percent, near April’s all-time low of 1.8 percent, according to the government-affiliated Japan Housing Finance Agency. In Singapore, the average floating rate for 25-to-30-year mortgages has risen to 1.3 percent from about 0.9 percent a year ago, Keff Hui, a director at brokerage Mortgage Supermart Pte, said.
Commonwealth Bank, Westpac, ANZ and National Australia Bank are named the so-called four pillar lenders for a law that prevents them from buying each other.
As banks endeavor to maintain market share, some are handing customers a cash incentive. National Australia Bank is offering A$1,000 till Sept. 30 to shift a mortgage from a competitor, while Westpac says its front-line staff can offer as much as A$1,500 cash to new mortgage holders. Commonwealth Bank is offering A$700 to customers that switch their mortgage to the bank before Sept. 27.
Investors such as Singh are relying on rising rental rates along with price appreciation in making their purchases. Sydney has seen a 32 percent surge in residential rents since 2008, according to a report by broker Savills Plc. The city is among five globally with the highest-yielding residential markets, at 4.8 percent, the broker said.
Singh will get about A$40,000 a year in rent from his most recently purchased house, he said. Based on Suncorp’s benchmark rate, he will pay about A$41,000 a year in interest and principal over 25 years, according to the bank’s home loan repayment calculator. Borrowers typically get a discount on the benchmark rate with Brisbane, Queensland state-based Suncorp offering a 70-basis-point reduction on its website for loans above A$250,000.
The shortfall between interest paid and rent received along with other expenses, including council fees, insurance and maintenance, can be claimed as tax deductions from an individual’s income, according to the Australian Taxation Office.
The high yields and expected price appreciation are also luring Australians that manage their own pension fund, known as self-managed superannuation funds or SMSFs.
“There’s been a rapid increase in self-managed super funds looking to invest in property along with general investors,” John McGrath, chief executive officer of McGrath Estate Agents, which has offices in New South Wales, Queensland and Canberra, said in an interview.
SMSFs, which have between one and four members and together manage A$506 billion, are permitted to borrow to invest in property and certain other assets, prompting the central bank to say in the minutes of its Sept. 3 meeting that households could be taking financial risks and would be closely monitored.
Increased demand from investors comes amid constrained supply of new homes. ANZ estimates that there is a shortfall of 270,000 dwellings in Australia, equal to around 20 months of housing construction, and this will rise to 370,000 dwellings by 2015.
Sydney’s median house price has risen 8 percent this year to A$666,900, according to RP Data. That compares with the average cost of $779,000 for a home in New York City last quarter, as tracked by the Real Estate Board of New York. The average house price in London was 452,821 pounds ($726,008) as of July, a 7 percent increase from a year ago, according to researcher LSL Property Services Plc.
The price gains have made Australian homes the sixth-most overvalued globally and the house-price-to-income ratio was 21 percent above its long-term average, the Organisation for Economic Co-operation and Development said in in May.
“Investor appetite will continue as long as rates are low,” John Buonaccorsi, a Sydney-based bank analyst at CIMB Group Holdings Bhd, said. “The problem will be when rates turn.”