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What’s Happening In Debt Markets? Why Ratios Matter And The Outlook For The Good, The Bad, And The Ugly.

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In our last update, we talked about increased capital requirements and costs and how this affected the availability and cost of property funding. Since then, a number of other factors have also started to restrict funding for property. Some of these factors will have a short term effect, but others are likely to last longer.

Banks manage their loan exposures by a number of ratios and limits. A couple of key ones which affect property lending are (1) the ratio of development to investment limits and (2) the ratio of property to non-property limits.

APRA, which oversees the Australian banks, monitors these ratios closely.11

A number of banks are close to their limits for development lending. For some, this is due to capital ratio issues which are being caused, in part, by capital tied up in Sydney and Melbourne apartments which are still to be completed.

Combined with concerns as to potential oversupply, this has resulted in restricted availability of development funding. Available funds are being allocated to existing customers but on much more conservative terms. The other ratio which is becoming relevant is the overall ratio of non-property to property lending. Property is being affected as much by its own growth as a lack of growth in the denominator, non-property lending.

In the non-property sector, there are few sectors which are growing, becoming relevant, or are expected to grow significantly. Lending to the resources sector is reducing and the outlook and loss provisioning is actually reducing capital availability. Tourism, whilst it is doing well as a sector, is not a big user of capital and rural lending is stable.

One of the biggest areas of non-property limits is residential mortgages. Over the past few years, APRA has intensified its scrutiny of the mortgage lending practices and risk profiles of bank’s exposures. Last week saw Westpac announce it was halting lending to non-residents.

The increased scrutiny from APRA may limit growth in residential mortgage lending. As a key part of the non-property limits, this could limit growth in property limits for Australian banks.

Banks go through cycles where the focus is either revenue growth or return on equity (ROE). When revenue is in focus property lending is a way of generating quick revenue growth. We are now in a cycle where the focus is on ROE’s. As a result property lending is restricted as capital is deployed to higher returning parts of the Banks and costs come under more scrutiny. The banks’ focus on cost reductions is starting to affect a number of property teams through staffing freezes or reductions. At the same time, banks are facing resource constraints and frontline staff are being required to do more in terms of analysis of new applications and existing exposures.

What Does This Mean For Borrowers?

In this environment, loans generally get allocated by funders into the good, the bad, and the ugly baskets. The good loans continue to get done at reasonable margins and with reasonable appetite from funders. The bad, that is, anything a higher degree of risk, can get done but take a lot more work and time to set with more limited demand, higher pricing, and/or increased covenanting. The ugly simply aren’t getting funding.

There is no doubt it is getting tougher to get finance. However, the groups who are willing to put in the upfront work – and present their proposals the right way – will continue to get funding and do so at a time when the base rates are at historically low levels. CBRE believes these groups will be rewarded for their efforts as they will face less competition on acquisitions. CBRE assists borrowers by delivering a broader range of funding options from both banks and non-banks.

For vendors, more complete due diligence packages, provision of indicative funding terms, and a detailed understanding of the buyer’s funding options and how to assist them in obtaining funding can dramatically improve sales outcomes.

Originally Published On: http://www.theurbandeveloper.com/

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Finance

APRA rules to target higher risk loans

risk loans

Banks will be required to set aside more capital for higher risk interest-only and investor mortgages, under long-planned changes to regulation that are aimed at making the sector more resilient to future shocks.

The Australian Prudential Regulation Authority (APRA) on Monday finalised its new framework for bank capital, which acts as a critical buffer to protect the financial system in economic crises.

The new regime, which APRA has been consulting on for four years, will start in 2023, and it will cement reforms that originated in the 2014 financial system inquiry led by former Commonwealth Bank chief David Murray.

APRA said its new framework would not force banks to raise more capital, but confirmed that it would impose higher capital requirements on mortgage lending deemed to be higher risk.

The changes are unlikely to come as a shock to banks, as they had been repeatedly flagged to the market. In response, banks have in recent years charged higher interest rates to property investors, interest-only borrowers and customers with smaller deposits. At the same time, banks are offering the lowest rates to owner-occupiers with larger deposits who are paying principal and interest.

Bank capital refers to funds held by the bank that can act as a shock absorber against risks, such as borrowers defaulting.

APRA said Australian banks’ top-tier capital had roughly doubled since the global financial crisis to more than $260 billion, and its new framework was aimed at reinforcing this strength.

In mortgages, the largest asset class for Australian banks, the regulator said its new framework would aim to better distinguish between higher and lower-risk lending.

To do this, it is changing the banks’ “risk weights” – financial models used to determine the riskiness of a loan, which influences how much capital is set against different types of lending.

Under the changes, loans to owner-occupiers who are repaying both interest and principal will attract lower risk weights, while loans to investors and interest-only borrowers will attract higher risk weights.

Banks have already incorporated these changes into their pricing in recent years, but APRA’s new framework is likely to embed these practices permanently.

APRA chairman Wayne Byres said the changes were aimed at ensuring the nation’s banking system remained strong compared with banks overseas. “Capital is the cornerstone of the banking system’s safety and stability. It protects depositors during periods of stress, ensures banks can access funding, facilitates payments and helps banks to keep lending to their customers during good times and bad,” Mr Byres said.

“Although Australia’s banking sector is already strongly capitalised by international standards, the new capital framework will help ensure it stays that way,” he said.

Smaller banks have long complained that Australia’s capital framework gives the big four banks and Macquarie Group an unfair advantage in the home loan market. This is because “advanced” banks with more sophisticated risk systems receive more favourable capital treatment.

APRA said its new framework tried to better support competition, but it had not closed the capital gap entirely between the “advanced” banks and others because it supported giving lenders an incentive to invest in advanced modelling.

 

Article Source: www.brisbanetimes.com.au

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Brisbane

CBA Predicts House Prices Will Drop 10pc

House Prices

Another of banking’s big four has added its voice to the chorus predicting a drop in housing prices is on the horizon.

The Commonwealth Bank of Australia says Australia’s housing prices will drop by 10 per cent as prices start to moderate next year before dropping significantly in 2023.

It is the latest banking institution to join the growing consensus that house prices will correct in 2023: Westpac predicted softer changes in dwelling prices up 8 per cent in 2022 and down 5 per cent in 2023, similar to the ANZ’s assertion of a 6 per cent rise before dropping 4 per cent.

Meanwhile, NAB had witnessed a fall in property sentiment from experts and predicted 4.9 per cent growth next year.

Sydney and Hobart would be the hardest hit capital cities with prices expected to drop 12 per cent in 2023, according to the CBA, however, if the 2022 price increases were included, the impact was less severe.

The prediction for high-density developers was more promising with units to increase by 9 per cent next year before dropping by 7 per cent in 2023, creating a 2 per cent increase overall.

CBA dwelling price forecasts

Location 2021 2022 2023
Sydney 27%▲ 6%▲ -12%▼
Melbourne 17%▲ 8%▲ -10%▼
Brisbane 26%▲ 9%▲ -8%▼
Adelaide 22%▲ 6%▲ -8%▼
Perth 13%▲ 3%▲ -9%▼
Hobart 29%▲ 5%▲ -12%▼
Darwin 17%▲ 7%▲ -8%▼
Canberra 26%▲ 7%▲ -10%▼
Capital cities 22%▲ 7%▲ -10%▼
Houses 25%▲ 6%▲ -11%▼
Units 14%▲ 9%▲ -7%▼

^Source: CBA, Corelogic

CBA head of Australian economics Gareth Aird said the predictions took into account higher fixed mortgage rates, affordability constraints and natural fatigue after a period of extraordinary price gains.

“Our expectation for the RBA to commence normalising the cash rate in November 2022 means that we expect national dwelling prices to peak in late 2022 around 7 per cent higher than end 2021 levels,” Aird said.

“We expect an orderly correction in home prices of around 10 per cent in 2023 as the RBA takes the cash rate to 1.25 per cent by the third quarter of 2023.”

ANZ senior economist Felicity Emmett unpacked the impact of interest rate decisions and said the Reserve Bank was more concerned about the amount of housing credit in comparison to wage growth, and mortgage serviceability rather than house prices.

However, the increase in dwelling prices was not being passed on to developers, with greenfield sites increasing in price as well as construction costs which went up 7.1 per cent

in the past year.

 

Article Source: www.theurbandeveloper.com

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Finance

What Should Every Entrepreneur Know About Caveat Loans?

Entrepreneur

Who among us hasn’t entertained the idea of running your own business?

Thousands of Australians launched one throughout their middle years. If you wish to join them, though, raising funds might be a roadblock. However, here’s some good news: when you’re in an excellent financial position and have no debt other than your mortgage, you may qualify for a caveat loan.

“Caveat loans are primarily provided to businesses in need of short-term financing, and they are frequently covered by the business’s or shareholders’ personal property,” says Max Funding’s lending specialist Shane Perry.

If you think caveat loans are a viable financing option for your small business, here’s everything you need to know about caveat loans.

How Do Caveat Loans Work?

The first thing to learn about caveat loans is what they are and how it works for entrepreneurs. Caveat loans are short term loans, also known as “bridge loans.” When you take out a caveat loan, you may use any property (commercial, residential, etc.) as collateral and get funds. This kind of financing does not need a lot of paperwork and maybe approved within a day.

Typical Caveat Loan Conditions

Short-term funding is the goal of most caveat loans, which typically have terms of one to twelve months. As a result, small businesses may find themselves in a precarious position despite the decreased interest rates if they fail to pay back their loans on time, placing them in danger of default. In addition, the lender can forfeit the property if the loan is not repaid on time.

Interest Rates On Caveat Loans

If you’re looking for long-term financing, a caveat loan may not be the best option. Private lenders often disclose caveat interest rates on loans on a month-to-month basis. That indicates a monthly interest rate of 0.99 % to 1.5% for many Australian lending institutions.

At first sight, it seems to be an excellent deal — until you factor in the annual rate. Assuming a 12 to 18% yearly interest rate, a borrower would pay least that much every year. By accepting these rates, cash-strapped borrowers risk default and losing the collateral where the lender has placed a caveat.

Second Mortgage, Are They The Same As Caveat Loans?

One of the most common misconceptions regarding caveat loans is that they are seen as a second mortgage—which is wrong.  Many people mistakenly believe that a caveat loan is a type of mortgage since the property is being used as collateral; however, this is not the case.

Using the equity in the property as collateral, the lender grants you a loan. However, the lender restricts the property by placing a lien on it. The lender’s caveat prevents you from selling the property. In addition, you can’t obtain additional financing against the same property. Mortgages and caveat loans vary significantly in this respect.

Do Some Australian Business Owners Use Personal Properties As Collateral For Caveat Loans?

Small business owners and sole proprietors often use their personal property as collateral, and lenders are more than willing to accept that. However, if the property is occupied as a residence, the risk is just too high.

Final Thoughts

It’s usually a good idea to understand caveat loans before applying. Don’t rush into the deal since you won’t secure additional financing for your property. However, it’s good to note that caveat loans allow you to finance 100% of your loan-to-value ratio even if you have a poor credit history. Caveat loans are a great option if you’re looking to grow your business, launch a new venture, or improve your cash flow.

 

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