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This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Hi, this is Arjun here, one of the property nerds, and thank you for tuning in to today's episode.
I'm joined by my fellow co-host, Lee. Hello, yes. Hi, I'm Lee, and for all those listeners out there, if you haven't heard our podcast, don't know who we are, I'm Leigh Paliwal. I'm a property investor. I'm the director of Hills Finance, which is based out in the Hills District of Sydney in Bella Vista.
And basically, our specialization at Hills Finance is to look after high net worth professionals and business owners, as well as complex multi-investor property portfolios. Awesome. Well, that's a bit about you. For those tuning in for the first time, my name's Arjun, as mentioned earlier, and I am the co-host of the Property Nerds here with my lovely and amazing wife, Leigh Paliwal. And I am the director and head of research at InvestorKit.
So we're a leading buyer's agency who really help investors scale their portfolios with more than, coming close to more than 50% of our clients now own three or more investment properties, which is putting them in the top 10% of investors in Australia. So that's a bit about us. For those who've tuned in many times, sorry for the lame, lousy intros about me and Lee, you know, it's our little plugins, but we've got lots to talk about, don't we, today? Yeah, lots of changes, I guess, that have come up in the finance space, and I'm sure you've got a few things to cover off in the property space as well. Yeah, so APRA is the word that's going around the block.
And of course, that is a key thing on people's minds because anything that is so large or macro that disrupts or I guess changes the flow of credit is no doubt going to have some sort of flow and impact to property. Property isn't an asset class where everyone's running around with millions of dollars in cash and buying every property with cash. Finance plays a huge part in the world of property investing. So I'm pretty lucky. I've got the finance guru at home, Lee, and she's here with a whole bunch of numbers and breakdowns on what APRA's changes include.
So I guess I might just start off with the APRA changes. What are they, Lee? I mean, could you explain them in terms of simple terms, what those changes mean? Okay, so today we're recording this. It's Friday the 8th of October.
Earlier this week, I think it was Wednesday, APRA made the announcement. And so the APRA announcement was that they are looking to increase the buffers that lenders are using. So this is basically deposit-taking institutes, so banks, so your big four, any deposit-taking institutes, Macquarie, et cetera, to increase their buffers on top of their assessment rates. So at the moment, it's been a 2. 5% buffer incorporated into the assessment rate being used, and that's now being increased to 3%.
So does that mean then, like, if you have a buffer, are you saying that, say, if someone has like maybe a 3% interest rate today, the bank's saying, hey, we want to check your affordability if you can afford this mortgage as if it was maybe, say, 5. 5, and now that's gone up to 6%. Am I understanding that correctly, Lee? Yeah, so to break that down, if you're getting a 3% rate with the bank, for example, instead of 2. 5% on top of that, which would be a 5.
5% assessment rate, it's now increased to a 3% buffer on top of that. It's now a 6% assessment rate being used. So that's a two-part thing that goes through my mind when I hear something like that. Number one is it's like squillions of 0. 25% interest rate jumps to even make our mortgages sit with a 6 in front.
And I think in a previous recording with Phil, host of Smart Property Investment Show, I was saying that interest rates really aren't running anywhere for some time soon, and either we might even see them come down to zero, if not at least the bond-buying program just sits around for some time and doesn't really move around, and it just kind of keeps that cash rate low for the banks. So that's kind of where that's one part. A whole bunch of rate changes would need to take it up to the 6. But the other part is don't you feel pretty good when it comes to the systems that we have in place in Australia and the comforts knowing that Australians who are signing up for these loans, whether it was the 5. 5% of before and it's now the 6, that's a very comforting position to know that I'm buying this property and I can afford this as if it was 5.
5% or 6% interest rates. Yes, exactly. So exactly right. Australia is pretty, like in terms of like the banking and finance, the way we manage our risk and everything, I think any client or any person looking to buy a property and they're seeking finance, there's all these different buffers that have been put in place, and really it's all to make sure that at the end of the day, the debt you're taking on, you're going to be able to manage it and you're not putting yourself at financial risk. So it's really, really comforting to see.
So what have you seen as the impact from this? Because I'm sure like, you know, there might be people out there who are thinking, I'm about to go on my investment, hold on a minute, should I not? What are the numbers out there that you're seeing if you run it just on a standard scenario, if we can call the standard as? Yeah, so I'm not sure if anyone listened into our last podcast, I ran through a couple of scenarios, so I thought I'd bring that back in again this time around. So basically I've put together a bit of a standard profile.
So I've got a married couple that I'm using an example of, and then they both earn an average wage of 80K each. Between the two of them, they have a 5K credit card limit, and also they're paying 500 per week in rent with standard monthly living expenses. I don't know if there are very many people with 5K credit card limits though. I mean, like a lot of people start having a lot more these days. The banks keep sending you these letters going, hey, would you like to increase it to 30,000 there, John?
And you're like, sure. I mean, let me get those Qantas points, right? But look, I think it's a fair calculation because there's many good people out there. I'm probably just representing me and a close group of friends who just can't get off these Qantas points, even though we can't fly anywhere, which is pretty annoying, but that's enough about that. Yeah, exactly.
That use has gone away, really. But yeah, so anyway, so that's the client profile views, and I ran a couple of scenarios to kind of understand how do these buffer increases really impact your borrowing capacity, or what kind of difference we can expect depending on the scenario that we're looking at. So there's a couple of scenarios I ran. The first one was if the client is purchasing or the clients are purchasing an investment property. So I used a 1 million purchase price as an example.
We're here in Sydney. That's like your minimum kind of standard house price we're looking at these days, roughly. So 1 mil purchase price with a 4% rental yield. So that's about 770 per week in rental income. So again, I mentioned the income, so 160K joint income for the couple.
They've got a 5K credit card limit. Because they're going to buy to invest, we have to incorporate the 500 per week rent and their standard living expenses. So then, okay, the question is, okay, now there's a 3% buffer. What's the difference? So the borrowing capacity decreases slightly, okay, by down to 953,000.
It's about a 53K difference, which is 5% of the lending requested for in that scenario. So 5%, I mean, at those purchase prices, does it make a huge difference from what I'm seeing? I don't think it's a massive seismic shift when it comes to borrowing power. But what I will do is I'll just say that, hey, if that 4% yield at a million is a pretty high yield, I'm guessing that's long gone in Sydney. We might cut that up into two 500K purchases just to be conservative.
And that 50K number now looks like 25K per 500K in purchase price. So that's not a huge shift, is it? Not really a huge shift from, I guess, part of me thinks that is the intention of this change more a psychological shift to go, we're making a move, we have now made a move, and it makes that sentiment or thought that people may take before making this decision to say, oh no, APRA's making this move. So part of me feels it's more like a psychological play rather than an actual substantial risk reduction. What are your thoughts?
Well, you've got to ask what's the reason that APRA want to increase the buffer to begin with? And so obviously everyone's talking about how hot the market is across the country. It's been pretty crazy. So their intention is to obviously slow that market down and prevent future risk building up. So it's not a huge difference in terms of decrease of borrowing capacity.
We don't know if there will be further announcements made from APRA to further prevent risk, like what they're wanting to do 2015 was 14. 62%, 2016 was 9. 4%, and 2017 was 6. 4%. So if you reacted to the first group of APRA changes back in 2014 in Sydney and decided, hold on a minute, it's gone crazy for the last three years, I'm not coming back for more property.
Well, you would have missed out on a cumulative 14. 6, we'll call that 15, plus 9. 5, we'll call that 10, plus 6. 4, we'll call that 7. So that is a huge amount of growth, close to 30% in growth that's occurred during that time.
So 30% would have been a big amount for you to leave on the table if that happens. So with that impact, looking at the next group of changes, APRA came in in 2020 and suspended many of these changes and kind of did the winding back. But Sydney's first wave of declining markets started to come in at 2018. So you could obviously see a slowdown in the rate of growth from 14 to 17. But in 18, we started that becoming zero growth.
And then in 19, we had a 5. 88% decline, with some regions declining as low as that 5% number and some sub regions of Sydney declining up to 15%. So that first wave of correction did not happen for another four years until the first APRA changes came through. So even after the second or third APRA changes, it happened in the year or two following. So then there was the negative gearing to add on top of that.
So there's a wave of changes that needed to come in, as well as time that took that lag effect of credit and the changes in behavior and the response and the availability of credit for the markets to respond. So Lee, would you say it's, you know, the lag effect here, it's pretty clear that the lag effect is there in some of these changes, it doesn't always tend to happen. And people making decisions on just one change could still be missing out on a fair bit of growth ahead. Well, yeah, definitely. Like we were talking about how like, small the change was with the buffer increase that's currently being announced from APRA, right?
So that's just one small change. It doesn't mean and like, again, we were talking about how it's a 50k decrease in borrowing potential. So is that really big enough change for you to hold off you wanting to buy? It's a fair point. Yeah, that could be one way to look at it.
Yeah. And I think the whole idea of showing these previous changes and what happened in Sydney is that when Sydney did have some declines in the years 18, 19, after these many years of changes, negative gearing talks and things like that, the fact that you were already going to be up 30% plus in the years prior, didn't make that hurt for those who had purchased prior 2017, because they'd soaked in a decent amount of gain already. It's interesting, though, that when you take into account different markets, the trajectory is very different, just like I explained in the interest rate side of things, and how we did not see all markets act the same, even amongst the previous changes with APRA, all markets did not respond the same. So to give you some context, if we take this over to say, another capital city by the name of Hobart, in December 2014 and March 2017, I talked about those larger APRA changes. During those years in between, while Sydney had some phenomenal growth, Hobart was still lagging around.
No massive changes came in, and it was single digit growth during those years. So one would look at that and go, hey, are these changes impacting Hobart a fair bit? I beg to differ, because in the years following the changes, as Sydney did have some declines, Hobart had a 13. 7% increase in 2018, another 8% increase in 2019, another 8% to 10% increase in 2020, and now close to 18% year-on-year growth in 2021. So we can see huge positive direction after two waves of changes that occurred over those four years, three years, and while Sydney went the opposite direction.
This can also be shared across in another example with the market of Ballarat, which was rising between the years of 2016 by 4%, in 2017 by 7%, I'm just rounding these numbers, guys, in 2018, 7%, and then double-digit growth in 19, 20, and 21. So you can see that the trajectory of Ballarat was in an upwards cycle, even though these changes came into play, even though these changes had damaging impacts to, say, Sydney before that recovered. So it just shows the importance of assessing property markets needs to be far deeper than a singular indicator of credit. Credit is very important, but the requirements of credit changes based on where you are buying, and the access to that credit changes by the local individuals within those markets who are representing the transactions there. So from Ballarat, Hobart, Sydney, we saw completely different responses to those environments, which shows that a singular indicator of credit is not enough.
It is a key part, it is a major impact, as we saw 5%, just like that is now changed for people overnight, but it is not the only indicator. So here is where when we do come to analyzing markets, I would firstly say a 5% change will make some impact in a few places. We're already seeing the rate of finance slow, which I'll let you touch on me, but also we are seeing the rates of growth slow down over the last few months. Again, that's a national comment, it's not the same for all sub markets, but what this really does show from the deep dive of APRA is to take a very open approach to your investing, not just your backyard, and realize that in every single given year, whilst it feels this year and last year, we're seeing blanket growth everywhere, it's very rare for blanket approach data to make a blanket approach impact for prices in all markets all the time. This is a very unique time where we're seeing all markets rise, but they won't be rising by the same rates, they won't be falling by the same rates when things happen, it's important to take a wide scope.
So on the finance side, Lee, obviously going into these months ahead for capital growth and the end of the year coming up, what is the finance data showing you and what are you expecting towards the end of this year? Yeah, so the ABS housing finance data has recently been released. And so just to run through, I guess, the data that was released and we can break it down. So for total housing has fallen by 4. 3%.
So about 4. 3%. So the largest fall, this is actually the largest fall since May 2020. Now with the largest fall since May 2020, I think it's important to also give context to say, it's massively erupted, right? So we couldn't have expected it to stay at these high levels, right?
Yeah. Yeah. So to break into that, so that's for the total housing 4. 3% fall. Now to break that down for owner occupied housing, that's fall fell by 6.
6%. And then in terms of for investor housing, that's actually rose by 1. 5%. So yeah, whilst there has been a decrease, I would partially attribute this to the lockdowns that have been taking place in New South Wales and Victoria. So obviously that's intensified what's happened with the decrease and therefore has impacted obviously the owner occupied numbers.
There's a lot of people locked up, they can't go and see where they might want to live. And therefore, you know, there's these people buying where they're going to live. And those are the two biggest states as well. Investors on the other hand, though, so they've rose and, you know, everyone's getting used to the lockdowns, I would say. So they've probably gotten used to the conditions, probably seeking interstate investing options, even though you might be stuck in New South Wales, Victoria lockdowns, just really, I guess, broadening their options.
And that's attributed for investor housing still to rise nationally. And so these numbers are still very high, I would say, even with the decline for August 2021 data. So we are still expecting a strong finish for the end of this year and definitely for the beginning of next year as well. And am I right in saying your expectation of that finance movement when you say a strong finish for capital growth, that comes off the back of the lending indicators and fast forwarding them six months, right? Correct.
Exactly. Cool. So there we have it on our finance update. And, you know, with that, I think the strength is definitely there in the markets when it comes to finance. But yes, it has tapered off a little bit.
And I'd say expected there was a huge number, you know, owner occupiers total, I mean, total lending, sorry, excluding refinance for both owner occupiers and investors creeping well over that $30 billion mark is huge. So I personally feel that, you know, with 5%, whilst it's a small change, my thinking here is that we should see lending still taper off a little bit. And we should see from these high levels, especially growth levels continue to taper off. For many parts of Australia, growth rates were hovering between 1. 2 and 2% per month.
Our expectations are that going into 2022 for InvestorKit, our analysis of markets is saying that in 2022, we may end up with a 0. 8 to 1. 2% monthly rolling for most of the country, which is no small number.
