“I’m so stressed. I have 11 properties settling and I don’t know what to do, none of the banks want to lend to foreigners…”
The message was from a friend of mine who’s also a mortgage broker. She sometimes messagages me to get advice for tricky loan scenarios.
This time was different. I checked our policy guide and came up short. This time there really was no solution for her customers.
The perfect storm for Chinese investors
There are several factors that have combined to cause a disaster for investors.
- The banks stopped lending to foreign investors.
- Chinese nationals are restricted from taking money out of China.
- Foreign investors are required to buy new properties.
- Thousands of investors have committed to buy a property off the plan.
What happens if you sign a contract to buy a property but you can’t get the rest of the funds together when it’s time to settle? You lose your deposit, typicaly 10% of the purchase price, and you can be sued for losses incurred by the developer.
Thousands of investors are likely to lose their deposit because of this combination of risky investment, fiscal policy and banks changing the rules.
The banks ‘broke up’ with foreigners
Once upon a time the foreign investor market was too good to be true for the banks. Wealthy customers, big deposits, high incomes and multiple properties. Oh, and let’s not forget that foreigners probably don’t know if their interest rate is competitive or not. What more could a bank want?
But then things changed.
One by one the banks began to break up with foreign investors.
CBA was the smartest of the bunch and has avoided the foreign investor market for over five years. On 18 April, they announced restricted policy for temporary residents living in Australia, the close cousin of foreign investors.
Westpac and St George on the other hand had long embraced foreign investors. They’ve enjoyed huge numbers of applications over the last couple of years and only last year began to get stricter on investors and announced further changes in March. The final straw came on the 26 April when they pulled the pin altogether and announced they no longer accept foreign investors.
The smaller banks such as Suncorp, BankWest, ING and ME bank aren’t interested in foreign investors and haven’t been for quite some time.
Why? It’s not because of some patriotic urge to keep property ownership in Australia. It’s actually something far more sinister.
What about NAB, ANZ and Citibank?
ANZ technically allows foreign investors to borrow up to 70% of the property value. However, they have strict foreign income and identification requirements which means that foreigners have to meet face to face with the bank or a mortgage broker in order for them to get approved for a mortgage.
In other words, ANZ isn’t a viable option for the huge number of foreign investors and will probably pull out soon anyway as nobody wants to be the last man standing.
NAB just reviewed their policy and announced they will lend 60% of the property value and would only use 60% of any foreign income. In addition to this they have strict income verification requirements. Unless you have a huge deposit and a huge income to match it then you’re unlikely to get approved.
Similarly, Citibank recently announced stricter lending rules and now only allows foreigners earning particular currencies such as USD, UK Sterling (GBP), Singapore dollars (SGD), Hong Kong Dollars (HKD), New Zealand Dollars (NZD) and a few others.
What’s missing? Chinese Yuan (CNY)!
Saved by the non-banks? Nope!
Liberty Financial, Pepper, MKM and other specialist lenders don’t lend to foreign investors and haven’t targeted this market.
La Trobe Financial was the only specialist lender left that lends to foreign investors. They reviewed their policy and announced last Friday that they’re out of the market too.
Nobody wants to be the last man standing…
If you’re the only lender in Australia that will approve loans for foreign investors then what’s going to happen?
You’ll be inundated with applications! Way more than it is possible for most lenders to process and definitely more than it would be financially responsible to approve. They’d end up with a loan book filled with foreign investors which would cause a huge problem for their treasury, ability to raise funds and would definitely draw APRA’s attention.
So it’s almost certain that even if one or two lenders want to remain in the market they will be forced out but the sheer amount of applications.
Foreign investors had to commit… but the banks didn’t
When you buy a property off the plan you’re committing to settle on a property in the future. You pay the deposit now but you settle the property in a couple of years time.
The problem is that, with a few exceptions, you can’t be guaranteed a loan approval so far in advance. You’re assuming the lending rules don’t change and that the property market doesn’t head south before you settle.
The banks are under no commitment to provide finance to an investor who buys off the plan. Even if the customer had a pre-approval.
The question on everyone’s lips: Will the market crash?
If you’re a struggling first home buyer then you’ve probably got your fingers and toes crossed in anticipation. However many experts think this is unlikely to cause a crash.
Inner city suburbs and new areas with lots of developments could take a hit to their prices as large numbers of new units come onto the market. It’s unlikely that high quality, established suburbs would be affected.
It’s also possible that some property developers will get into trouble when their new units don’t sell as planned. It all depends on their situation, some developers will benefit from keeping the investors deposit!
What if the construction industry does become a bit unsteady? If you remember 2007 the government used first home buyers grants to quickly bring confidence to the market during the GFC. If I was in the government then that’s exactly what I’d do to stabilise the property market.
What about temporary residents and Australian expats?
In this case common sense prevailed and despite a string of policy changes which make it harder to apply for a loan, it’s still very possible.
Aussie expats are great customers and have a fantastic track record of paying off their mortgages. Temporary residents, especially those on 457 visas, tend to the be the best and brightest from other countries and several lenders are still willing to approve their home loans.
Why did the banks pull the rug out?
In late March several banks discovered several large Chinese syndicates which were supplying false documents to enable people who didn’t qualify to get approved for a loan. The scale and sophistication of this has been unprecendented.
Entire networks of fake companies were set up in China which were used as fake employers providing fake payslips to borrowers, real estate agents and mortgage brokers. They could also produce fake bank account statements and potentially many other types of documents.
We’ve seen and reported some of these fake documents ourselves. However it looks like many people successfully used these documents to get approve for loans through the major banks.
Typically the borrower would be someone living in Australia however a false job would be set up so they looked like an Australian expat living in China. Alternatively they were a foreign investor living in China who’s money was from a questionable source. Since they couldn’t prove their income they’d get a job created for them.
It’s possible that a large amount of money laundering and illegal activities are tied up with the money that’s been coming into Australia and spent in our property market. At this stage many people suspect but nobody really knows for certain.
Find out more
Feel free to call us on 1300 889 743 or comment on this article below if you’d like to know more as the situation develops.