Australian Banks Take Action to Combat Peer-to-Peer Lending
Residential real estate values in Australia’s eight capital cities have increased by about 70% in the last eight years. It is common knowledge that buyers from overseas have played a large part in the property boom. A recent report by Credit Suisse, a leading global financial services company, has substantiated this with data.
According to the Zurich-headquartered firm, in the 12 months to March 2017, investors and property buyers from other countries made property purchases in Australia at an annualised rate of $8 billion. This works out to 25% of the new property supply in New South Wales and 16% in Victoria.
Business Insider Australia points out that a very significant portion of this demand comes from the citizens of one country – China.
Almost 80% of the real estate demand in NSW is from China. (The buyers are from Mainland China as well as Hong Kong, Macau, and Taiwan.
Where do foreign buyers get their financing?
Till recently, Australia’s big four banks, National Australia Bank, Commonwealth Bank, ANZ, and Westpac, were happy to lend to overseas property buyers.
It is important to remember that foreign borrowers are not a single homogeneous group. A “foreign” buyer could fall into one of several categories:
- A foreigner residing abroad
- A foreigner in Australia holding a working/spouse/temporary visa
- An Australian citizen living overseas
- A New Zealand citizen
- A permanent resident
Although the banks always had separate lending criteria for different categories of overseas buyers, non-Australians were treated on par with Australian citizens. A bank’s lending decision was based primarily on the result of their credit appraisal process. If a borrower was found to be a good credit risk, funds were made available.
But that has changed in the recent past.
Guarding against Peer-to-Peer Lending: Australian banks restrict loans
As an attempt to forestall the growth of peer-to-peer lending, each of the big four banks has introduced policies that restrict loans to non-Australians.
Early last year, Westpac said that it would not lend to a non-resident, even if the loan applicant’s income was not considered to determine repayment capability. In a statement, the bank explained its rationale.
They said that their “core purpose” was to help Australians buy a home or an investment property. “For these reasons, Westpac will no longer lend to offshore customers who are not citizens or residents of Australia with an eligible visa.”
At about the same time, Commonwealth Bank of Australia, which is the country’s largest lender, controlling 25% of the market, said that it would discontinue accepting loan application from self-employed foreign buyers.
Over the last two years, the tightening loan market has severely restricted the flow of funds to foreign property buyers. The following chart illustrates that mortgage lending to non-residents, which peaked in November 2015, has been in decline ever since.
An opportunity for private investors
The slowdown by Australia’s banks in extending finance to overseas property buyers has not been accompanied by a fall in demand. In fact, non-residents, especially the Chinese, continue to spend very large amounts in buying real estate outside their home country.
Juwai, a company that provides information regarding international properties to buyers from China, Taiwan, Hong Kong, Malaysia, and Singapore, reports that the Chinese spent a staggering US$100 billion+ on overseas property acquisitions in 2016.
Which countries get these investments? Juwai, the name means “home-overseas,” says that the US is the most favoured location. It got over US$50 billion of the US$101.4 billion that was invested last year. Australia is #2, while Hong Kong, Canada, and the UK, make up the next three.
This mismatch between high demand for Australian properties and the lack of financing has thrown up an attractive opportunity for private Australian investors. The banks have instituted measures that impede many highly creditworthy loan applicants from obtaining finance. In fact, there are instances where an existing bank customer with a good repayment record is denied a loan because of the new lending restrictions.
Private investors can utilise this opportunity to deploy their funds at attractive interest rates with non-Australian borrowers. The fact that you will have a first charge on the property against which the loan has been provided will ensure that your capital is secured.
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