Falling rents or loss of tenants could seriously jeopardise the financial stability of nearly 36,000 investment portfolios around the country, according to Digital Finance Analytics (DFA).
With so many investors relying on tenants to pay borrowing costs, more than one in three portfolios with Sydney property would be at risk. In Melbourne, one in four properties could be impacted, said the DFA.
“These are investors who would not have income or savings to pay for their investment property mortgages if rent were to stop,” said Martin North, principal of the DFA.
North puts the number of property portfolios that may be affected at 36,000, based on analysis of household surveys, as well as public and private data used to model the nation’s property market.
The increasing supply of houses and apartments (particularly a looming apartment glut in Brisbane), as well as falling rents are creating pressures for many investors, said North. Approximately 20% of investors with Brisbane property in their portfolios could be at risk, compared with less than 10% in Adelaide, Perth, and Canberra.
Many investment advisers, mortgage brokers, and property analysts are echoing North’s findings, as weak cash flows from investment properties, low equity, high gearing, and large loan commitments means investors need to review, restructure, and roll back on debt.
RBA Governor Philip Lowe said too many banks were giving owner-occupier and investor loans to struggling investors, increasing the risk of defaults if even small shocks rocked the economy.
“Not having the cash flow to maintain your repayment commitments is where you can run into trouble,” Mario Borg, principal of Mario Borg Strategic Finance, told the Australian Financial Review. Borg owns a mix of houses and apartments in a personal portfolio valued at more than $10m.
“There is no one-size-fits-all when it comes to an optimal portfolio size, as everyone's financial situation and personal circumstances are different,” he said.
Borg creates a buffer against potential financial stress by falling markets or rising rates by borrowing only 30%-40% on investment properties. "You should also ask whether there are adequate financial buffers in place should the unforeseen happen and you lose your job, or the business takes a turn and cash flow is reduced all of a sudden.”
Christopher Foster-Ramsay, principal of Foster Ramsay Finance, said borrowers need to take into account the current lending environment, including higher interest rates, bigger deposits, and much closer scrutiny of borrowers’ finances and ability to repay.
“There is going to be an upheaval for property investors. Obtaining interest-only loans is going to get very hard,” he said.
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