Strong house prices a problem for residential property investors

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The soaring house prices in recent years have also driven rental yields in both Sydney and Melbourne to record lows. And according to Moody's Investor Services, this can become a problem for investors, as "the net costs involved in servicing a housing investment have increased relative to household incomes, making investment properties less affordable."

This eventually increases the risk for Australian residential property investors and residential mortgage-backed securities. It has also increased the level of cash flow losses suffered by residential property investors over the past three years as it made investors dependent on house appreciation to cover their investment losses.

"Investors in Sydney houses require 39.6 per cent of net household income to service their investment properties, while Melbourne house investors require 26.5 per cent, both record highs," Moody's said. This leads to an increase in risks and default probability for residential property investors.

This is the reason why the Australian Prudential Regulation Authority (APRA) clamped down the growth of investment lending in 2015. The concentration of the Australian big four banks on housing loans was troubling the banking regulator.

"It is a significant issue of concern to us that close to two-thirds of [the big four banks'] balance sheets are exposed to property, mainly housing loans," said Charles Littrell, APRA's executive general manager of supervision and support.

According to Moody's, investment loans lent during the height of the lending boom in 2015 and 2015 are going to perform relatively poorly compared to those issued in other years. It might also mean that the performance of investment loans across the entire banking sector is bound to deteriorate in 2016 and 2017.

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