Major developer sees 'dangerous' impact of lending curbs

A Sydney property developer and relative of Australia’s richest man, Harry Triguboff, has said that restricting developers and foreign buyers has "a very real potential" of sparking a chain reaction of unintended consequences.

In recent months the apartment market has received its fair share of press, with most reports claiming that an oversupply of apartments could trigger a collapse in property prices.

However, Luxcon Group managing director Ilya Melnikoff said recent restrictions on both developers and foreign buyers could actually lead to price rises by curbing the supply of new units.

Mr Melnikoff, a nephew of Meriton founder and billionaire property tycoon Mr Triguboff, told Mortgage Business that in addition to a crackdown on lending to non-residents, banks are also adding additional restrictions on the amount of pre-sales developers can accept from foreigners.

"Foreign buyer pre-sales have gone from 30 to 35 per cent accepted to 20 per cent. There are talks of restricting it even more," Mr Melnikoff said. "If projects can’t get the pre-sales, they can’t get started, leading to higher housing prices due to a lack of housing stock – housing demand will in fact increase," he added.

"It’s a real problem because some areas are heavily dominated by Asian buyers, such as Chatswood, Macquarie Park and Epping. You are really slowing down the production. There are a lot of local buyers, but there is a tremendous amount of foreign demand there. Now with the 4 per cent stamp duty on foreign buyers, that has the potential to put brakes on the whole thing altogether."

The issue is amplified by the fact that foreign buyers are typically more comfortable purchasing off-the-plan, whereas local buyers tend to wait until construction has commenced before purchasing as they want assurance the project is going ahead.

Mr Melnikoff’s Luxcon Group is a medium-density developer with a number of projects in Sydney currently in the construction or DA phase.

The group has established relationships with the banks, which has so far meant it can continue securing funding. However, stringent requirements around pre-sales and LVR restrictions are becoming a concern for the company.

"Even though we are existing clients [of the banks], there are more and more requirements being asked of us," Mr Melnikoff said.

"Banks are now asking for 100 to 120 per cent of the debt coverage in pre-sales. On top of that they lower the LVRs in terms of how much they lend for construction costs. On top of that they have added restrictions to foreign buyers. What that does is it slows down the pre-sales, it substantially delays the projects from getting started or not be able to start at all," he said.

"That effectively limits the production of the units. When there is a shortage of something there is obviously price rises. There is a real danger in all these restrictions actually creating higher housing costs as a result of lower production of units. There is a great potential of this happening as the result of developers not being able to complete their projects.

"All of these restrictions could create a chain reaction and a situation that these policies were designed to prevent."

All four major banks have pulled back on their non-resident lending in recent months, with NAB the latest to announce changes to its policy for home lending to foreigners.

A handful of non-major lenders such as ME and AMP Bank, as well as mortgage managers and brokers, have followed suit.

Last week, the Reserve Bank’s financial stability department chief, Luci Ellis, warned that property developers are one of the ‘vectors of distress’ that have historically triggered financial crises.

Ms Ellis said markets tend to see housing booms ahead of banking crises, however, it is "usually not the mortgage book that brings the banks down".

"If we find a way to cause a disaster in the mortgage book in Australia […] that would be the thing that could be very problematic for the banks, precisely because it is so big. But as the banks have said publicly before, it is important because it is big, not because it is particularly risky," she said.

Ms Ellis made the comments at the Centre for International Finance and Regulation Research Showcase in Sydney last week.

"The thing that has tended to be the causal agent in a banking crisis, even though you saw something go wrong in housing prices, it was the property developers and the commercial real estate," she said.

"These are the vectors of distress that actually cause a problem for the banking system historically."

However, when it comes to settlement risk, Sydney developer Mr Melnikoff said foreign buyers are less likely to walk away from off-the-plan properties.

"While we understand the mitigation of these risks, there has historically been less drop-out rate among foreign buyers than with local buyers," he said.

Banks have also admitted that loans to overseas borrowers carry less risk of default and are often paid off faster than loans to local buyers.

[Related: Non-major on a winning streak with mortgage sales]

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