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Property investors battered by a 'perfect storm' of falling prices and tighter credit

In the heady days of the property boom, as big city house prices jumped ahead in leaps and bounds, investors reigned supreme, swatting away first home buyers with their superior purchasing power.

It was a win-win for the investing class. They had willing banks and favourable tax laws working for them, pumping up property prices and capital gains in a virtuous circle.

According to property investor Michael Ilieff, who arrived in Australia as a Bulgarian refugee almost 30 years ago with $8 in his pocket, the tables have well and truly turned.

A combination of hard work, negative gearing and interest-only borrowing helped Mr Ilieff build a life through property, but right now his investment record spanning decades counts for nothing.

He wants Westpac to extend his interest-only loan on a property bought well before the Sydney and Melbourne property boom took off. Even with prices falling, the property is worth much more than he bought it for, but the bank is treating him like a newcomer.

"Everyone (investors) are suffering from that," he told The Business.

"Just the fact that they're asking you how much you're spending on your Netflix, how much toothpaste do you use. They really make it hard to borrow money. It's ridiculous there's just a blanket formula and no flexibility. I'm not sure how you can run the property market or anything to do with the economy if the banks continue to be this strict."

Investors are big players in Australia's property market, representing about 42 per cent of total mortgage demand.

A significant shift in investor sentiment could lead to a serious downturn in the property market with job losses in the labour-intensive construction sector, not to mention the serious knock-on effects to the services such as architects and lawyers, as well as retailers who sell household goods.

Peter Koulizos, chair of Property Investment Professionals of Australia, believes the banks' tighter lending policies in the wake of the regulator crackdown and royal commission has made it very difficult for investors.

"Even though 2018 was a tough year. I think 2019 will be even tougher," Mr Koulizos warned. "So far as borrowing money is concerned this is the worst I've seen. It wasn't this bad during the '90s recession, and it certainly wasn't this bad straight after the global financial crisis."

Investors have also been singled out by banks for bigger interest rate hikes. On average, loans to investors have gone up by 57 basis points more than loans to owner-occupiers.

Interest rates - Investor vs Owner Occupier

But the biggest risk to investors, according to property research firm CoreLogic, is falling prices. Investors will no longer be able to ride a wave of capital gains.

CoreLogic's head of research, Tim Lawless, said property prices will continue to fall through 2019 and possibly into 2020. In Sydney they are already down more than 11 per cent.

"It's a bit of a perfect storm in many ways," he said. "Rental yields are beginning to weaken or fall while we're also seeing unprecedented levels of supply coming onto the market, which could lead to further falls if demand softens."

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