Investors have backed further out of the property market and there is no surprise there.

That's been the trend since regulators started tightening the thumbscrews on the sector.

In July investor lending fell another 1.3 per cent, to be down more than 15 per cent for the year.

Owner-occupiers have been more resilient, with lending up 1.3 per cent over the month. But these figures are from July, well before the big banks started peddling their out-of-cycle mortgage rate hike.

It's taken more than three years for the regulators to turn around the $1.5 trillion juggernaut that is the mortgage portfolio of Australia's big four banks.

But the real target has been about a third of that, or $530 billion, that has been lent to investors.

The impact has been obvious, a so-far fairly gentle slide in residential property prices.

Rate rises will have a greater impact

The so-called macro-prudential tightening engineered by the Australian Prudential Regulation Authority had the sole aim of de-risking the banks' balance sheets, forcing them to build up secure capital buffers.

The "macro-pru" tools have been pretty broad, slowing the banks' annual growth of investor loans to 10 per cent and throttling back interest-only lending to 30 per cent of new loans.

Those weapons have been put to one side as APRA plans a more targeted approach demanding verification of a borrower's ability to repay the loan.

It's a hardly surprising move given the outright fraudulent tactics to sell loans that have emerged during the banking royal commission.

In economic terms, it has been a supply shock limiting the amount of credit available, mainly to investors.

While the change has been relatively subtle so far, stand back because the sledgehammer may start swinging in the form of higher interest rates.

That's a price shock that will have a far greater impact.

JP Morgan's Henry St John said the out-of-cycle price rises would be a double-whammy for investors.

"The tighter credit rationing has already affected investors; it has been slowing in an orderly fashion," Mr St John said.

"The higher interest rates are more a sledgehammer hitting both investors and owner-occupiers."

30pc of existing loans highly geared

The impact of the rises in the past couple of weeks obviously didn't show up in the release of the July home loan figures.

It is more likely a delayed feedback playing out over the next three to six months.

Mr St John points out much of the commentary in the wake of the big banks' recent 0.15-0.16 percentage point hikes has been that $200 to $300 a year in repayments will be added to the average loan.

But the impact will really be felt in the 30 per cent of the bank's loan books with high loan-to-value ratios (LVRs) typically held by investors.

"A huge amount of the loan book are a really high LVRs," Mr St John said.

"The average loan [for high LVRs] is around $800,000. The impact for those loans would be additional repayments of $800 to $1000 a year."

That is an entirely different level of pain, particularly as the capital value of the investment the loan was taken out against is falling.

Very vicious circle

It has become a very vicious circle for investors, according to Bruce Carr, principal of mortgage broker Loanscape.

"The argument goes that if you remove one third of prospective buyers from the property market it will lead to a crash in housing prices," Mr Carr said.

He has crunched the numbers on loans and conditions in the market (before the recent increases) to demonstrate how investors' capacity to borrow has been slashed.

Scenario 1 — "mum and dad" investors

A couple with two children, a modest home loan remaining, and a family employment income of $100,000 pa. Lenders: three major banks, one second tier bank. Scenario: seeking to purchase first investment property.

Scenario 2 — "seasoned" multi-property investors

A couple with no dependent children, no home loan, a family employment income of $135,000 pa, two existing investment properties (both under finance) earning 3.5 per cent pa gross rental return. Lenders: three major banks, one second tier bank. Scenario: seeking to purchase third investment property.

APRA too slow

Mr Carr said multi-property investors were feeling the pain.

"Compared with the situation in January 2015, for every $1 million in debt held by a property investor, they now require $30,000 additional annual net income to qualify for the same loan," he said.

Mr Carr said while APRA's intent to take the heat out of the property market was sound, it acted too late.

"We are now living with the consequences," he said.

"The outcome is that few people — other than the banks — are happy.

"High property prices mean many first home buyers and upgraders find the stretch to property ownership too hard or too risky.

"Those who purchased at the peak are seeing their equity ebb away.

"Many investors are feeling the pinch — their bank has raised interest rates by 25 per cent, they cannot refinance, and repayments are set to increase by a further 30 to 40 per cent when loans roll out of their interest-only phase."

House prices yet to bottom

CoreLogic property analyst Cameron Kusher said things were only likely to get tougher for investors, and by extension put more downward pressure on house prices.

"Tighter credit conditions, higher mortgage rates for investors and interest-only borrowers and reduced affordability have already led to the falls of 5.6 per cent from the peak in Sydney and 3.5 per cent from their peak in Melbourne," Mr Kusher wrote in a research note.

The spring selling season, which is usually ushered in with banks offering discounted loans, has a very different feel this year.

"Although the magnitude of the mortgage rate increases announced is fairly small around — 15 basis points by each lender — it is likely that the higher mortgage rates will impact on housing market sentiment," Mr Kusher said.

"Furthermore, it may end up further exacerbating the declines which are already occurring in Sydney, Melbourne, Perth and Darwin and the slowing of value growth being experienced elsewhere."

Mr St John said the response so far to the unwinding property market had been more chronic than severe.

"The turnover [in existing housing stock] has been low and hasn't changed that much," he said.

"If rising rates forces selling by investors, then that will hit not only prices more severely, but the broader economy."

RBA still watching

For the time being, the Reserve Bank is relaxed.

The cooling property market has been welcomed. The banks and regulators have done all the heavy lifting while the RBA has sat back and watched for a couple of years.

"Not so long ago there was concern in the community about rapidly rising housing prices and debt and declining housing affordability," RBA Governor Philip Lowe recently told the House of Representatives standing committee on economics.

"These earlier trends were not sustainable and were posing a medium-term risk to our economy.

"So a pull-back is a welcome development and can put the market on a more sustainable footing."

If the gradual unwinding goes to the RBA's plan, official interest rate will be heading up, perhaps later next year.

That would mean more pain for highly geared investors.

If things come unstuck, property prices slump, consumption is strangled and the economy stalls, there is a chance official rates could fall, but not by much and certainly not enough to give investors much relief.