APRA bank loan changes put the brakes on property investors
The consensus among economists is that the housing boom has peaked, writes Larry Schlesinger.
The wheels might not have come off yet but the investor demand that has driven Australia’s property boom is starting to wobble.
This week’s announcement by the Australian Prudential Regulation Authority (APRA) that the big four banks and Macquarie Bank must hold more capital against their gargantuan mortgage books to provide a buffer against defaults will apply further pressure to housing growth. The banks are already increasing home loan rates to meet more expensive funding costs.
Combined with the blizzard of tougher lending policies already introduced by the banks this year, to slow down investor lending growth per bank to less than 10 per cent a year, the consensus among economists is that the housing boom has peaked.
Property analysts say Sydney and Melbourne, where there has been the greatest acceleration in prices and where investors have dominated, will be hardest hit. House prices in Sydney have surged 20 per cent over the past year, and 10 per cent in Melbourne.
Brisbane, Adelaide, Hobart and Perth, where there has not been the same price growth, will not see the falls, analysts say. Darwin, hit by the slowdown in resources, has had little price growth this year. In Canberra, where house prices have increased by about 5 per cent over the 12 months to June, Domain senior economist Andrew Wilson expects more house buyer activity, although apartment prices are falling thanks to oversupply.
This is how much the banks have turned the screws on investors. All have reduced loan-to-value ratios (LVRs) on investor loans, with Westpac, the nation’s biggest lenders to investors, slashing its LVRs earlier this month from 95 per cent to 80 per cent (meaning a $200,000 deposit if you’re buying a $1 million dollar home). Investors must be able to service loans at higher than 7 per cent (a 2 per cent buffer), pushing more to the sidelines or requiring them to downsize their buying ambitions.
Banks have also removed mortgage discounts from investor loans and have cut back on offering riskier products such as interest-only loans. Some, such as ANZ Banking Group, have removed the cash-flow benefit of negative gearing from investment lending policies and both Commonwealth Bank of Australia and Westpac have reduced the proportion of rental income they will consider when assessing mortgage serviceability.
“Confidence from investors in markets like Sydney is going to start to wane,” says CoreLogic RP Data’s head of research, Tim Lawless. “There is a growing acceptance that the market has run its course.”
Logically, fewer investors out there means less competition for property and less pressure on house price growth, which, according to economists including Paul Bloxham of HSBC and Shane Oliver of AMP Capital, has already peaked.
Both economists anticipate weaker levels of growth for the remainder of the year and into 2016, with expectations that prices will start falling from 2017 when the Reserve Bank of Australia could start raising rates again.
“If mortgage rates rise as a consequence of more stringent capital requirements on housing lending, this is likely to be a drag on housing activity because mortgage rates are still the key driver of activity in the established housing market,” Bloxham says.
Oliver, who expects prices to fall by between 5 per cent and 10 per cent in 2017, says it’s unclear yet what impact the APRA measures will have on the housing market. But he says the RBA and APRA both want to see a slowdown in lending to investors and more heat coming out of this market.
What the RBA does not want to see, Oliver says, is rising rates for existing mum and dad borrowers. The impact of this would go beyond the housing market into sectors such as retail spending. Were this to happen, both Oliver and Bloxham believe the RBA could cut rates to dampen the effects. “It’s a 50-50 call whether there’s another rate cut,” Oliver says.
The latest data from the country’s biggest mortgage broker, Australian Finance Group, which shows investors in NSW quitting the market in droves, suggests the cumulative impact of the changes is having the desired effect.
Its June-quarter figures show that the proportion of investor loans in NSW, consistently at about 50 per cent of all lending over the past 12 months, fell to 42 per cent over a three-month period. This is likely to affect investor buying across the country.
“Investor lending has returned to levels we are more used to,” AFG chief financial officer David Bailey says.
Depending on how much lenders increase rates due to the APRA changes, Bailey says it may bounce some people out of the market. “It’s very early days, but initial discussions with some lenders suggest increases of between 10 and 20 basis points.”
Other analysts, such as CLSA’s Brian Johnson, believe the rate rises could be higher but the clear message is that they are going up.
ANZ and CBA have already moved, announcing they will lift interest rates on a range of fixed and variable investment loans by between 10 and 40 basis points from August to ensure investment lending growth does not exceed APRA’s ceiling of 10 per cent.
But both banks will also cut rates by between 30 and 40 basis points on fixed-rate loans for owner-occupiers, with ANZ’s Australian chief executive, Mike Whelan, telling Fairfax Media there will be a heightened focus on “owner-occupier and first home buyers in the country”.
Period of uncertainty
Gerald Foley, managing director of National Mortgage Brokers, says first-time investors without the equity and cash flow to satisfy the banks’ new requirements will be the ones most affected.
More broadly, the changes are creating an unusual period of uncertainty between lenders and borrowers, particularly for investors who have employed a particular investment strategy.
“In the short term it won’t have a significant impact, but if there is a sustained period of continued tightening it will have an impact. It will take confidence out of the marketplace,” Foley says.
The winners out of all this, he says, could be first home buyers. “With some investors sitting on the sidelines, there may be better opportunities for first home buyers to acquire property, which is potentially part of the impact regulators want to see,” he says. “Banks still have money to lend and are offering sweeteners on the owner-occupier side.”
CoreLogic RP Data’s Tim Lawless believes there will be a correction, “but it won’t be of the magnitude that some commentators are forecasting – 20 to 30 per cent. It will be a gradual moderation.”
But certain pockets of the market are at greater risk of correction, he adds. “When you look at areas of the market most susceptible, it’s the investment markets where there is a lot of new supply – the inner-city apartment markets and the outer suburban greenfield housing estates.”
Among the inner-city investor-dominated apartment markets, Lawless points to Melbourne, where there is much greater geographic concentration around the central business district, Docklands and Southbank.
“The risk is much less in Sydney though, because dwelling approvals for apartments are not as high as Melbourne and the geographic distribution is much broader, spreading out to places like Parramatta, Lane Cove and Chatswood.”
Others, such as veteran mortgage market analyst Martin North, expect a “slightly negative impact on mortgage pricing” from the APRA changes, but do not believe there will be much impact on the broader housing market.
“House prices are a factor of supply and demand,” North says. “There is rising supply, but also strong demand. Compared to other asset classes housing is doing a lot better, plus there are all the tax concessions like negative gearing and the ability to offset capital gains.
“The supply of investment loans will still be there. Remember that not all banks are growing their investment lending at 10 per cent. Some will see it as a target. And there’s also the opportunity for the non-banking sector to fill the gap if the majors disappear from the radar.”
Foley says this is already happening: “We are seeing increasing appetite in the broker market for specialist lenders like Pepper, Liberty and LaTrobe who can better tailor deals in the current market.”