Investment lending is slowing. When the banking regulator, APRA, announced a 10% annual growth cap on investment loans in December 2014, the total annual growth of all Australian Deposit-taking Institutions (ADIs) was 16%, according to the regulator’s own monthly statistics. In that quarter, loans to investors accounted for 42% of all new lending.
However, after hitting a peak of 43% of new lending in the June 2015 quarter, investor lending has been falling. In APRA’s latest quarterly figures, investors accounted for just 31% of all new loans in the March 2016 quarter, and annual growth actually declined in the 12 months to April 2016, decreasing by 1%.
With APRA’s restrictions appearing to successfully curb investment lending, Australian Broker investigates whether it is time for the banking regulator to relax its tough approach.
A moot point
The chances of APRA easing up are highly unlikely, Michael Russell, managing director of broker network MoneyQuest, tells Australian Broker
“There’s no doubt that APRA’s prudential intervention has taken a bite out of investment lending. As to whether they should now consider relaxing their restrictions, at the risk of sounding self-serving, the answer is clearly moot given they will not.”
Russell adds there is still “far too much heat” in the housing market for the regulator to relax just yet.
“Capital city dwelling prices are reported to be 10% YOY to April, with Melbourne up 13.9%, Sydney 13.1% and Brisbane 7.1%.
“These growth levels are simply too high given the recent rhetoric from APRA and as such we shouldn’t hold our breath for a relaxation in their intervention.”
On top of this, Russell says, APRA is continuing to ask the banks to lift their capital levels in the wake of some global uncertainty, causing any chance of a relaxation to be out of the question.
Like Russell, John Flavell, the CEO of Mortgage Choice
also believes the regulator is unlikely to change its tune anytime soon.
What is more likely, he tells Australian Broker, is that lenders will begin to tweak their policies – relaxing their restrictions so APRA won’t need to.
“Instead, what we are likely to see is Australia’s lenders constantly tweaking their policy and pricing as they seek the right flow of business.
“Over the last couple of months, several lenders have reintroduced certain policies that they had previously removed in a bid to turn up the investment lending tap and attract more of this business. Moving forward, we are likely to see a lot more of this.”
APRA will want to avoid any premature move, according to Flavell, which could result in an unwanted surge in house prices.
“If we do see APRA relax its lending restrictions, it would likely encourage Australia’s lenders to turn their investment lending ‘tap’ back on. This would drive more investment activity, which could result in higher property prices,” Flavell says.
“That said, even with the level of investment lending activity tracking downwards over the last 12 months, property prices have continued to rise. Data from CoreLogic
shows property values have climbed 10% higher over the last 12 months to June, while values in Sydney and Melbourne are up over 13% over the same time frame.”
This reinvigorated house price growth is something which Moody’s has recently flagged as risky. The ratings agency claimed it proves it is too early to hail APRA’s move a success.
In its report, House Price Growth is Increasing Tail Risks for Australian Banks, Moody’s Investors Service suggests the re-acceleration in Australian house prices may be driven by increased bank appetite for investor lending, after a period of tighter underwriting to comply with APRA’s 10% annual growth limit.
“These trends are unfolding against a backdrop of already high levels of household indebtedness, and elevated overall leverage in the economy,” Daniel Yu, a Moody's vice president and senior analyst said.
“The current trends are therefore credit negative for Australian banks, particularly in the context of the banks' high ratings, because these trends raise the banks’ sensitivity to any potential deterioration in the housing market.”
Crystal ball gazing
APRA may not budge for the time being, but the regulator can’t uphold the annual growth limit forever. Flavell says he can’t see the limit being lifted unless it starts to materially discourage investors from the property market.
“If the changes being made by Australia’s lenders start to drive existing and potential property investors out of the market, then we may see APRA relax its investment lending restrictions.”
However, he admits he doesn’t expect this to happen any time soon.
“According to our annual Investor Survey, 74% of potential and existing investors believe now is a great time to be an investor.
“And, while one in three investors said the recent spate of investment lending changes had made it slightly harder for them to have their finance approved, 70% of respondents agreed the changes wouldn’t put them off buying an investment property.”
For Russell, it all comes down to the property market and balancing house prices.
“At a point in time when dwelling price growth has cooled to 6% to 8%, first home buyers have returned to their historical norms, and present concerns around the glut in the apartment market have come to an end, then at that time APRA should be able to take a step back,” he tells Australian Broker
Good news for brokers
But regardless of what move APRA makes, both Flavell and Russell believe mortgage brokers will remain front and centre.
“The more complex the mortgage market becomes, the more necessary it becomes for borrowers to seek out professional advice. These changes have only served to further highlight the ongoing value provided by the third party distribution channel,” says Flavell.
Russell adds: “Fortunately mortgage brokers are a resilient group and accept that this comes with the turf. From a business perspective, it’s far from doom and gloom as overall mortgage lending volumes are continuing to rise as consumers take advantage of low interest rates.”