Tighter lending restrictions could backfire

by Miklos Bolza30 Mar 2017
While the 10% cap imposed by the Australian Prudential Regulation Authority (APRA) appears to have considerably slowed down investor loan growth, the alleged success of these restrictions may not be as clear cut as that, according to a leading analyst.

Stuart Jackson, portfolio manager of The Montgomery [Private] Fund, said that a lot of the backward trends associated with lending had more to do with banks reclassifying loans from investor to owner-occupied.

“When these speed limits were in place, banks then started to differentiate their standard variable rate between investor loans and owner-occupied so the investment loans became more expensive,” he told Australian Broker.

This meant anyone with an investor loan which was substantially paid down or who had changed the purpose of their property went to the bank and switched their loans from investor to owner-occupied to get the lower rate.

“When you’re talking about new lending going out for investment property, that reclassification effectively masked what was actually going on in terms of new loans.”

This makes it difficult to tell whether there has been a slowdown in lending for investment purposes from the data available, Jackson said.

While tighter lending restrictions imposed by APRA did not seem to have truly slowed down investment lending, they had two unintended effects, he added.

First, banks were encouraged to make out-of-cycle rate rises to drive revenue and increase funding relative to costs. Further regulatory tightening will continue this trend, Jackson wrote in a recent blog.

Second, tighter controls could force borrowers to seek alternative non-bank lenders unhindered by APRA’s watchful eye. There was definitely an opportunity for finance providers in this space, with movement already seen in commercial lending, he said.

“The banks pulled back from commercial lending for residential projects two years ago so developers looking for funding have investigated alternative means of financing.”

With non-banks still willing to offer funds where the banks fear to tread, the risk of economic imbalance that APRA is trying to avoid is still there, Jackson said.

“It’s just the liquidity is working its way around the banking system where we’re seeing increasing controls and more conservative lending policies coming through.”

However, it would be tough to extend the same financial controls to these alternative finance providers, he conceded.

“It becomes difficult when it comes to regulating the non-bank sector. Because you’re talking about a fairly dynamic part of the marketplace, it has the ability to work its way around these things and come up with new solutions. It’s problematic from that perspective.”

Related stories:

Further macroprudential action expected from APRA

44% of economists call to scrap CGT concessions

Mortgage fraud increasing year on year