APRA : How much further to go ?

ABS reports on property for Jan 16:

1. Housing finance: 5609.0 - Housing Finance, Australia, Jan 2016
2. Building approvals:8731.0 - Building Approvals, Australia, Jan 2016

APRA regulations appear to be having the desired effect on the investors. What is surprising is the effect on the Owner Occupier, which (seasonally adjusted) is showing a greater drop (emphasized in red) than the investment housing. I wonder if it is:

• A statistical anomaly or noise
  
• Overall slowdown in property market
• Supply glut in the OO segment.

A summary of the above statistics on AFR
Conditions tighten: Investor home loans fall at fastest rate in seven years

How much further before the APRA induced changes stabilize ?

Something unrelated: Second graph (No of dwelling commitments) resembles a fibonnaci retracement.

 

Hi @Skilled_Migrant good post and thanks for sharing the links.

I dont have any answers for you nor do I have any policy or macro-financial expertise or wisdom I can share.

My only thought on this (and it is a fleeting one based only on my opinion) is that even though lending growth for investor-loans has slowed to below that 10% threshold that APRA needed to see it at, I suspect APRA won't lift their pressures on the banks anytime soon.

Reason being is; it hasnt been enough time for the APRA policy to quell investor interest. I believe there is still a fierce hunger for investor-mortgages and everyone who wants one (who cant get one right now) are sitting on the sidelines waiting to pour back into the market the very moment any conditions set by APRA are eased and banks' serviceability foemulas 'lightened' again (including yours truly!).

What APRA want is less residential loans being written for investment properties so they are probably aware of the market-demand. Banks of course just want more profit as fiercely as they possibly can, so the very second APRA lift anything, they'd be out selling their wares again. APRA probably want anotber year or so like this so that some of the would-be investors lose interest in property altogether and go pursue other thingz.

Who knows, maybe some of the brokers on PChat could chime in, as they are in daily contact with the lenders? @Peter_Tersteeg have you heard of any news on APRA policy easing?

 

I don't see APRA themselves changing their stance any time soon. They're probably looking at the slow down in Melbourne & Sydney, giving themselves high fives and starting to wonder what to do next.

Lenders are starting to ease back a little. Not anything drastic, but they've met their growth reduction targets and have decided to get back into the pricing game. The CBA's February pricing is an obvious example with better discounts for investors than owner occupiers.

The NAB is pricing investment loans again as well (submitted a pricing request for a client 3 weeks ago with no joy, resubmitted the same request a week later and got an excellent result). Their pricing changes changes last week were regarded as a negative, but from a certain perspective it really just better defined their policy and opens them up to clearer pricing moving forward.

APRA isn't going to change their general stance on things like growth targets and the push for 'responsible lending', but the banks will become more aggressive in getting business as long as they can keep it within APRAs guidelines. It's the banks that will drive policy easing, not the regulators.

 

Yes. After all banks are businesses and they have shareholders. I doubt APRA will ease it's restrictions in the near future.

 

I can't see APRA fiddling anymore either atm, for a couple of reasons.

1. As noted there is signs of a tapering off in Sydney and Melbourne (that's something like 40% of the AU property market)

2. There is a lot of talk around property taxation - negative gearing, capital gains, etc. The chance of something happening in that area is reasonably high I would have thought. And though APRA is an independent statutory authority, they don't operate completely in a vacuum.

 

I think some of the positive things to come out of APRA changes aren't given due consideration at times. I've noticed banks becoming more competitive and keen with lending for other purposes, be it business lending for expansion, capital works and other areas. I could be wrong but I suspect it's related, ultimately one of thr main ways banks make money is by lending it, if APRA is restricting their ability to make profit in one sector they are more likely to try harder to make it up elsewhere.

we have traditionally had pretty useless policies/staff/focus from banks when it comes to supporting businesses and other productive uses so it will take a while of course for all of that to change. if the APRA changes end up being what makes them improve then it's a positive.

dealing with banks in asia vs australia it's incredible how different their understanding of and appetite for risk to anything unconventional is. we have a whole bunch of staff here who just don't "get it" and can't think outside the box, lead by policies that don't encourage it either and many companies and by extension the economy are hampered as a result.

 

There shouldn't be any more hard credit policy changes coming through. APRA has already imposed criteria on afforbility rates. Living expenses, uncertain incomes, which see high repayment and expenses whilst reducing borrowers income. It's getting harder to get inv loans approved from a bank' perspective as well

 

@sanj that is an interesting perspective. Perhaps you are right; encouraging lending for other business/investment purposes can hopefully only be a good thing.

The entrepreneurial spirit is alive and kicking in Aus, it is just sad that local/state governments and sometimes lenders don't always make things so easy. Just look at how many Aussie innovators are kicking arse over in the US because they couldn't get their upstart happening here.

I was in San Fran recently for a couple of weeks with work. It was cool to meet and hear of Aussies over there developing business ideas, just a shame that they had to leave Australia to do it (but that is another story!).

Back to property, who knows, the outlook for much of Australia in terms of capital growth is pretty flat or nomimal at best, in many areas. Maybe this will give would-be investors some breathing room to feel like they don't need to rush in to a property purchase. This can only be a good thing as hopefully it'll reduce the volume of 'buyers remorse' purchases later on!

 

I think too many people on the forums are still seeing APRA's intervention from an incorrect perspective. APRA doesnt really care about property prices. It's not their brief. They are responsible for banking system oversight. That's the primary scope of their concern. The APRA and ASIC driven changes surrounding higher capital requirements, responsible lending etc, are all about ensuring Australian lenders carry less risk and have more buffers in place for external shocks. These are the things that were meant to be introduced after the GFC...but have taken 8 years to occur as governments and lobbyists and banks have quarreled over the whats and hows and why's ...

Ultimately - why did APRA and ASIC decide to intervene? Simple - risk. More than 52% of lending had become I/O and they came to believe that if left to their own devices, the banks would just keep going and going until the entire banking system became at risk.

Look at it from a blunt regulatory perspective - A banking system where Australian lenders held just $1.50 per $100 lent, against mortgage books of hundreds and hundreds of billions of dollars , largely funded by wholesale/offshore money and underpinned by bricks n mortar mortgages against which more than half of the loans were never going to be paid off using an P&I repayment schedule, and where real household expenditure had been ignored and antiquated poverty indexes were instead being used to determine affordability - is what has prompted the regulators to action.

In a nutshell - APRA want more P&I and they want more capital held per $100 lent... and ASIC want much more realistic household expenditure to be considered in determining a borrowers capacity to repay. This is why they have placed a 10% speed limit on I/O and increased the amount of capital banks must set aside for every dollar of I/O funding from $1.50 to $2.50 ( which is why I/O rates have been increased to recover the banks ROE) This is also why much higher Household Expenditure Measures have been introduced. The regulators believe this will better place Australian lenders to withstand any future shocks like; a recession and associated unemployment blow out, or a GFC 2.0 , or a liquidity /credit crunch , for example. And while the changes are significant, and many are now coming to fully appreciate just how significant - they are only the first tranche of regulatory changes. There is a 2nd tranche coming - although it wont be especially painful.

By 2018, all banks will be required to move all funding arrangements to 12 month minimum rollovers. BASEL IV is the name of the regulatory regime behind this. You have to remember that at the moment Australian banks secure the majority of their funding offshore. They simply dont have enough Australian deposits to fund all their lending. Not even close. And a pretty decent chunk of their funding is arranged using 90 day or 180 day residential mortgage back securities (colloquially called mortgage bonds or RMBS) Structuring bonds on 90 or 180 swaps is what lowers their cost of funds quite a bit, because they are only asking investors to lend to them for 90 or 180 days. But it also means the debt has to be refinanced/rolled over every 90 or 180 days. And thats all well and good when the securitisation markets are open for business... after all, this type of arrangement is precisely what has allowed non banks and smaller mutuals and 2nd tier lenders to get enough money at cheap enough rates to compete with majors... its literally, precisely why Australia has such a competitive mortgage market and why so many innovative products have evolved here, but - and here's the rub - the GFC /credit crunch exposed this structure as being a real risk as well. Because this is what caught lenders like RHG/RAMS out during the GFC - when securitisation / interbank lending completely froze up ( you may know it colloquially as the credit crunch) after Lehmann Brothers went nighty night, it was literally impossible to rollover mortgage bonds at any price....

Anyway, BASEL IV has been a long time coming - and it will increase funding costs by @ 30 bpts according to most estimates... but it will also mean that if there is another credit crunch, banks will have up to 12 months to roll their debt over... reducing the prospect of becoming insolvent if the RMBS markets close for a while, and therefore reducing the prospect of Govts having to bail out "too big to fail" banks.

So if you step back and see these changes for what they are- they are really all about recalibrating things so that our banks cant get as far off the leash as Wall Streets banks did.

So when discussing APRA and ASIC, keep in mind that changes to I/O pricing, servicing calcs, increased HEM's , and the subsequent consequences for prices, growth etc.... are the side effects of, but not the drivers of, APRA and ASIC's intervention.

 

I personally think all the discussion in the media on this topic ( both negative gearing and capital gains tax ) will certainly scare off some potential first-timer investors. I think it would be having a fairly large subduing effect on the first-timer market for investor loans. Have any of the brokers noticed any change in the volume of enquiries in this segment of the market?

 

The thing I notice more than anything else is that prospective investors believe negative gearing changes ( if they ever happen- and that's a very sizeable IF) will be applied retrospectively. The grandfathering of the changes seems to be getting missed by most.

 

...the likely grandfathering ..

 

The only party to announce an a policy has been unambiguously clear on this. Grandfathering. The other guys- who are actually running the show, and who we all hoped might actually be a little more ambitious on just about any topic at all by now - havent really said anything yet , other than... its on the table, then off the table, then maybe on the table.

Long and short of it appears to be - unless Shorten beats Turnbull, which is unlikely, nothing at all is going to change with regards to NG. But I deal with perhaps 12-15 investors a month, and they have ALL been mistaken in their views on what the ALP has stated regarding their NG policies.

 

Looks like BASEL IV will be implemented only in 2017 and the details of Australian tweaks will also be finalized in early 2017.
Banks tighten the screws on home loans: APRA

 

Update on BASEL IV.
Beware 2018, when the next perfect banking storm may hit
Not looking good for banks, small businesses and dare I say.... property

 

More pain to come:
Australia's banks are 'too big to get sick': APRA

 

I actually did a big write-up on what might happen to property demand for specific property types, should labor be elected and their negative gearing changes enacted.

I agree with @euro73 ; people forget that all proposed labor changes (and likely any changes by liberal, should they ever announce any...), will be grandfathered and not retrospective.

 

The APRA changes wrt lower LVRs is beginning to hit the mortgage insurers:

• Genworth is expecting a decline of 20% in it's business (Gross Written Premiums) in 2016 in addition to a net profit decline of 25% in first quarter. Well called @Tyler Durden.
• It is also beefing up its capital position, to service upcoming mortgage defaults (policy holder obligations).

Genworth first-quarter profit falls 25pc falls as appetite for risky property loans falters

Since Genworth operates in mortgage insurance, surely its greatly reduced profits as well as diminished forecasts foretell the implications for the property market.

This is just the lending aspect of market. Political, regulatory, FDI, taxation aspects are yet to flow through.

 

But there is a predictable cycle to this ..soon as bank profits and the finance/flow on industry profits are smashed, immense pressure will be put behind the scenes to governments and politicians to reverse the regulations.

An industry with hundreds of billions to throw around generally gets its own way over indebted governments or pesky regulators. Sometimes it just takes a few years. History has shown this time and time again, and the credit cycle is just as valid as any other one.

 

Given their leverage is 115x I'm expecting them to bankrupt if the property market sneezes.

The ridiculous Genworth - MacroBusiness