Hi PC mortgage broker (who have been through many credit cycles). It has been pretty evident that over the past couple of years the credit cycle has been tightening with regulatory bodies placing constraints on lenders as well as banks tightening their lending criteria. With the Royal Banking Commission heading the way it is, there doesn’t seem to be any heat coming off lending criteria. My question is for brokers (and investors) who has seen a few credit cycles - is there something different about this tightening period to others, or do you think when the banks come out of the spotlight they will relax lending standards again to grow their mortgage books? And if so, how long does it normally take?
This isn’t a ‘one size fits all’ type experience unfortunately. It’s specific to the circumstances of the day. Previous regulatory responses to slow demand and control lending come under a different set of economic circumstances. The last time APRA applied their soft touch incentive based macroprudential tools in the early 2000s, coincided with relatively large rate rises. These rate rises do more to constrain financial capacities and demand over anything else. But using general principles, lenders will look to grow and maintain their books. In slower credit growth environments they’ll look to cost control (what they’re actively doing now). Over time, they may increase net interest margins to maintain profit. To grow credit, they may bend policies and serviceability frameworks, but this will be a little while away at least (not in the short or medium term).
I've been a broker for about 17 years now and I think this one is different to the others. Laws tightened up in 2009 and the interpretation of the new laws has been tightening up to so I think it unlikely to ease up, except in minor ways.
@Terry_w I guess that means that case studies of rapid portfolio growth seen in the past will remain a thing of the past? Unless non-conforming lenders become a bigger part of the market. Those that want to have have big portfolios will either have to do so over much longer periods or have extremely large incomes. Interested to hear your thoughts too @Redom I noticed that the lead up to the GFC had quite a substantial increase in mortgage finance market share with non-bank lenders - maybe this is the avenue to above average credit growth in the future? And hence property market booms.
There have only been two credit cycles since deregulation. Pre APRA ( mid 2015) and post APRA ( mid 2015) Pre APRA was expansionary. 3 main levers which add up to 1 main result - debt to income ratio. ( fancy speak for borrowing capacity) 1. assessment rate for existing debt was "Actuals"- if the right broker was employed, and knew how to extract all the juice from your borrowing lemon, you could get to 20-X income or perhaps even greater 2. IO was limitless. 3. 1970's era poverty indexes were used for living expenses. Post APRA, . All 3 have changed 1. assessment rates are now sensitised and for a double whammy they are sensitised at P&I. For a triple whammy they are sensitised at P&I over the remaining term of the loan, so if you have used 5 years IO the debt is assessed at 7 % or more, and P&I, and over 25 years. Or 10 years IO means sensitised P&I over 20 years. Ouch. 2. IO terms are limited, introducing holding cost risks that no pre APRA investor ever faced. 3. HEM's- and they are indexed to CPI as well, so if wage inflation tracks CPI, you see no real improvement to borrowing capacity with wage rises. It has resulted in debt to income ratios that have been savaged down to 7 or 8 or maybe 9 x income...that's all she wrote for building large dollar portfolios, and the IO term limits is all she wrote for holding large dollar portfolios even if you can build them by some miracle, unless you inject sufficient income to do so. Or reduce debt. or both. Even after the GFC there were no regulatory interventions around assessment rates, household expenditure measures or IO quotas. LVR's fell back at some lenders, and pricing got a bit all over the shop like a dog on tiles, but servicing calcs and IO werent really any different. Securitisation markets got pickier, and cost of funds increased - so we saw some banks pull back on LVR's to as low as 80% ( gasps everywhere) - CBA and WBC stayed at 97% right throughout though - ANZ dropped to 90% . NAB dropped to 90% . And the banks detached themselves from the RBA monthly cash rate meetings once and for all. ANZ led the way with bi-weekly Friday rate calls, and NAB spent millions on "breaking up" ads on Valentines Day....... but there were no lending changes as a result of Australian regulatory intervention. And that had all stablised and LVR's returned to 95% , within 2 - 3 years or so. As @Terry_w has suggested, this is different. And its different because its regulator driven not market driven. The post GFC stuff..ie the credit crunch...meant there was a shortgage of available money around the world for many banks. Australais banks were not affected- except for the cost of those funds... becaue our RMBS was so solid. And thats what APRA wants to get back to... a GFC proof RMBS, which means much less IO volume on the banks books. So I think this will be with us for several years to come.... at the very least. Correct. I can use nice language like...maybe. But that would be patronising. The cold hard truth is that there is really little or no chance of building multi million dollar portfolios unless you have a massive income , or win lotto, or inherit money. The first purchase, the 2nd purchase...still Ok for most borrowers. But beyond that, starts getting tough. If you look at the income required to borrow $2 Million pre APRA v whats required post APRA, you need an additional 124-136K or thereabouts ( it varies between lenders but that figure is a good guide) So in my view, what is required now is active debt reduction and higher yields....That's the only thing that will work, aside from lottery, inheritence or very large ( and I mean very) pay rises.... Forget the non banks ( I assume you mean Pepper and Liberty) being a cure all solution that everyone can turn to .... they will certainly solve some problems for some people for some time.... but they will have to pull the pin eventually. They cant offer funding to everyone who cant get it at the big and middle sized lenders. CBA has a 430 Bn book for example. WBC has a $270 Bn book.... if half of it is IO , Liberty and Pepper cant absorb all that volume..... All roads, other than a huge pay rise or a lottery win - lead to debt reduction.
