Investor loans could face major capital increase

Investor loans could face major capital increase

Alarm bells are starting to ring. Is anybody else slightly concerned by this and the impact it may have on the ability to obtain finance (which is already getting harder by the day) and the potential impact on property prices in the country?

 

My Thoughts are if investment loans were 2-3 times the price of PPOR loans , it would have a Major negative impact on the australian economy , possibly sending it rapidly into recession .

It would dramatically alter the spending of anyone with an IP ( which makes up a significant minority of tyne population ) . A massive number of properties would go on the market and no one would be buying . Prices would plummet and the government would very quickly change .

It would effectively re write the economic landscape in australia over night .

Can't see it happening .

Cliff

 

The major markets are already off their peak. It was the inevitable trajectory anyway even without APRA intervention. We just got there 6 months sooner. Yet they'll pat themselves on the back for what they perceive to be a job well done. By the time such ideas go through several rounds of discussion the numbers will well and truely reflect this trend. Basically - there's no need for this.

 

The big 4.5 players in the banking world in Australia,were all talking about this at every AGM late last year and the bankruptcy of real estate utopia,every person that i talked too at those shareholders meetings from the risk management team upwards were saying the cost of funding,is the big problem they will face in the middle of this year,nothing going to change the only items that ever do is the entry price,and nothing is ever permanent only just temporary..

 

This is hard for my little brain to process. Are they saying they want interest rates to be 2-3 times ppor rates or are they saying they want you to come up with a deposit 2-3 times what is required for a ppor?

 

Without understanding what is actually meant by “Not just marginally higher. Two to three times higher than for a like for like owner-occupied loan.” its hard to know what this article is trying to get at.

If they are in-fact trying to say IR on investment loans could be 2-3 times that of a PPOR, then unless PPOR loans drop to 1% you would have absolute economic chaos.

 

pfft that will never happen. It still amazes me though that such a thing as an interest only loan exists...

 

Me too. As well as mortgage insurance. And offset accounts. It's almost too good to be true.

 

I think it means the amount of capital held for each loan should be 2 to 3 times higher than for PPOR loans, and basel defines investor loans as those that rely solely on the properties income for servicing. So if you could show you can afford the mortgage without the rent, then you wouldn't have an investor loan according to basel.

 

Yes, this is how I read it as well. It won't result in interest rates 2 to 3 times higher, just as if the price of flour doubles the price of bread would increase but wouldn't double as there are a lot other inputs.

 

Me too.

 

So the Basel brains trust think that businesses need higher costs, sounds like a great way to ensure a steady economy and growth - NOT. Little thin on detail so I won't rant long

 

Without having read too much into it the article implies that it's targeted at residential mortgages and in particular the investment side of that market and separate from business.

The logic actually goes the other way, if banks are pushed away from residential investment loans ("dead" loans from an economic viewpoint) due to reduced demand they might actually begin to get back into lending to businesses to encourage actual economic development.

That has always been the strongest arguement against property investment as a core financial product like it is in Australia. Property investment is a very unproductive form of investment for the overall economy, it makes a human need more expensive without generating basically any productivity in return and thus takes money out of the economy as well as taking away funds that could be used on productive avenues.

 

I

oh please... And then the sun would start spinning around the earth!

 

This is where investors ( even savvy ones with large portfolios) who don't understand how mortgages are funded, are not really understanding what's changing in the regulated world of lending. That's perfectly understandable, they aren't bankers with knowledge of securitisation or mortgage funding, and they've never had to understand in the past 30 years because the money was always just there so why would they think tomorrow would be any different than yesterday? But like it or not - this is the new regulated era we are entering...its bigger than APRA and ASIC- its driven by global regulators and politically all the G20 nations are obliged to get on board - and the BASEL committee will drive these changes incrementally in the coming years

But before anyone panics- they are not talking about doubling or tripling rates for investors. They are talking about doubling or tripling the capital provisioned for INV loans vs the capital provisioned for P&I loans...

Right now Australia's banks provision a certain amount of liquid tier 1 capital for every dollar they lend out. It can be as little as 1.5% per dollar. That leaves the banks extremely vulnerable to a call on their debt in the event of a property collapse or credit crunch - they couldnt pay what they owe and they are ill provisoned to stay liquid. It would require a bail out of hundreds of billions if it were to occur here. It was only 8 years ago we saw it devastate the US and Europe.

But the good news is, APRA is well ahead of the curve on this and they have already had the banks transition from 1.5% capital per $1 lent to 2.5% capital per $1 lent for I/O debt. The banks all undertook capital raising exercises last year to raise the capital and it's what caused I/O cost of funds increasing by @ 45-47 bpts with most lenders . Some, like AMP took it all in one bite back at the start of all the APRA broo-ha ha - others like WBC, CBA - well everyone really, did it in 2 or 3 increments across the last 6 months.

I have posted about BASEL IV extensively previously and warned that further capital provisioning would be likely to come in mid 2017, as BASEL IV requires the new capital provisioning be in place by early 2018 ...

So APRA will spend much of 2016 "consulting" with the banks about these changes- the banks will cry poor and try to get the best deal possible...lobbysists will be disptached to all corners of the land to lobby, but by hook or by crook APRA will adopt the changes, even if they take a soft(ish) approach to how far they want to go. It will mean further capital raising will be required from the banks in 2017 , and yes that will mean further increases to costs of funds for investor lending , but it will not be especially painful as they have already done much of the heavy lifting

If APRA asked banks to move from 2.5% to 3% capital provisioning for example , which would be 2 x the P&I levels of 1.5%, it would increase funding costs for I/O debt by @ 22 - 24 bpts.

If APRA asked banks to move from 2.5% to 3.5% capital provisioning, which would be 2.33 x P&I levels of 1.5%, it would increase funding costs for I/O debt by @ 44-48 bpts - just like we just went through in the 2nd half of 2015

If they were aggressive and asked the banks to move from 2.5% to 4% , would be be 2.66 x the P&I levels, it would lift rates by @ 66-72 bpts

Against that though, if the RBA cut the cash rate rates by 25 or 50 bpts ... we'd end up with a solid net reduction in rates for P&I and not much change for I/O - but the "spread" between P&I rates and I/O rates would blow out to more than 1%. And thats what BASEL, APRA and all the regulators are engineering. As I keep banging on and on and on about - they want us all moving to P &I and deleveraging. They want less I/O debt- and if you insist on it and they want to keep lending it, the regulators want much bigger capital buffers in place

These are the real drivers behind the changes to the lending landscape. These are the mechanics behind why you are seeing modest LVR reductions for investors, pricing separation between P&I and I/O, but more importantly - servicing calc conservatism .

Just another reason we are unlikely to seea big credit boom returning any time soon...

 

Just found this one today.

APRA chairman Wayne Byres: Bank capital moving 'somewhat higher'

 

Subscriber only ...

Cliff

 

"Australia's powerful banking regulator says lenders will probably face "somewhat higher" capital requirements this year due to changes in global financial regulation, and it will also aim to enhance competition where possible.

After tougher capital rules last year resulted in the big four banks raising more than $18 billion combined in new equity from shareholders, Australian Prudential Regulation Authority chairman Wayne Byres said on Friday that capital requirements were probably climbing higher still in 2016.

Echoing previous remarks, he said the industry would be able to absorb the changes in an "orderly fashion" over several years - suggesting any changes will be more gradual than the new policies that triggered last year's capital raisings.

Mr Byres also said APRA's banking policy agenda would be dominated by moves to make the industry both more competitive and more resilient. These were both recommendations of the financial system inquiry, which called for Australia's banks to be made "unquestionably strong".

"Over the year ahead, we'll be watching how the international capital framework is finalised with a view to establishing an 'unquestionably strong' and robust set of domestic capital requirements for Australian deposit-takers," Mr Byres said at the Australian Economic Forum in Sydney, a closed-door meeting of top investors, executives, and officials.

"The result of the changes in the pipeline will, in all likelihood, lift capital requirements somewhat higher, but still well within the capacity of the banking sector to absorb in an orderly fashion over the next few years," he said.

APRA does not have an explicit competition objective, but he said it would "mindful" of changes that would enhance the competitive playing field where possible.

"So we'll be looking at policy choices that, where possible, add to the competitive dynamic of the industry when this doesn't undermine prudential outcomes," he said.


For instance, APRA last year required big banks to set aside more capital against mortgages but did not apply the change to other lenders, which should help to make the home loan market more competitive.

Mr Byres' comments on capital are closely watched by the market, as analysts have differing views on the size of the capital build that may be facing the Australian banks over the year ahead.

These are his first public comments of 2016, and there is a view among some in the market that regulators are softening their stance on how significantly global capital requirements may be lifted.

The Basel committee, a club of banking regulators, earlier this month said global banks would need to increase the amount of capital they hold, but the change was less than had been expected.