Lending market changes in 2015 - looking ahead, whats next?

As I’ve said repeatedly on SS, 2015 is a year where policymakers are making significant interventions in the lending market (in particular to investors). To date, these have been regulator-induced changes that try to protect against ‘asset bubbles’ forming and the associated pain (I may post separately on this to contextualise the problem).

Regulators (APRA in particular) have made changes to change the incentive structure of the investor segment of the market to try and slow lending growth and promote more prudent lending in Australian housing. Hopefully everyone was adequately prepared/advised and made plans as necessary!

As mentioned, the latest changes were INCENTIVE driven and targeting obvious areas of concern (serviceability). Changes in pricing for investors and ‘fixing’ weak spots in our prudential system (clever manaevouring around ‘assessment buffers’ by investors/banks). These have all been regulatory changes that could be considered relatively reasonable

Now this begs the question – what’s next if this round of changes doesn’t cool lending growth? Right now the regulators (APRA) will be playing a ‘wait and see game’ with lending market conditions (RBA are also doing much of the same while waiting on economic data).

Back in January I made a few calls based very much on ‘what I’d do if I were the regulator’ - promise I don’t work for/advise APRA as some have suggested .

That said, if the investor lending data comes in above expectations, this is what I think may happen.

The next round of changes I suspect will be much more direct. APRA have already TOLD us very clearly that they CAN and WILL go down this route if necessary (in their December letter, reading between the lines a little). Now what does this mean?

1. A direct LVR cap on all investors. Likely to be set at 80% LVR.

a. Will this be geographic based? I doubt they’d be daring enough to go here –I can imagine the economists squirming at the thought of this. BUT, it’s something that they are actively looking at and MAY have a growing appetite if growth in investor lending continues above 10 per cent.

2. A ban on interest only loans for PPOR, with some small exemptions for hardships.

a. Interest only loans are a NIGHTMARE for regulators. Given that it relies on prices to either stay flat or increase to maintain equity - its viewed as SPECULATION from buyers that the value of their home will increase. Regulators have very little comfort with ‘speculative’ acquisitions of PPOR’s. As such, the ‘non amortisation’ of PPOR loans is a big NO NO.

3. A bigger differentiation in pricing between investors and PPOR holders (incentive effect).

a. I think the latest cuts may give the RBA room to fire another shot or two. I wouldn’t be surprised if these injections solely went to PPOR holders and excluded investors completely. They’d do this by making banks continually hold more capital against investment loans and thereby pass on costs to investors.

So what to do?

· Right now I wouldn’t be advising people to do too much – data will need to come out. If it does come out too strong, then ‘bring forward’ high LVR purchases. Lock in I/O terms as far as possible.

Hope this helps!

Cheers,
Redom

 

I think #2 would scare the living daylights out of most investors. Which of these possibilities do you see as most likely, in order for most likely to least likely?

EDIT: I misread it - I thought you said a ban on IO loans on investments!

 

Thanks redom, you always take the time to explain things clearly. Love your posts

 

Great post.

You've proved to be on the money (see what I did there) in the past. Incredibly so.

 

You don't think they would put an investor cap or LVR caps on lending specifically in the Sydney ( and possibly Melbourne markets )?

 

Didnt know they can be selective with policies? Happened before anyone know?

 

Happening in NZ right now. It was NZ wide, then they changed it to target Auckland specifically. No doubt APRA is looking closely at it.

 

it's effectively done already thru postcode anyway. With everyone in the lending chain growing increasingly nervous I can see why they would want to limit their exposure

 

Great post Redom, thanks for adding it! Glad I'm seeing my broker this week to find out best course of action because of these changes.

 

ING have already done it with properties in NSW.

 

When do the next round of new investing lending figures come out?

 

I'm not a big fan of Government intervention on the whole. Tries to make a complex issue too simplistic.

 

Great informative post Redom

 

Just had NAB broker decline IO on a PPOR loan last week - it was a 90% lend so may have been different if LMI wasn't involved. First time that's happened though.

Cheers

Jamie

 

What do you think the time frame for this may be? I have to wait until mid-August until I'll have available funds for my next IP & was hoping to have the option to go up to about 90% LVR. A change to 80% would seriously affect what I can consider buying

 

I think it'll be towards the end of the year if they do make further steps. They've got to let this play out and it'll take a few months at the very least for the effects to flow through. Couple more months for the data to feed through too.

Much of it will depend on data - if Sydney accelerates again and investor lending growth well exceeds 10% they're hand may be forced.

 

They're monthly and quarterly. The impacts of this on the market will have a lag effect (i assume of around 3-6months) to feed through, so nothing likely for a while. The next data release is unlikely to capture this.

I recall a few articles saying that these have done nothing by quoting May lending figures - those figures would not account for the recent investor changes though.

 

the 80% lvr caps assumes affect new purchase and IP related.

say you're able to take 95% lvr on new purchase on a IP today, and 3-12 months all banks tighten up on 80%.

would this limit on top-up/equity release as well? say your property goes up 10% in 12 months, it is likely you will the 80% LVR?

 

That's a relief - I should be able to scrape in there if they do take that route. Not good for longer term plans though.

 

If they applied this yes.

Note that this type of direct and incentivisation measures would very much be temporary (some serviceability calculator changes on the other hand may be more permanent). It'd be wound back once concerns died down.