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

Look, in general I think APRA has overstepped it's boundaries with all this "macro" prudential tightening controls. What they are doing is more micro then macro and they shouldn't be intervening in such a specific way. Taking this further and intervening is a specific geographic region will be even more micro prudential which starts to take us away from a free market economy approach to a command economy (this is quite an exaggeration but it's to make a point).
Will we see this happening? could be. Will this be a stupid move that will impact the economy in more ways then APRA/RBA thinks? most definitely.

Kind of funny that these measures come out when Liberals are in power, I'd think these things are usually a Labor kind of intervention.

 

APRA, like the RBA, work independently - the govt of the day doesn't control this and leaves this type of thing to APRA uninterrupted.

 

He he, yes that is exactly how it work
But on a more serious note, you are 100% correct, I was just a bit cheeky with that remark.

 

Did a little more reading last night, one of the only things I agree with is the abolishment of LMI.

For me, All LMI does is transfer the risk from the bank to the insurance company, so the bank has no real incentive to do proper due diligence on the customer, save the loan being rejected by Genworth or another LMI provider.

Therefore for higher LVR lending, the banking system is totally is at the mercy of the insurance companies.

If there wasn't the ability to transfer this risk, banks would be a lot more cautious as to who they lend to, and a natural tightening of the mortgage market could occur.

Thoughts?

 

I'm a big fan of LMI because it's insurance for ME. People often say LMI protects the bank, not the investor. Stuff that - with an extra 50-100k in my pocket, I feel pretty damn protected if things turn sour!

 

There are quite a few lenders who operate outside of the APRA regulatory environment and thus aren't really affected by everything that's occurring. Guess who is providing a lot of their funding?

 

Haha yes, smaller lenders get funds from the bigger lenders and this happens without APRA looking over the books as closely on the smaller lenders.

Banks are innovative, regulators are reactive. There'll be ways to get things done when policy changes are regulator induced NOT market induced.

The ways around will likely be a little more costly or add some innefficiency to the process (potential refi's required) - but now that the 'dust' has settled (well barely) a little - there's a few options still on the table for investors relying on actuals OFI.

 

Theoretically what your saying is very true - that is a major 'microeconomic' flaw as incentives may be misaligned in the origination of the loan. Big problem in the US without proper regulation around it.

Practically, the banks assess LMI deals the same as non LMI deals or harsher (in anticipation of insurer's concerns).

The regulatory system around lending aims to protect against some origination issues too. Brokers, writing half of loans, have a big big role in this too.

In the absence of this insurer, banks would find other means to offload risk too.

 

http://www.brokernews.com.au/news/b...-may-need-to-be-amped-up-says-imf-201991.aspx

So a quick little update - IMF who've been in Australia talking with the RBA and APRA and banks have just come out and stated that more may need to be done.

Very much in line with original thoughts - mainly focussing on intensifying the price gap between investors and PPOR as well as targeting I/O loans.

“Such intensification could include requiring banks with fast-growing investor lending to hold more capital, raising risk weights on investor lending, and restricting the duration of interest-only loans.”

 

Westpac one of the larger funders have just announced an LVR cap to 80% (with exceptions/quirks related to combinations with PPOR loans). First major player to announce this...

ANZ and others have reduced LVRs down to 90, but that wasn't ever going to do too much as most investors will usually play below this space.

Usually its a matter of time before others follow.

Direct LVR caps coming to the marketplace just went from possible to very likely.

Cheers,
Redom

 

Ok, so since this post:

1) Westpac move to introduce an 80% cap on investor loans. Others will soon follow - so if purchasing at 90%+, i suspect lender choice will change by the turn of the year. Its likely that many banks will move here, but not all.

What to do: If your thinking of utilising LMI to purchase and can do now, i'd probably recommend from a finance angle, going earlier is better. In saying that, the uncertainty created by these changes may cause reflection and 'wait and see' (purchasing decision).

3) ANZ, CBA, have just increased the differential between investors and PPORs by a healthy margin. Not long before others do the same. Thinking of refinancing because of this? I'd suggest waiting, as others will follow soon after. Unlike policy changes, price changes are likely to follow each other quicker given the effect on profitability.

The way point 3 is playing out is APRA is forcing banks to hold more capital against their investment books. Its not ANZ and CBA going 'stuff you Australia' - it is NOT A a cash grab. I'm not sure what the media's spinning it as, but it just wouldn't make any sense given the two lenders involved.

Cheers,
Redom

 

Thanks for the update. This could have a big impact on first-time buyers getting a foothold in the market by buying an investment property. Perhaps focusing more to lower-value entry-level properties or in regional areas.

 

So if the banks collapse because of perpetual greed, who is going to clean up the mess? Yes, it's the depositors and taxpayers.

What APRA is doing is mild IMO. They could have implemented harsher requirements.

 

Redom,

Do you think LVR tightening would be limited to Investors and PPOR can still be funded up-to 97 LVR?

 

Redom,

What do you think will be the impact on house prices per-se?
Restricting credit availability via LVR/Serviceability tightening will puncture the bidding power of property speculators.

 

The changes are specifically targeted at investors. I don't recall that there have been any LVR changes for owner occupiers at this point.

At the end of the day, I'm not convinced that this will have a huge impact on the market. In reality, these changes are only truly effecting a small market segment.

 

Won't this effect all future investors? and Investment home loans form a significant part (more than ppor) of home lending.

 

The changes we've seen effect everyones affordability to some degree. Whilst this does mean people qualify for less today than they previously did, this only affects those who were intending to borrow right up to their maximum borrowing limit.

The people this affects the most are buying probably in the combination of reasonably hight LVRs (above 80%) and trying to stretch their affordability to buy more property. It's still fairly easy to qualify for 1 IP, but qualifying for 3 or more is starting to get tough.

Investment makes up a little under 70% of the market (although this is changing). Of that 30%, only about 10% or less own more than 3 investment properties. This takes us to about 3% of the market in total.

When you consider that some of that 3% are quite wealthy already and have more cash flow than they really need, the figure were people are significantly affected is probably quite a bit less than 3% of the market.

Given the focus here on property investment, people's views can be somewhat distorted compared the rest of the population.

 

Hi Redom, great post as always, just wondering if 'fixing' I/O for IPs the best thing to do for now? given the capital controls that APRA will continue to roll out against investment loans?

 

I think of fixing rates as part of a broader risk management strategy - not only a pricing decision.

Reality is fixing comes at a 'flexibility' cost. For investors looking to grow their portfolio through the accumulation stage, this flexibility is generally required (equity releases, valuation shopping, etc).

Despite the APRA changes, it's worth making your choice around this framework and balancing it against potential pricing differences, rather than just looking at pricing alone.

Cheers,
Redom