Lending to become easier for Investors for the first time in 5 years

Discussion in 'Property Finance' started by Redom, 11th Jan, 2019.

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  1. Redom

    Redom Finance Strategist Business Plus Member

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    With fast drops in house prices, key regulators are now beginning to worry about the state of the housing market and the potential impact on the broader economy.

    This worry is likely to result in the lending pendulum swinging back to investors for the first time in 5 years. As background, regulators have been tightening the screws over the past 5 years and have engineered a slowdown in housing. In late 2014, APRA signalled its intention to implement lending tightening. In 2015, action was taken to reduce borrowing power for investors (and homebuyers). By mid 2016, all lenders had now dramatically changed their borrowing power calculators. 2017 saw interest only lending being aggressively targeted & a repricing of investor loans. 2018 had increasing scrutiny on living expenses and the royal commission impacting bank risk appetites. For more context, we’ve run a running commentary available in the links above.

    Regulators have recently communicated with lenders to open their books. Furthermore, APRA will continue to allow non-banks to operate with weaker lending standards, despite now having regulatory powers over them. As a result, non-banks will continue to grow volumes rapidly as more borrowers seek to manage interest only expiries.

    What lending changes will be made for investors & homebuyers?

    Lending changes will be gradual over the course of the year and lender specific, rather than market wide changes. Initially we’re likely to see these three changes occur from different lenders.

    1. Marginal improvements to borrowing power (overall). Lenders will begin to breach APRA’s lending rulebook at the margins and APRA will turn a blind eye to it. This effectively means they are allowing it, but without explicitly saying it. Lenders can do this in different ways, some potential options are:
    • Negative gearing addbacks increased back to assessment rates. Some non-bank lenders do this already and have better borrowing power calculators for investors as a result. This targets investors.
    • Nominal rent figures to be excluded. Lenders have an artificial $650 p/m rental expense for those living at home rent free. I suspect lenders will begin to exclude this in some cases to target younger ‘first time investors’.
    • Bank assessment rates back down to 7% (the set floor). Most lenders have an assessment rate slightly above this. Lenders may seek to reduce this back down to 7%. This helps all borrowers.
    2. Adjustments to credit policy to allow greater flexibility & increased policy exceptions for borderline applications.
    • This will help individual homebuyers & investors with specific scenarios. For example, there may be some additional flexibility around: variable income sources like bonuses & allowances, equity releases on land, expat lending, better maternity leave treatments, etc. A lot of borrowers have been declined based on credit sentiment and borderline deals over the past 12 months, this will swing so some of those ‘no’s will turn into ‘yes’.
    Picture1.png
    Figure 1- Different policy changes will have different impacts on borrowing power. If you're lucky enough to have all of these apply to your specific situation, there's a potential $300,000 increase in your owner occupier borrowing power. In general though, these changes will target different groups of buyers and assist serviceability.

    3. Lower prices for interest only variable loans.
    • APRA’s removal of the interest only cap will allow lenders to aggressively target this business. The market pricing of these loans will likely come down through 2019.
    In addition to the above changes, the following may occur if housing performance continues to deteriorate at alarming rates.

    4. RBA to cut rates by up to 50 bps amid a slowing economy & growing financial stability concerns.

    5. APRA allowing bank floor assessment rates to fall 0.50%. Currently there is a floor assessment rate of 7% in APRA’s rulebook. Typically this has been the key prudential benchmark for all lending in Australia. APRA may allow the floor assessment rate for debt treatment to fall if rates are cut.
    • Current probability of this is very low, this is a signal to markets that neutral interest rates are lower. This will boost borrowing power & help affordability, by around 10-20% across all lending.
    Overall what does this all mean to investors?

    This would be a marginal improvement to some borrowers. It will be lender specific, so there’ll be a smaller macro impact from this.Nonetheless, loosening lending standards should assist credit growth. How much of this happens will depend on how bad things get with housing & the economy through 2019.

    Picture2.png
    Figure 2- If interest rates fall, borrower repayments should fall assuming lenders pass on the rate cuts. This will assist cash flow & feed through to consumption. In general, interest rates also help lift demand for housing and support asset price inflation.

    Picture3.png
    Figure 3- Assessment rate changes impact all borrowers and assist borrowing power. Investment borrowing power increases are greater because investment properties usually obtain rental income. This assumes a 4-5% yield on investment debt.

    Picture4.png
    Figure 4- The increase in total repayment from a 30 year term IO obtained in 2014 to P&I 25 year term in 2019. Compared to when the loan was initially obtained, the impact of a repayment increase may be very small given rate cuts. This assumes that investor loan pricing comes down.
     
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  2. Lacrim

    Lacrim Well-Known Member

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  3. NG.

    NG. Active Member

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    hi @Redom thanks fr this. when will this occur, and what lenders? interesting given the RC report due out soon?
     
  4. Redom

    Redom Finance Strategist Business Plus Member

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    Later in the year and gradually from specific lenders first.

    Also (and importantly), I suspect much of this will really play out as an increased risk appetite once the RC spotlight goes away. A clearer risk profile will speeden up loan assessments, which has been a bit of a drag (customers often taking months for approvals last year).

    Any rate cut or assessment rate change would be back end of the year at best I think...and would probably require unexpected falls that only some believe will happen.
     
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  5. AlexV_Sydney

    AlexV_Sydney Well-Known Member

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    "APRA... have engineered a slowdown in housing"

    Slowdown was an effect, not a reason or target for APRA actions. they said many times they don't care about prices.
     
  6. Rex

    Rex Well-Known Member

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    @Redom I still think there will be a scaling back or rationalisation of the recent 'actual expenses' phenomenon. At least allowing borrowers to separate out their basic expenses from discretionary spending, and less line-by-line scrutiny of transactions by credit assessors. This looks to be within the scope of APG223 as is. Do you not think there will be any movement on the expenses front after the RC blows over?
     
  7. Redom

    Redom Finance Strategist Business Plus Member

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    Probably. Truth be told there isn't complete consistency between lenders here - some are better than others and apply very similar policies differently. Individual lenders have also changed a fair bit in how they treat expenses during a credit application. I don't think there'll be too much change in lending policies towards expenses, but I think there'll be differences as a result of a higher risk appetite from lenders. With 2018 risk appetites, lenders were approaching lending with fear. That fear led to really stupid questions being asked and more line by line analysis. This then translated in timeframes for finance approvals blowing out & less buyers as a result.
     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    It's a good analysis of what APRA is probably thinking at this point, but APRA's relevance has been shadowed by the Royal Commission over the past 12 months. Predict APRA all you like, but it's not going to make a significant difference over the next 12 months.

    I certainly hope that there will be some rationalisation of living expenses and assessment rates, there might be some additional policies as well. This will all improve people's borrowing ability.

    However the Royal Commission results are more likely to push things in the opposite direction in the immediate future and then there'll be legislation to follow and how that legislation is interpreted.

    We'll have a better understanding of what will be happening for the next year or so in about 3 weeks, when the RC report is published.
     
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  9. marmot

    marmot Well-Known Member

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    Reading today's article in the Australian from Michael Drapac of Drapac Capital Partners certainly does not inspire any confidence in the direction of Sydney property for 2019 and if it was not for the chinese buyers that can still get money out of China the market would be in far worse shape according to Michael Drapac.
    So who is going to buy all these apartment that are due for completion this year, especially if they are overpriced for the local market.
     
  10. Rex

    Rex Well-Known Member

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    giphy.gif
     
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  11. mickyyyy

    mickyyyy Well-Known Member

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    @Redom great post and i was expecting enough changes to assist ppl to refinance their existing debt, but not all will be able too as maxed out borrowing capacity a few years ago.
     
  12. euro73

    euro73 Well-Known Member Business Member

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    It is been @ 3.5 years , rather than 5 . I don’t think APRA’s work is quite done. lenders started making changes in mid 2015 . Mid 2015 to today isn’t 5 years :) but I agree they will start to relax things gently around the edges in 2019 . But it won’t change much, in all probability.

    If lenders revert to 7% P&I and neg gearing at 7% as well, they will basically end up with Firstmacs calculator - which means it will be a modest improvement only. But an improvement still.

    We will probably need to see the assessment rate fall to 6% P&I or less (maybe 5.5%) for a really material improvement in borrowing capacity ...

    Let’s also not forget that banks had plenty of spare capacity within the 30% quota and didn’t use it.
     
    Last edited: 17th Jan, 2019
  13. Fargo

    Fargo Well-Known Member

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    You might want to learn some maths Euro, APRA restriction were made mandatory in 2014, banks had already introduced restrictions for prudential reasons and because APRA was waving a big stick before then, with warnings and threats that if the would if the banks didn't tighten lending standards it would be made compulsory. You bang on about lending restrictions as if you are a prophet but you that discovered them but you are a few years late .
     
  14. euro73

    euro73 Well-Known Member Business Member

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    Ah, our old friend @Fargo .

    May 26,2014 - APRA wrote to lenders with DRAFT Prudential Practice Guide 223. A copy is below FYI

    December 9,2014 - APRA wrote to lenders with the final version of APG 223, informing them they'd start getting serious about monitoring things in the first quarter of 2015. A copy of that document is also attached FYI. You will note that APRA themselves write in that document that "some ADIs are currently conducting self-assessments against APG 223, which APRA considers to be good practice" That is very different to what you are arguing - that "banks had already introduced restrictions for prudential reasons " by 2014. It's a small but kind of important distinction, wouldn't you agree?

    So you kind of - but not really - got it right. APRA certainly wrote to ADI's twice in 2014. Once with a draft for discussion, and then a second time with formal guidelines, including 7% assessment rates.....

    But sadly, you have this part wrong - and given this is the foundation for your desperate pot shot this morning - it means you have everything wrong - again! You see, no ADI's ( lenders) had actually introduced , commenced, started or begun any material changes to their calculators at that time. 2014, I mean - just so you don't misunderstand for a 2nd ( or 20th) time. ADI's didnt start announcing changes to servicing calcs until mid 2015. I've attached a few examples /screenshots below from various lenders so you can see for yourself....


    AMP 18 May 2015 . This is not 2014.

    Screenshot 2019-01-17 07.57.18.png


    ST George 22 June 2015. Also not 2014.

    Screenshot 2019-01-17 08.05.24.png

    NAB 13 June 2015. Also not 2014 . FYI this assessment rate was later reduced to 7.25% and then to 7.2%

    Screenshot 2019-01-17 08.10.53.png


    Macquarie 1 June 2015 . Still not 2014 I'm afraid

    Screenshot 2019-01-17 08.14.08.png

    ANZ 20 June, 2015 Yeah I know- it's also not 2014 Crazy, right?

    Screenshot 2019-01-17 08.16.17.png


    Further to this, a small number of lenders held out until mid 2016, in fact - including Westpac and CBA, who you have previously claimed ( in another of your previous, error ridden posts) to have tightened lending by 2014.

    So regarding your kind suggestion that I learn maths..... while I thank you for the suggestion, I'm sure if you think really really hard about it, even you will agree that Mid 2015 until now is essentially @3.5 years, not 5 years. And this was my point - we have not been in a tightened credit environment since 2014, or for 5 years. We have been in a tightened credit environment for at worst 3.5 years, and considerably less if you account for the fact that Australia's two largest lenders ( WBC and CBA) who make up 40+% of the market between them, only changed servicing calculators 18-24 months ago, respectively.

    I'll give you this though. You are extremely reliable. Reliably wrong.
     
    Last edited: 17th Jan, 2019
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  15. Redom

    Redom Finance Strategist Business Plus Member

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    Great post @euro73 - that's true. I think I covered a general summary of events in the second para of OP, only signalling begun in 2014 (and yes, I characterised this as the beginning of the pendulum swinging). There was a great paper released by APRA analysing the differences in borrowing power from lenders, I believe in 2014. This was their 'wtf is going on' moment. No regulator wants their prime mortgage banking system to have wild differences in borrowing capacities from lender to lender. You've attached the strong signals too, giving time for the market to prepare a bit. There was also a lot of 'talk'. This was part of the jawboning going on now. It's a good indicator of how APRA work & how things run their course. Like they did on the way up, it'll be reasonably similar on the way down.

    The difference is the impact won't be nearly as strong as you've also noted. There were structural issues they fixed then, the policy responses mentioned in the post are very much cyclical and loosening around the edges. I.e. they don't harm, jeopardise or really impact financial stability much at all. A big move would be the assessment rate change below 7, that would require a lot of courage and would likely represent things going really really badly in the housing market.

    Nonetheless, for the current market segment of OO/upgraders/first home buyers - some of those changes will help around the edges. There's scope for a 2-15% increase in OO capacity for some borrowers - which may help the market. A big change would be allowing lending to flow quicker too. Hopefully the RC doesn't interfere with more efficient/seamless credit allocation. I think uncertainty in credit decisioning has been a factor too, this has already begun to change for many over recent months.
     
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  16. euro73

    euro73 Well-Known Member Business Member

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    I agree @Redom .... loan processing times have been horrible for the best part of 2018, which really hurts peoples ability to transact with any confidence. I suspect its been as much of a contributor to low auction clearance rates and downward sentiment as servicing changes have been...

    Here's some interesting viewing... Home Loan Experts | Auction Day - January 12, 2019 - Your Money
     
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  17. Redom

    Redom Finance Strategist Business Plus Member

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    Thanks for the vid @euro73 - Otto's a very switched on guy, so I definitely respect his opinion.

    I personally think his explanation is more of the current story. It's already very tough. Lending policies have already gone very far (ANZ 6 month statements, Suncorp 4, every bit of verification, slowness, etc). This is the current market has been trending in this direction over the past 12 months. There may be a few stragglers who tighten up verification a bit more early this year.

    Nonetheless, I personally believe in 1 Jan 2020, it may be marginally easier than 1 Jan 2019.

    This believe is based on communication from key regulators who signal what the future looks like, and the general fear that will continue to rise if market conditions deteriorate. It is based from personal experience sitting with key regulators in 2014, understanding how they think & understanding the tools they have at their disposal.

    They're worried and already game planning what they may do. If Sydney/Melb has two more quarters of -4%, then I'm next to certain there'll be a strong policy response. In general, I don't think the market will do this, so I think it will be slow... (unlike the way it worked when they tightened, which was pretty quick). But it will now begin trending in this direction.

    Essentially the story I'm telling is a future one, looking ahead over the next 12-18 months. Not a describer of what the current market & what has happened.

    I'd echo his comments on the impact of the RC, especially with regards to their commentary on lending standards as a whole. They will make a lot of headwaves, but I think this will be around the market structures, incentives & behaviours of market participants (including brokers). Most of this won't be recommendations about lending policies (this is not their job and they don't understand it). It may impact risk profiles of lenders, but I think they've already made strong adjustments in anticipation/backlash already.
     
  18. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    why not?

    Sydney has already fallen close to 12% from peak and we are not even halfway past all the multiple headwinds at play in parallel,

    Given all the bulls case are still applicable,
    Why do you think sydney has fallen so far so fast?

    What do you think is going to drive the market next?
    given that
    • Wage rise is hard to come by and trend likely to continue given the rise and rise of wage cannibalising gig economy
    • excess supply for next few years,
    • stagnant/falling rents
    • multiple headwind still in play
    • Sydney price still at a very high P2I ratio (a.k.a price has to fall 30% more just to normalise long term P2I ratio assuming income growth is not high enough)
     
    Last edited: 17th Jan, 2019
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  19. Redom

    Redom Finance Strategist Business Plus Member

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    Generally because unemployment is low and the economy is still performing strongly. This means there’s loads of buyers in the shadows waiting to jump in who can borrow and purchase. We have a general sense for this from the conversations we have. Is that point now? I don’t know. Probably a bit later given the pace of declines in Dec and continued uncertainty (elections and RC). Time will tell.

    I’d say the current price movements are pretty standard cycle behaviour following large price rises. Prices overshoot and come back. Prices undershoot and then come back. It will likely stabilise somewhere. I don’t think that stabilisation point will be too far from current prices.
     
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  20. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Income rises of the decade we are entering, laced with lots and lots of job disruptions, looks less likely to be supportive of ever increasing valuations, just to sustain the current stretched valuations even after the current falls is a tall order,
    if not falls then a long period of price stagnation to normalise? aka 17 peaks not recovered by 2027?