Will APRA ever Loosen the Screws?

So we all know that APRA has 'tightened the screws' recently and has had an effect on most of us getting finance in the same way as we were before this. Some have found ways to deal with it and some have pulled up the hand brake whilst they reassess their next move. The effects of investors pumping money into the real estate markets around Australia and especially Sydney and Melbourne has forced APRA's hand into what the status quo is regarding getting finance.

Are these current policies from APRA here because of the booming markets and will they relax them once the major market booms die down? Or are these new policies here to stay and we should just get used to the fact that from now on, finance will be alot harder to attain?

Please comment.

 

Yeah I think in a few years when the economy swings the other way, they'll want to increase investment activity in Australia.

 

APRA's role is to create a stable finance sector and ensuring a property bubble is not created is one of their many objectives.

APRA's role isn't to stop investment lending but rather to put a cap on the growth of investment lending to 10% from the previous year. I think this is completely reasonable.

The issue is that although implementations of policies may have been done in good faith - we won't see the impact until a few months away.

An example is that many first home buyers can only get into the market by structuring their purchases as investments so that they are able to use the rental income. These policy changes may have indirectly hindered rather than aided first home buyers in purchasing their first home even though they are technically labelled as an investor.

Sometimes the intent with things is good and the tool used doesn't give the desired outcome.

So what we are going to see is a refinement in existing policies, new policies and even removal of some policies.

I personally think there a lot more changes to come.

For us Brokers - there will be a massive requirement to really demonstrate why its beneficial for customers to have interest only loans and ensure that not only the benefits but also the implications have been properly mapped out with the customer.

 

Lenders will ease their risk assessment, essentially their credit scoring models will get easier to pass. This hasn't really been talked about as this isn't necessarily policy, rather it's risk tolerance. Lenders will be more willing to lend money based on how risky they feel the loan is.

As an example, the NAB is currently highly unlikely to approve an equity release above 80% with a cash out portion. A few months ago, this was easy, today even if they approve the loan, they put conditions on it that make it impractical to actually get the money. A few months ago this was quite easy, today it's almost impossible. There's no actual policy around this, the reason they give for declining the loan is that it's too risky, but they won't tell you why it's risky. Eventually this will change.

The recent policy changes that have affected peoples affordability have been targeted due to tightening the interpretations of 'responsible lending' (which is a legislative requirement). As an example the regulators don't think it's responsible for existing debts to be assessed at actual repayments, rather a buffer needs to be introduced.

It's difficult to argue with this logic. Hence I don't see that the policies which have had the biggest impact in investor affordability changing for the better anytime soon. If say Macquarie were to change some of their policies back to what it used to be, they'd likely draw the immediate attention of the regulators and have to explain themselves.

As a result I don't think that the policy changes that had the biggest impact on serviceability will ever go back to what they were. Some of the more minor changes, such as BankWest limiting investment LVRs to 80%, or AMP withdrawing from investment lending will likely change back, but this hasn't really affected many people anyway.

In summary, as the major markets cool down, risk tolerances will improve fairly quickly. Policy changes that have a minor impact will likely improve. Policy changes that have had the most impact are never going back to what they once were. These may even get tougher.

 

The other consideration is pricing of investment loans. This is one of the measures put in place in response to APRAs requirement that the banks hold more capital against money they've loaned.

It stands to reason that once this capital is raised, rates on investment loans should normalise with owner occupied lending. Nice in theory.

When the capital has been raised, most of this extra margin will become future profits for the banks. Whilst they will likely reduce the margins over time in the interests of being competitive, they're not going to give it up easily. It'll be future competition that brings this down and in the short term the rate difference could even increase.

 

I don't see the major banks ever changing the increase on investor rates though, maybe it will decrease a little but still be there. This is an easy cash grab for them even when there is a downturn there will always be investors obviously. I hope I'm wrong

 

My personal opinion only. I believe APRA was asleep at the wheel to long...the tightening should have been more seamless and should have happened back in 2014 when Sydney was taking off. Small steps then would have not resulted in the changes today. If they simply provisioned back then for a slightly higher capital ratio..then it would be a different story. But then what can you expect of people who are essentially academics. Intervention will never really resolve the issue.

The real crux of the issue is structural...in Sydney...there is too much Red tape for development proceed. So APRA is given the nod by the govt is treating the symptom...rather than the cause. Again govt policy has a hhuge bearing.

My belief is that the APRA tightening will prematurely affect markets like Qld and SA which have more fragile economies...though they will be ok.

I see when they realise that Sydney and Melbourne have cooled significantly mid -late 2016 it will be business as usual and things will return to normal.

 

Thanks Sash. Great post.

 

APRA's interventions:

1. Serviceability tightening (i posted on this separately) - IMO this is here to stay. Byres (APRA Chairmen) speech gave that away in the tone it was written. Policymakers ALWAYS carefully word their speeches, fretting over each and every word and considering what the communication states. The tone was obvious about the 'actual repayments' and some of the other serviceability changes. They also specifically mentioned that its just as important to keep this up in down markets as it is in rising markets.

2. Risk based policy - as Peter has said. NAB are a great example as they now make you jump through hoops to get funding. This will loosen up over time, depending on lending market conditions.

3. Pricing - this is very much temporary. Its old school policy that isn't very good (it has a lot of 'wastage cost' that is transferred from the consumer to the producer). It will be reversed once the market cools and theres no need for it. Our market is liquid and competitive enough for it to happen.

@Shahin_Afarin - from a policy perspective, any form of regulatory intervention is likely to have some sort of spillover costs. These ones are no exception.

In saying that, IMO APRA have taken some very good precautionary steps to try and minimise these as much as possible. Relying on pricing to cool the market and making some sensible structural changes to serviceability calculators will have far fewer consequences than alternative approaches tried by other countries.

Cheers,
Redom

 

How will it do that?

The Fed Gubb want to increase investment activity in Aus every single day.

So far; fail. I reckon that $20k small business incentive will prove to be a fizzer.

And, the Banks are not real friendly with Comm lending these days.

Of course; we now have the Chinese Free Trade Agreement - and what happens? The whole Country (except the Fed Gubb) is having a cry about it and trying to derail it..

I can see all sorts of endless red tape and Union interruption and aggravation involved in any of these future projects.

Meanwhile, the Chinese will crack a wobbly in response, and eventually say; "You know what? Forget trying to sell any of your products to us, boys and girls"...

Good one, ACTU....shut down jobs for Aussies, and shut down possible future exports.

 

Partial reversal perhaps?

 

@sash
No mate, more Chinoise will flood the market in Brisbane for sure since last month:

After the mining bloom, the Govt and people in martin place is trying to rescue the economy by boosting industries such as:

1. exports (other than stuff from the ground)
2. education for overseas students
3. tourism
4. building high rises and sell off to the rich chinese. --> your ass whooping materials

and the low AUD is essential to make the above happen.

so if you see the unemployment figures are healthy, remember to thank the low AUD which drives more overseass people to buy OTP in entire Australia.

 

Ah; of course - I was thinking with my overall economy brain rather than the PI brain.

 

I will be an extremely happy man if that happens!

 

This is an unprecedented intervention by APRA the RBA and ASIC . Well coordinated, thoroughly thought out and clinically executed, with the aim for APRA and the RBA being to de-risk the Australian banking sector and insulate it against future shocks. What is not often spoken about is a serious ramp up in the vigorous reinforcement of responsible lending by ASIC as well. So be under no illusions, these changes are not a short term thing. At all levels, lending to investors is under a serious regulatory microscope.

Looking firstly at the demand by APRA for banks to curtail the growth in their I/O lending, and fast. This requirement presents the banks APRA is concerned by with the most pressing and immediate short term goals. In simple terms - they need to get their backsides under 10% I/O growth by end of financial year. And then they have to maintain it on a month by month basis thereafter. This is something many commentators seem to have missed, but what it means is that lenders must be at no more than 10% I/O growth from Jan 2015- Jan 2016 , and from Feb 2015- Feb 2016, and from March 2015 -March 2016 and so on. Being under 10% "on average" for the year is not going to suffice. It's a month on month, year on year proposition now. ie it's a seriously delicate balancing act. If you had not previously understood this, it may help in understanding why contributors like Peter, Shahin, Redom and I are arguing that you need to take these changes very seriously and understand they aren't going to disappear in a hurry.
If you want a perfect example of the urgency of these matters - you need only look to AMP. AMP reports by calendar year not fiscal year, so they only had until Dec 31 this year to get their house in order. So while the other lenders tapped on the shoulder by APRA have until end of this financial year and are going about meeting the 10% target incrementally, AMP went early and went hard. This might allow you to reasonably conclude that if those banks targeted by APRA ( Macquarie, Westpac, CBA, NAB, ANZ etc) hit the New Year and haven't seen any sufficient reduction in I/O business by then, AMP's 47bpts rate increase ( versus the banks approximately 30bpts - so far ) may give you some idea of where the banks are possibly going to have to go in order to get where they need to get by June 30,2016. So far we have seen them staying open for business and trying to "incentivise " ( or "disincentivise" depending on your view) investors into P&I by lowering LVR's for I/O debt, making cash out more difficult and repricing I/O debt upwards and repricing P&I debt downwards...those changes may well just be Phase 1. . Phase 2 is starting right now - Expect a sub 80% P&I war to erupt almost immediately ( NAB fired a shot today already) and expect to start finding it very very hard to extend any I/O periods that are due to mature. That's some easy, low hanging fruit right there to help them meet their June 30 targets.
The good news is, if the changes they have introduced so far do result in the banks achieving their sub 10% target , there may be SOME capacity to relax some of these particular changes a touch ( LVR's for example) Likewise, expect far more severe restrictions if this raft of changes don't get them under the magic 10%.

The second moving piece is the changes to servicing calculators - I agree with Redom that these changes are not short term changes. They are here to stay. Perhaps not forever...but for APRA to allow a return to 'actuals" seems extremely unlikely

None of these things should cause fear. It just means the easy credit ride is over and heavily leveraged investors will have to accept they simply cant get limitless supplies of money. That in turn means the cycles of the past 2-3 decades wont be replicated - with fewer people being able to borrow vast sums of money there has to be a slowing of growth. It doesn't mean calamity. It doesnt mean crashes. It just means we are going to see doubling of prices take longer than 7 years. Quite a bit longer I would suggest - more like 12-15 years. But that's only a guess... And while this forum has its share of investors who these changes wont upset too much because they have already benefited from the greatest credit wave in history and have mature, low LVR portfolio's to show for it all these years later ( and good for them for taking advantage of it while it lasted) it really really really is not going to be that way now, so those starting out or still highly leveraged may have to be a real rethink about the importance of cashflow .

 

Great post. I think more than anything what new investors will need to be more mindful of now is buying at good prices and being able to manufacture some growth via adding value and not only relying on organic growth.

 

Like boom and bust, credit gets tight and loose, who knows what the regulators will do into the future, it will depend on how economy is going and the rest of the world.

But with interest rates where they are and recent pricing increases (or erosion of buying power rather) I would say you do not have to be a rocket scientist to see they wont want things taking off too much anytime soon.

 

This is quite different to previous changes to credit environments. Previous changes were market driven. For example, securitisation markets got much much tighter during the GFC. Money therefore got pricier and Australian lenders were forced to move away from their traditional practice of following RBA rate movements, and started withholding rate cuts or taking extra rate rises etc etc. There was no longer a standard big 4 SVR. Everyone was doing their own thing. On top of that, some products became (and remain) impossible to securitise, namely traditional/old school lo docs and no docs , which were replaced by products that retained the name lo doc, but required far more verification such as longer ABN histories and GST registration. 100% LVR lending went the same way. 105% LVR lending as well. But servicing calculators were never really affected. LVR's were to a degree, but even at the height of the GFC, most lenders only ever reduced to 90%.

This time - we have regulatory intervention at work. It is not the markets which are requiring banks to reprice I/O debt, increase capital, reduce LVR's and modify their policies towards borrowing capacity.

 

Agree. The instability in the chinese share market and the low AUD will only drive more foreign investment here. I was talking to a Chinese colleague a couple of months ago and he commented that chinese investment will only increase here. Fleeing to a safe place to park funds in property. It is a cultural thing.

 

@euro73 Banks not doing the right thing & regulators on sidelines for too long, I think less more often is better than letting it run till brakes have to be hit hard, I guess it is easy to sit in the arm chair with all the fixes