Will APRA ever Loosen the Screws?

A very interesting article in todays news, an economist is criticising APRA for their approach.
http://www.mortgagebusiness.com.au/...omist-slams-apra-lending-crackdown?utm_source

It's quite telling that until recently, almost nobody had ever heard of APRA, both at a consumer and even within the industry. I've no doubt that they've been working behind the scenes for years, but it's at this point that they're really throwing their weight around. In many respects it's completely necessary.

 

Yes I think they needed to apply these sorts of interventions far earlier. The only real surprise in all of this is that it took APRA so long to act. Anyone who can fog a mirror could have predicted that as the RBA began it's rate reductions, servicing calculators were going to provide a huge uplift in borrowing capacity. What couldn't have been predicted is that the regulators would ignore the consequences of not putting some regulations in place to stop the low rate environment creating a huge bias towards I/O debt. It was never a question of IF they were going to be forced to act - it was only ever a question of WHEN. I guess I simply overestimated their acumen! I really did believe they would act 24 months ago at the beginning of the rate cutting cycle. By imposing a 1 or 1.5% servicing buffer across the board THEN and increasing I/O capital requirements THEN, these changes wouldnt be necessary now.

Having said all of that - I have always believed an end to the credit free for all was coming and I and my clients have built large portfolio's around this exact scenario, by deliberately adding exceptional additional cash flow via NRAS, with the objective being to
1. maximise cash flow
2. minimise costs and taxes
3. reduce non deductible debt aggressively

Large amounts of non deductible debt remains the single biggest impediment to most investors capacity to grow a portfolio. It may not be a very big thing for long time investors such as many who frequent this site- many of who have long since paid off their PPOR debt - but for the majority of mere mortals who are still carrying large mortgages, the removal of non deductible debt will make a very significant and material difference to being able to get past 2 or 3 properties.


I have read many posts where contributors believe that doing a quick renovation or increasing rents will somehow improve their borrowing capacity to pre APRA levels, and these changes wont have a material impact. I disagree with this, and here's why - If you are an investor and owe Bank XYZ $1 Million and are paying 4.5% I/O against that $1Million of INV debt , Westpac or NAB or Macquarie or whomever used to assess that at 'actuals" and considered that debt to be costing you $45,000 per annum in the pre APRA days . They are now assessing that same $1Million as costing you @75,000 . The $30K gap is the reason borrowing capacity has plunged. My view is that gaps of that size may take years and years to recover from. Even if your $1 Million was spread across 4 x 250K loans and 4 properties, and you managed to somehow get an uplift in rental income of $100 per week from each property, that would only equate to $400 per week, or $20,800 per year. Banks will utlise just 80% of that, so that equates to $16,640. It would barely get you back half of the 30K gap.

In other words, even spectacular rental yield increases such as the example above will barely make a dent in what the banks calculators have just taken from you. For those with $2, 3 or 4 million in debt the gap is even wider. The assessment gap could reach 100K + for $4Million in debt. Imagine the sorts of rental uplifts or salary increases you'd require, to get that sort of gap back. Yes, eventually with time , wages will increase, rents will increase, people will pay down some of their debts and the gaps will close, at which time we may very well start to see quite a bit of borrowing capacity return to the market. But the reality is, that could take years and years.

While we wait for that to happen, my clients and I have deliberately applied an accelerant that will see us create significant amounts of equity (by reducing non deductible debt) AND significant capacity to actually use that equity ( by reducing non deductible debt and replacing it with deductible debt and extra rental income) faster, so that when we do, inevitibly have the next great credit boom, we will be in a fantastic position to take advantage of it. In the meantime, we are saving hundreds of thousands in interest by reinvesting the tax free surpluses in aggressive non deductible debt reduction.

 

Interesting article Peter.

Although i'm not sure there's any point evidencing low default rates. We're in the middle of a large upswing, default rates have long lag periods and FOLLOW boom periods. APRA made reference to that in their speech. Affordability is tied to interest rates, of course its going to rise. Not much use using it as a benchmark, the APRA calculation based on a 7% SVR is much better as it shows a more time neutral comparison of where 'affordability' looks like

He does raise a good point about the 10% benchmark. One of the criticisms of macro prudential approaches is using 'arbitrary' benchmarks.

Transparency is definitely a good thing - i certainly wouldn't mind more communication from them and see it as an important tool. Justifying it would be great, in more detail than speech form.

They did make all this VERY clear late last year. It shouldn't have been a surprise to anyone, they warned investors/lenders/banks/brokers publicly. It was very predictable they'd be making moves for anyone paying attention to their words and responsibility in Australia's financial system.

Cheers,
Redom