It’s official. APRA, the banking regulator, has created chaos. We will see this unfold over the coming weeks.
For a while APRA has been concerned that property prices have been growing too quickly, especially in Sydney and Melbourne. Their concern is that the more the market rises, the more it might fall if there is a property crash. Because most loans are secured by property, a fall in property prices would reduce the strength of the banks which places the financial system at risk. Many would say that Australia fared better than other developed countries during the GFC due to the strength of our banking system. So APRA has cause to be concerned.
A (silly) solution
They have got the solution completely wrong. APRA has created a new requirement that banks can’t grow property investment loans by more than 10% p.a. At a first glance this sounds reasonable – if every bank restricts lending growth to 10% then the system can’t, by definition, grow by more than 10%. 10% growth is probably sustainable. However we need to dig a bit deeper.
It isn’t easy for a bank to manage to an arbitrary growth number. Their shareholders don’t want them to be too far below 10%. And the regulator won’t allow them to grow faster than 10%. The tools available to banks to manage this fine balance are blunt. They can increase interest rates (although interestingly not all the banks have the technology capability to increase rates for investment loans while keeping rates for owner occupied loans unchanged). They can tighten their lending criteria. Or they can stop lending altogether.
It is hard for banks to estimate the impact of these changes, especially since the impact is dependent on behaviour of other banks. For example, if one bank stops lending (as many have done), this creates more demand for loans from other banks. In the past week we have seen 3 of the 4 large banks increase rates by over 0.25% per annum on investment loans. Many banks have also tightened their lending criteria. In response, smaller banks are concerned about the floodgates opening. So we are starting to see smaller banks refuse to take on any new loans.
And what does all this mean for property prices? In Sydney and Melbourne we should see prices peak or even reduce in some areas. And in the rest of the country it is likely that prices will reduce. Ironically APRA’s policy to stabilise the market could do the exact opposite.
What are the impacts on various stakeholders?
|Property investors with existing loans||Higher interest rates. Not great although we haven’t reached chaos just yet.|
|New Property investors in the process of applying for a loan||Here is where the chaos begins. You have to feel sorry for people who have already signed a contract to buy a home, and are now unable to get a loan.|
|People trying to buy an investment property||These people won’t have much confidence in their ability to borrow. Who knows if the banks will change the rules again?|
|People trying to sell||They won’t get the same price they would have received otherwise|
|Employees at banks||Banks are always looking for a reason to reduce staff numbers. And what better reason than restricting loan volumes|
All in all, we expect to see lots of disgruntled property investors over the coming months. It won’t be pretty. If you are currently looking to buy a property then the best solution is to wait a couple of months. Bargains will emerge. You heard it here first at Plenty.