Wednesday, September 30, 2015

APRA Tightens Investor Loan Market: Will Property Prices Dive?

The Sydney median house price is currently at a whopping $1,017,000.

Speculation is always rife regarding property with many campers on both sides of the coin, the ones that believe property will be resilient and appreciate in time and the ones holding out and waiting for the 30-40% market 'correction'. The Australian Prudential Regulation Authority (APRA) has been tightening up the investment loan market by restricting financing in many ways.

These APRA changes will surely impact the market in the short to medium term however, banks have intelligent and crafty people working for them who will always find a way to mitigate the APRA controls. They'll discover ways to circumvent the regulation changes and find ways to increase financing while complying with laws. 

More recently, banks have been issuing notes and participating in capital raising to meet the APRA requirements of higher capital adequacy ratios. 

What sort of changes has APRA implemented and in what ways have the banks reacted?

* Banks potentially delaying finance approvals for buyers of subdivided greenfield lots until preliminary works such as roads have been completed and the land is ready for development. This will hamper developers reliant on presales. 
* I've been told by two of the big four banks that rental property income is now only factored into your repayment abilities at 50-60% of the year, it varies with banks. Banks are assuming that your investment property is untenanted for half the year, each year (this reduces your calculated repayment capacity)
* Discount incentives on investment loans have been reduced, for example, CBA raised rates on IP(investment property) mortgages by 0.27% and so has ANZ
* Growth of investment loan book is capped to 10% per annum
* Up to 20% deposits required as opposed to writing higher LVR loans, Westpac requires 20% deposit on investment property loans now
* Repayments can be factored at principal and interests on all loans even if you are taking out or have an interest only loan (this reduces your calculated repayment capacity)
* Banks are required to hold more capital, possibly an extra 200 basis points in capital as per APRA which is approximately an extra $2 billion for each bank. Previously, banks could self-assess the riskiness of their loan and set their own capital requirements. APRA plans to raise capital threshold from 16% to 25% on each home loan
* APRA has requested banks ensure that borrowers can afford to repay the loans on all their properties if mortgage rates reach 7%.

Currently, NAB's investor lending has been growing at 14% per annum, CBA at 9.9% per annum and ANZ at 10.6% per annum.

Thus, I conclude that property prices may take some sort of hit in the short to medium term such as six to twelve months by being discounted or prices being stable, however, it will be on its trajectory up again within the next seven to ten years. There is still an inherent under supply of housing being built and with the tightening of investor loans, building projects will slow down and this will again be the impetus for housing development bottlenecks. 

APRA tightening bank loan lending may potentially create a poorer subclass of society. If the investor loan book is restricted to 10% growth, the lenders are more likely to provide preferential investment funding to those with larger deposits and or equity, with higher incomes, those with more savings and those who are generally already, richer and earning good incomes. There would be less incentives for them to take risks with poorer loan applicants. 

1. The Sun Herald, Domain, 'Affordability the biggest loser' by Shane Oliver
2. Random

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