Lending market changes in 2015 – looking ahead, whats next?

21st June 2015

First posted on Propertychat.com.au

As I’ve said repeatedly on SS, 2015 is a year where policymakers are making significant interventions in the lending market (in particular to investors). To date, these have been regulator-induced changes that try to protect against ‘asset bubbles’ forming and the associated pain (I may post separately on this to contextualise the problem).

Regulators (APRA in particular) have made changes to change the incentive structure of the investor segment of the market to try and slow lending growth and promote more prudent lending in Australian housing. Hopefully everyone was adequately prepared/advised and made plans as necessary!

As mentioned, the latest changes were INCENTIVE driven and targeting obvious areas of concern (serviceability). Changes in pricing for investors and ‘fixing’ weak spots in our prudential system (clever maneuvering around ‘assessment buffers’ by investors/banks). These have all been regulatory changes that could be considered relatively reasonable

Now this begs the question – what’s next if this round of changes doesn’t cool lending growth? Right now the regulators (APRA) will be playing a ‘wait and see game’ with lending market conditions (RBA are also doing much of the same while waiting on economic data).

Back in January I made a few calls based very much on ‘what I’d do if I were the regulator’ – promise I don’t work for/advise APRA as some have suggested .

That said, if the investor lending data comes in above expectations, this is what I think may happen.

The next round of changes I suspect will be much more direct. APRA have already TOLD us very clearly that they CAN and WILL go down this route if necessary (in their December letter, reading between the lines a little). Now what does this mean?

• A direct LVR cap on all investors. Likely to be set at 80% LVR.  Will this be geographic based? I doubt they’d be daring enough to go here –I can imagine the economists squirming at the thought of this. BUT, it’s something that they are actively looking at and MAY have a growing appetite if growth in investor lending continues above 10 per cent.
• A ban on interest only loans for PPOR, with some small exemptions for hardships. Interest only loans are a NIGHTMARE for regulators. Given that it relies on prices to either stay flat or increase to maintain equity – its viewed as SPECULATION from buyers that the value of their home will increase. Regulators have very little comfort with ‘speculative’ acquisitions of PPOR’s. As such, the ‘non amortisation’ of PPOR loans is a big NO NO.
• A bigger differentiation in pricing between investors and PPOR holders (incentive effect). I think the latest cuts may give the RBA room to fire another shot or two. I wouldn’t be surprised if these injections solely went to PPOR holders and excluded investors completely. They’d do this by making banks continually hold more capital against investment loans and thereby pass on costs to investors.

So what to do?

Right now I wouldn’t be advising people to do too much – data will need to come out. If it does come out too strong, then ‘bring forward’ high LVR purchases. Lock in I/O terms as far as possible.