In this week’s email newsletter, available for free by signing-up here, SQM Research’s managing director, Louis Christopher, outlined why he believes that the Australian Prudential Regulatory Authority’s (APRA) curbs on investor mortgages does not appear to be working, and outlines possible further steps that APRA might take:
I am getting an increasing sense APRA’s recent action isn’t working. Since the announcement by the major banks of new restrictions four weeks ago, clearance rates have stayed above 80% in Sydney and 75% in Melbourne. This is hardly slowdown territory. On top of this I am having a strong sense that listings have fallen again from the levels in May.
Once APRA are convinced that their existing efforts to slow the market have failed, they will likely turn the screws again. When? We remain unsure, however given the frequency of their past actions, I am thinking sometime prior to Xmas.
And what will they do?
Well they may well just ask the banks to place tougher restrictions to get overall investment lending credit growth back under 10% pa. In other words, leave it to the banks on how they wish to meet the credit limit.
The risk with this approach is you unnecessarily slow down investor appetite across the country. This would not be a desired outcome for the RBA who have stated previously that they are relying on housing construction and I believe the “feel good” factor that is associated with rising house prices to keep the other parts of the economy from stalling.
My thinking is that APRA will increasingly follow the recent action by the Reserve Bank of New Zealand (RBNZ) and focus putting LVR limits specifically on Sydney real estate investors.
The RBNZ are now targeting specific areas where there is evidence of a bubble; that being Auckland where house prices have risen substantially.
Setting such a course for the Sydney market and perhaps, later in time, on the Melbourne market would be optimal for the RBA. It would enable to keep rates low if not lower and would tactically target the problem “bubble” areas.
We have perhaps already seen movement on this front with the news last week that ING direct is going to reduce LVRs in NSW down to 80%. Mind you, as the comments suggested in the link, this is unlikely to materially slow the market there and ING face the risk of just lowering their own market share unless their peers follow them.
How much sway APRA has in persuading most of the banks to take a tactical approach to servicing and LVR restraints remains to be seen. Mortgage originators remain hungry for market share and no doubt NSW, especially Sydney is where the credit demand has been. It would be very enticing to the banks to quietly keep their offers open in NSW while perhaps tightening the screws elsewhere in order to meet an overall minimum 10% credit growth cap requirement.
For now it strongly feels like that it is up to the banks to work out how they keep to the new minimum APRA requirements
For Sydney investors who were looking to get out of this current cycle, your bus stop is arriving soon. This is now a massive sellers market and much of easy gains have already been made after a three year surge in prices which will amount to over 50% in gains. From here while the market will still rise for the remainder of 2015 Sydney is fraught with additional risk, that being in the form of APRA.
The risk is, whatever the relevant authorities do from here, they may well overstep the market and cool the market down too quickly. We are in unchartered waters here. Macro prudential policy is a new policy tool that has not been fully tested before. I am sure no one high up has properly modelled out the “what-if” scenarios.
Meanwhile there are other locations which appear to be offering far better value and are primed for a rise, especially on the back of a lower Australian dollar.
What a shame it is that Australia’s financial stability regulators – the RBA and APRA – actively resisted macro-prudential reforms for so long, thereby contributing to the current predicament.
Both the RBA and APRA spent the better part of two years resisting MB’s (and other’s) calls for regulatory measures to curb housing speculation, only to change their view recently at the eleventh hour, implementing lightweight curbs under the veil of secrecy.
At times, the RBA has also resorted to defending the bubble, releasing papers and speeches arguing that Australian housing values and household debt are not out of whack globally and/or are built on fundamentals, or cheering on the Dutch disease caused by the commodity boom, which for a while it stupidly viewed as permanent.
It’s a bit hard to have confidence in our financial regulators when they’ve stood silently on the sidelines and allowed policy stupidity to reign supreme, and the housing bubble to blow out of control.
