To see what else APRA might consider, he said all people needed to do was “look across the Tasman”.
Must have been what Triguboff did!
Banking regulator ‘not finished’ targeting property market, expert warns
31 March 2017
A move from the banking regulator on Friday to restrict risky lending in the housing market is expected to cool the market, but we can expect more restrictions to come, experts say.
The announcement from the Australian Prudential Regulation Authority (APRA) will affect borrowers looking for interest-only loans – where the property owner only makes mortgage repayments on the interest part of the loan and not the principal.
Banks will be forced to restrict these loans to 30 per cent of total new residential lending and any interest-only lending at a loan-to-value ratio above 90 per cent would require “strong scrutiny and justification,” the APRA statement said.
The changes will affect both investors and home borrowers, including those whose interest-only loan term is near to finishing, and could mean they are no longer eligible for the loan they had planned for.
The 10 per cent growth benchmark in lending to investors has been maintained – a clear sign APRA didn’t want to “kill off” investor lending, Compass Economics chief economist Hans Kunnen said.
Instead, it was aimed at limiting “speculators” in the market who were borrowing more than they could afford to benefit from the property boom.
“It’s aimed to cool the market and I imagine it will,” Mr Kunnen said.
In 2015, following APRA restrictions on investors and interest rate hikes from the banks, Sydney’s median price fell for the first time in three years.
“[APRA is] obviously thinking loans currently happening are not in the best interested of financial stability and they want to defer speculators.
“And if those who are pushing themselves to their limits can’t get a loan maybe that’s not a bad thing,” he said.
NAB chief economist Alan Oster said the limits would further slow investors in the market, who often take out
interest-only loans because the interest part of the loan is tax deductible.
But he was surprised by how mild the measures had been.
“I expected it to be more severe than what they have actually done. There was talk about lowering the 10 per cent [cap on investors] to 5 per cent and a debt-to-income ratio,” Mr Oster said.
For this reason, he anticipates APRA is “probably not finished yet” in the limits they will roll out to the housing market.
“Clearly prices are not slowing and that’s the issue. This will probably take some heat out of the market,” he said.
To see what else APRA might consider, he said all people needed to do was “look across the Tasman”.
“In Auckland, they have to have a 30 per cent deposit … that would have a bigger effect … There has been a lot of talk in New Zealand about a debt to income ratio of 6 to 1.”
In this scenario, someone would be able to borrow a maximum $600,000 for every $100,000 earned.
But it’s not just investors who will be affected by the loan changes, Vincent Turner chief executive of mortgage comparison platform Uno Home Loans said.
Internal data collected regarding those who enquired for assistance with a loan indicated the clear majority of those looking at interest only loans were owner-occupiers, not investors.
“The changes haven’t been specifically targeted at investors and will affect all people borrowing beyond their capacity,” Mr Turner said.
Even without the restrictions there has been a shift away from interest-only loans in the past four weeks on the platform due to lenders charging a substantial premium for interest-only loan rates compared to principal and interest.
A Mozo analysis of interest-only rates from the Big Four banks found they tended to be 22 basis points higher than principal and interest loan rates available.
In 2015, NAB was the only bank charging a premium for interest-only loans.
Interest-only loans climbed from 25 per cent to 30 per cent of the market over the past five years of the boom, Mozo property expert Steve Jovcevski said.
Those who reach the end of their interest only period will also be required to undertake a new application period if they wish to continue on with the same type of loan.
“Many owner-occupiers and investors who took at out an interest-only loan in the early stages of the property boom are now being left in the lurch as they find out they no longer qualify for an interest-only loan today under these tighter lending standards.”
Those with a current interest-only loan would need a full assessment at the end of the interest-only period if they intended to roll it over.
Lindsay David, founder of research firm LF Economics, said APRA was targeting the right loans but with “very weak
macroprudential tools” and they should instead get rid of interest-only lending altogether.
“These are toxic loans and many of these new interest-only loans issued will never be repaid by the borrowers.
That’s a complete disaster just waiting to happen.”