What have the idiots done?
Dangerous cocktail threatens to topple the apartment market
- Business Spectator
- April 6, 2016 7:27AM
As the banking regulator reins in lending to property investors, it’s becoming clear that it’s not just big city apartment prices that are under threat.
The credit squeeze in investor housing being imposed by the banking regulator, the Australian Prudential Regulation Authority, has suddenly taken a dangerous twist.
Combined with the actions of the Australian Securities and Investments Commission, the action has prompted a sudden increase in apprehension in the Melbourne and Sydney apartment markets. That increased fear level threatens the wider area of dwelling prices, bank shares and the entire economy.
I revealed the APRA credit squeeze last month (APRA gives the RBA some wriggle room).
But, at the time, I understated its significance by noting how it provided the Reserve Bank with additional room to lower interest rates rather than the threat to the apartment market.
It is important that Malcolm Turnbull and his cabinet plus Opposition Leader Bill Shorten, (who now leads the Newspoll ratings), understand exactly what is happening in our community because will affect their decisions.
Suddenly the tightening of money in China and the investor-housing credit squeeze being imposed by APRA are combining. The Australian sharemarket is now getting a whiff of what is taking place so bank shares are being discounted.
The APRA credit squeeze on our banks is being imposed differently to any other attempt to rein in lending that I can recall. Basically, banks have been told that they must not increase their investor lending by more than around six per cent a year (in some cases it can be 10 per cent). If they disobey the instruction, APRA has threatened that it will force them to raise more capital. So the banks are doing exactly what they are told.
And ASIC in its examination of the quality of bank lending is giving the credit squeeze an extra thump. Had this credit squeeze been imposed a year ago it would have had very little impact on the Sydney and Melbourne apartment markets because a significant portion of those Chinese buying apartments off the plan were either getting their funding, or planned to get their funding, from China. The Chinese banks were also funding Chinese developers.
But, over the last year or so, there has been a series of squeezes imposed by China on money going abroad. About six months ago this became more severe on those buying Australian property, so more and more Chinese apartment buyers and developers are knocking on the door of Australian banks. That looming demand and the APRA credit squeeze present a dangerous cocktail.
In Sydney there are very few inner city apartment vacancies and rents have been edging up, so there is a strong income base for any lending to Chinese investors. And most of the banks would love to lend the money but are restrained by the APRA credit squeeze. If APRA were to continue with this credit squeeze it would inevitably cause a number of overseas buyers who purchased on 10 per cent deposit to walk away and will also affect the ability of Chinese developers to buy land from the New South Wales government — money the government is counting on in its future revenue projections.
We all know just how important apartment development has been to the Sydney and Melbourne economies but I asked Callam Pickering at CP Economics to prepare a graph to put the China investors in national context.
graph 1
Any serious reduction in that big share of the market could snowball into a serious decline in our two major cities. In Melbourne the situation is more serious than Sydney because a two-tier apartment market has developed.
The vast majority of Chinese buyers are in there for the long term but when apartments come onto the market they cannot be purchased by overseas investors and therefore are subject to the vagaries of the local market.
And so these “used” apartments in Melbourne are selling at a significant discount to new apartments and in turn banks are valuing apartments on the basis of their ‘used’ value.
This means that if APRA continues its credit squeeze, the two-tier market will multiply it. Chinese developers are still paying top price for new Melbourne land offerings and they believe that the market will continue to be strong. But there is now much higher risk.
Nevertheless, in Brisbane and other capitals the influence of overseas investors is much less. There is no doubt there will be is a significant fall in apartment values if too many Chinese buyers are effectively frozen out.
That will spread into a wider ambit of dwellings and overall construction activity. Banks losses in resources will be multiplied by residential construction and dwellings.
Such events always multiply bank credit nervousness and we will have a downturn of some severity. In the past, warnings of this sort have been proven groundless but my fear is that APRA an ASIC live in a world that is totally different to what is actually taking place. They might well cause a catastrophe that is not necessary.