APRA relaxing as home price boom ends

The Australian 12:00am March 2, 2018

Michael Roddan

The banking regulator has acknowledged the housing boom may be drawing to a close, revealing its strict limits on the rate of lending to investors are “potentially becoming redundant” as the property market cools.

The comments come amid signs banks are preparing to ramp up lending to housing investors again, mostly by winding back interest costs, bringing them closer to owner-occupied mortgage rates.

Appearing before a Senate estimates hearing, Australian Prudential Regulation Authority chairman Wayne Byres said the need to maintain a 10 per cent annual growth limit on investor lending was reducing.

“At the aggregate level, demand seems to have subsidised,” Mr Byres told senators yesterday. “So the general dynamics in the market suggest is it potentially becoming redundant, although there are some institutions still growing quite quickly.”

Statistics this week showed the growth in credit throughout the economy at its slowest pace in four years as the number of loans going to investors slumped and falling house prices reduced loan sizes.

“The drop in credit growth, especially for investor housing, suggests that macro-prudential policy is starting to have a more material negative impact on housing,” UBS analyst Jonathan Mott said. “Indeed, house price growth has arguably dropped into historical RBA rate cut territory”.

John Flavell, chief executive of the nation’s largest mortgage broker Mortgage Choice, told The Australian investor lending had shrunk significantly in his own business, but banks were now positioning for growth.

“Investor lending dropped about 5 percentage points off its medium-term average and about 10 percentage points from the peak,” Mr Flavell said yesterday,

“When I speak to most lenders now, they say they’ve got some headroom in their lending cap. The price difference between investor rates and owner-occupiers was once as wide as about 80 basis points, but it’s come down to about 40 basis points now,” he said.

In recent weeks ING, Macquarie Bank and the Bank of Queensland’s Virgin Money have reduced rates on interest-only investment loans to entice new customers. Bank of Adelaide cut interest-only rates by up to 75 basis points, while listed bank Homeloans cut some home loans by 30 basis points.

In 2014, APRA announced new rules capping lending to investors amid surging double-digit house price growth in Sydney and Melbourne. According to figures released by CoreLogic yesterday, housing prices fell in almost every capital city last month, while Sydney prices recorded an annual price fall for the first time since 2012.

Mr Byres said lending standards in the sector had “got to very low levels” before the introduction of the caps, and in some instances “lacked common sense”. APRA introduced the limit because “we were particularly uncomfortable with the lending standards in which many of those loans were being granted”, Mr Byres said. He said that after a 30 per cent limit on lending to interest-only borrowers was imposed last year, standards improved.

APRA last March was forced to warn the sector “to comfortably remain below” the previously advised 10 per cent growth limit, after the sector began to eclipse it on an annualised basis in late 2016. The average pace of lending growth had also slowed from about 10 per cent a year to about 5 per cent now, Mr Byres said. “It doesn’t mean you don’t care about the issue any more, but its purpose is less now than it was,” he said.

He said APRA had no plans to scrap its interest-only cap. Last month Reserve Bank deputy governor Michele sounded a stern warning about the threat to the financial system posed by the “large proportion” of interest-only home loans held by negatively-geared property investors that were due to expire over the next four years.

It came as Morgan Stanley analysts tipped the housing market would slow further this year, posing risks to the economy, after national housing prices fell for the fifth month in a row. “We expect credit growth to continue to decline through regulatory pressure, and activity in the housing market to weaken,” the investment bank said. “Given the economy’s exposure to housing through leverage, this poses further risks should the weakness broaden into household sentiment and consumer spending.”

The Productivity Commission last month released a draft report for its review of competition in the financial system, in which it was highly critical of the lending caps imposed on the sector.

“You could say the APRA caps have worked, but more permanent and calibrated measures are the future,” Digital Finance Analytics principal Martin North said.

“The tougher lending standards which are now in place will be part of the furniture.”