The Australian Prudential and Regulatory Authority (otherwise known as APRA), was one of the major players in directing monetary and bank lending policy throughout our most recent property boom.
APRA swept in as the ‘big brother’ in 2014, supervising Australia’s ‘renegade’ lenders, whom it seemed were intent on profiteering off the back of a low interest rate (and resulting high demand housing market) environment. The banks? Profiteering? Never!
The authority intervened, as lenders clamoured for business with crazy low rate retail products, specifically targeting the investor market initially. Because banks can always see where their bread is buttered. And by whom.
A cap was introduced by APRA that meant lenders couldn’t grow their annual loans to property investors by more than 10% in 2014. And then in 2017, they moved again, placing a 30% limit on interest only loans as a proportion of all new lending.
It took the banks a while to toe the company line of course. First response to the intervention was an about face in marketing, as lenders ramped up campaigns with products designed to lure more homebuyers, and balance out the books a little.
But as the banks started to get more serious (or more inventive with their fundraising) and began upping interest rates independent of the Reserve, it didn’t take long for our runaway housing markets to start cooling off somewhat. The apparent desired effect APRA was going for.
We’re leaving now, but here’s a parting gift
Things have cooled considerably since APRA first tapped Australian lenders on the shoulder and enquired as to what they thought they were doing.
And it looks like we can expect more of the same colder, colder trend for our housing markets, before it starts to warm up again, with an overall decline in capital city home values recorded by CoreLogic of 7.1%, for the 12 months to December 2018.
Seemingly satisfied with what’s been accomplished, the prudential supervisor is now loosening its grip on lenders, lifting the temporary lending standards at the beginning of this year.
According to APRA, “Banks are now obtaining and analysing more comprehensive data on their borrowers to reduce the risk that they cannot repay their loans, and have improved controls to more consistently meet prudential and responsible lending obligations.”
APRA chairman Wayne Byres, said recently that he hoped the Authority’s move to improve lending standards would have a permanent positive effect on the market.
“Importantly, while the temporary lending benchmarks are being removed, the changes we have made to lift lending standards are designed to be permanent,” said Byers, “Continuing to support the resilience of the banking system and ultimately the protection of bank deposits.”
The coinciding criticism
Not surprisingly, APRA has become increasingly vocal about the actions it took, right around the same time as copping increased criticism from Australian Competition and Consumer Commission chairman, Rod Sims.
Sims has suggested that APRA’s focus on creating stability, negatively impacted customers by allowing banks to lift interest rates and rake in an additional $1.1 billion profit between them.
He said the regulator’s controversial lending caps had hurt smaller lenders, creating a veritable windfall for the big banks, reducing APRA’s efforts to little more than “blunt intervention with detrimental effects on market competition.”
Defending their actions, APRA said it had identified a “loosening of mortgage lending standards as lenders competed for market share.” And indeed, its interventions “achieved the necessary objective of strengthening lending standards and reducing a build up of systemic risk in residential mortgage lending.”
As far as the banks’ decisions regarding pricing, APRA brushed this aside as “a commercial decision” purely made by each lender. They might as well have ended with, “So there!”
The prudential regulator asserted that if it had not taken the steps it did back in 2014, the system would have been exposed to even greater risks down the track, as renegade IO lending to property investors was threatening to inflate an almighty housing bubble.
“The share of potentially speculative lending for property investment has been significantly reduced, as has the proportion of interest-only mortgages, which could otherwise have led to a further build-up of systemic risk,” APRA said.
Of course the “he said, she said” speculation around whether APRA’s intervention was warranted and effective, or unnecessary and detrimental, will likely continue without any real resolution.
With so many factors at play right now, who can say for sure what will have the greatest long term impact on Australia’s finance and property markets into the future? As with everything, only time will tell.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors. Now recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost 2 billion dollars worth of residential and investment loans over the last decade.
Known for his straightforward, accessible style, David believes by educating people about their mortgages; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).