Last week, the Australian Prudential and Regulatory Authority (APRA) mounted up once more, riding into the financial services sector with their posse, the Council of Financial Regulators (CFR), providing additional back up in their ongoing battle with the banks.
In what’s being described as an environment of ‘heightened risks’, this latest move from APRA was entirely expected, coming hot on the heels of increasing speculation that further regulatory intervention was in the wind. It also highlights a couple of things that property investors need to be aware of.
First and foremost, we will obviously see the lending landscape change yet again. The goalposts around how you can borrow and how much you can borrow are set to shift once more.
Secondly, our fiscal ‘watchdogs’ are getting a little fidgety about how things are heading for us, as a nation, economically speaking.
The greater the risk…
…The more anxious our regulatory bodies become. The last time we saw APRA swoop down to draw a clear line in the sand for lenders was back in December 2014.
At the time, investors were besieging key property markets, namely Sydney and Melbourne, like a veritable plague according to most reports. All those baby boomers burnt by managed super fund and investment failures off the back of the GFC wanted a better place to park whatever equity they had left.
Housing looked like a good option at the time, having been propped up by post-GFC government stimulation in the form of first homeowner boosts and the like.
Suddenly, we were no longer just that traditional nation of budding homeowners harbouring the iconic ‘Great Australian Dream’. We were fast becoming a country that recognised real estate as a far more powerful financial asset.
Naturally, our compounding love affair with property has seen more of us seeking a piece of the action. So of course, prices have kept steadily rising in key locations where most of us want to live – large cities with a diversity of industry, infrastructure and employment.
Logically, these locations are already relatively built out. Hence, trying to squeeze more citizens into the likes of Sydney is becoming increasingly tricky, and resulting in undersupplies, excess demand and consistently rising prices.
In summary, these are the aligning risk factors currently concerning APRA…
• High and rising house prices in key locations
• High and rising household indebtedness
• Record low interest rates
• Subdued household income growth
• Strong competitive pressures
Then there are reports that surfaced recently; indicating that investor borrowing among some of the banks was starting to sneak back up beyond that magical 10% benchmark officially imposed by APRA two years ago.
The latest intervention
Building on previous measures to curb ‘renegade’ lending practices and better manage risk in the financial services sector, APRA wrote to all Authorised Deposit Taking Institutions (ADIs) last Friday with a new litany of requirements, particularly around investor based borrowing.
A few of the new ‘demands’ are really just reminders of the previous lines that were drawn, including…
• Further reviews of serviceability metrics to ensure net interest rate and income buffers are set at appropriate levels to reflect current conditions.
• Continuing to restrict lending growth in ‘high risk’ segments, which includes higher LVR borrowers and longer term loans.
• Managing investor based borrowing growth within that comfortable 10% annual margin set in 2015.
In addition however, APRA is now coming down on interest only (IO) lending criteria and practices. All lenders are now being told to limit new IO lending to 30% of total new residential mortgage lending.
Furthermore, banks are expected to enforce strict internal limits on the volume of IO lending for borrowers seeking an LVR of 80% plus, with increased scrutiny of any IO loans above 90%.
In other words, that lending nugget a lot of property investors have come to rely on, the higher IO loan, is set to become a lot harder to secure…
Chairman of APRA Wayne Byers, said the previously set benchmark of 10% growth for investor based borrowing is an appropriate ongoing constraint in the current environment.
“APRA expects ADIs to target a level of investor lending growth that allows them to comfortably manage normal monthly volatility in lending flows without exceeding this benchmark level,” he said.
Byers explained the new supervisory measures are intended to ensure lenders recognise and respond to the heightened risks in the current lending environment, as reflected in their respective policies and practices.
He said the decision to target IO loans is due to the fact that they make up close to 40% of all residential mortgage stock currently tied to Aussie ADIs, which is relatively high by international and historic standards.
“APRA views a high proportion of interest-only lending in the current environment to be indicative of a higher risk profile,” Byers said.
“We will therefore be monitoring the share of interest-only lending within total new mortgage lending for each ADI, and will consider the need to impose additional requirements on an ADI when the proportion of new lending on interest-only terms exceeds 30% of total new mortgage lending.”
He confirmed that APRA will continue to closely scrutinise serviceability assessments, even though the regulator is yet to set official quantitative limits for serviceability at this point.
APRA has also told the big banks it’s monitoring the growth of ‘warehouse facilities’, which allow lenders to build a portfolio of loans for eventual securitisation.
“APRA would be concerned if these warehouse facilities were growing at a materially faster rate than an ADI’s own housing loan portfolio, or if lending standards for loans held within warehouses are of a materially lower quality than would be consistent with industry-wide sound practices,” said Byers.
Once more, the message for property investors is to be prepared to see the banks start implementing further changes around serviceability requirements, and adjusting their respective suites of mortgage products.
During these times, it’s a good idea to be consistent in reviewing your loan portfolio with a mortgage broker well versed in this area.
How you borrow for your investments is now just as critical as how you determine where to buy, because it will be those investors with sound financial structures who’ll continue to prosper in these ever changing times.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; 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).