Weird shenanigans are going on right now. Last week the RBA sent a clear message to Abbott. This week, the banks take control and send a clear message to Glenn Stevens.
Banks have started raising rates, bringing in one of the toughest credit environments in recent years and basically telling the RBA,
‘F-you! If you want to put restrictions on lending to investors and make it tough for us, then you leave us no choice… We have to do your job for you.’
The ANZ and CBA have raised rates.
And I’m pretty sure the other banks will be joining them in the next couple of days…
And so we find ourselves at a unique point in history. Very unique. The banks are raising rates while the RBA still has an easing bias.
I’m not sure when the last time that happened was.
Just to be clear, so far we’re only looking at loans to investors. ANZ led the way late last week with a 0.27% increase to variable investor mortgages, and a 0.30% increase to new fixed investor mortgages.
The CBA was quick to follow suit.
And my bet is that the other banks will be close behind. Not that they wouldn’t want to, but they also don’t really have a choice.
And as a result, we’re looking at one of the tightest credit environments in recent years.
Because these rate increases come on the back of a number of other measures aimed at making it tougher for investors to secure finance. Like Westpac’s policy a few months ago of requiring all investors to front a minimum 20% deposit.
All this is coming on the back of two big drives from APRA. The first is the directive that banks should get the growth of their investor mortgage book under 10% a year.
That call came out at the end of last year, but the banks were a bit slow coming to the party.
They’re scrambling now.
The second push was the announcement last week that APRA was increasing the required risk weighting on mortgage lending.
We also knew this was coming, and this isn’t really about slowing investor lending as it is about bringing Australian banking practices into line with world’s best practice.
And what the risk weighting means is that banks have to effectively hold more capital reserves to cover their mortgages.
Previously, banks had to hold $1.28 in their vaults for every $100 of mortgages. That’s now risen to $2 for every $100.
That may still seem like nothing (banking is a good business!), and a small change, but it’s substantial.
Think about it this way. $1.28 used to support $100 worth of mortgages. Now that same $1.28 only supports $64 worth of mortgages.
So banking just got a lot less profitable.
And so banks are passing that cost on to us. (Who saw that coming?)
And the ‘investor bubble’ is just a convenient cover story…
But we may not have seen the end of it. Some analysts are saying that banks will need to increase rates by 0.5-0.6% to offset the cost of the new capital rules.
Looks like the banks will phase it in to stop people freaking out too much.
But wait, there’s more. Seems it’s not just LVRs and interest rates. It also extends in to serviceability measures. You might now need a lot more cash-flow or cash on hand than you previously did.
For example, CBA and Westpac have reduced the weight rental income has on its loan calculations by 40 per cent, while ANZ no longer counts negative gearing towards lenders’ ability to repay their loans.
I’ve seen some modelling that shows that an investor with a $500,000 loan could be asked to hold an extra $10 – 12,000.
That is, with a loan for $500K and 20% deposit, an investor would have been expected to prove cash flow of about $8,600. That now jumps up to $21,000.
For a $1 million loan, we’re talking a jump from $14,700 to $36,870.
Have you got a spare $10-20K lying around?
And what’s been interesting is just how quietly the new regime has come in. I haven’t heard much comment in the news.
Where’s the bank bashing? Where’s the railing against our greedy overlords? Where’s Wayne Swan when you need him?
But nothing. I think the pollies know that the banks hands have been forced. APRA (i.e the government) moved first. Criticising the banks would just be criticising government policy.
And what about Glenn Stevens over at the RBA? Is he pissed at the banks stepping on his turf?
In fact on Wednesday, he gave them the green light. He said in a bit of Q&A about the new measures:
I imagine it will result in some rise in mortgage rates from the major banks. It is supposed to – that's the point.
So what do we make of it?
I guess you’d say that if it increases the stability of the financial sector, then that’s a good thing.
No one wants a housing bubble and no one wants a banking collapse.
But the thing about government policy is that it always tends to be behind the curve. The time for these measures would have been 18 months ago, when the current housing boom was ramping up.
But now we’ve got them kicking in at a time where it already looks like the cycle is maturing.
And there’s even the prospect of gluts building in some markets (I’ll write more about that later.)
And so rather than moderating the upswing, all this might just accelerate the downswing.
Things are moving quickly in the housing market right now. It’s a windy old road with a lot of bumps.
Maybe we’ll be sweet. Maybe we’ll sail through. But you never know. You need to watch a market like this closely.
I’m holding out of the market for now. I think these measures will help consolidate a peak in the current cycle.
I think I’ll just take a wait and see for a few months, and take stock from there. Maybe look to score some discount bargains a little further down the track.
I’ll keep you posted.
What is everyone’s take on the credit environment? Is it getting tougher on the ground?