Everyone keeps saying we need to do something about the problem of property investors. Rubbish. Investors are not the problem, and they won’t be targeted by the RBA when they finally bring macro-prudential into effect.
I get the sense that investors are being set up to take a fall.
Like property investors are somehow to blame for imbalances in the economy, compromised bank balance sheets, the wallabies loss to Ireland…
The media is still running this angle. Macro-Prudential – the new tool in the RBA’s tool kit – looks like it’s coming. It could be any day now.
Macro-prudential should give monetary policy a bit more flexibility. A bit more nuance, subtlety and finesse. A better ability to target specific markets rather than just carpet bomb the entire economy.
And what’s the RBA going to do with this more ‘targeted’ approach?
Target investors apparently.
At least that’s how the media continues to sell it.
The popular narrative runs like this: Investors have gone mad. They’re buying anything on stumps and paying absurd amounts of money for it. They stretching themselves far beyond their means to buy uneconomic properties in the hope that prices will just keep on going up. These speculators are completely unprepared for softer market conditions, and will get wiped out at the slightest stumble in prices. What’s worse, as they go down, they’ll take the whole economy with them, plunging us in to miserable dark age.
Your wi-fi will stop working.
This is the line that a lot of the media and a lot of commentators who should know better, are running.
And when you’re running that line, macro-prudential becomes the proof you’re looking for.
Why else would the RBA want to introduce targeted regulations if not to put a straight jacket on those raving mad investors?
Well, there’s a couple of reasons actually, and these point us to what we can actually expect from the RBA.
The first very good reason is you want to rebalance bank lending in Australia. Bank lending has become much more heavily weighted towards housing lending in recent years – entirely at the expense of business lending.
In a way, it’s easy fruit for the banks. Assessing property values and a lender’s credit-worthiness is pretty straight forward. A computer can do it. Crunch the algorithm, maybe get a human to cast an eye over the output. Easy.
Business lending is an entirely different kettle of fish. How do you assess a business proposal? That takes skill and experience. Even then, there’s a lot left to chance. A lot of fantastic business ideas never get off the ground.
For the same return, the banks’ business arms have to work a heck of a lot harder and take on a lot more risk.
No wonder they’re just not bothering. The balance of bank lending in Australia continues to shift away from business lending towards mortgages. Here’s a chart I drew up a few weeks back:
The RBA could be justifiably pissed. We’ve made money the cheapest it’s been in 50 years, the least you guys could do is send some of it towards businesses – you know, the ones that actually employ people get the economy going.
To me that seems like a very good reason to lean a bit harder on the banks.
The other reason that might weigh in things is the threat that our risk-shy banks have overloaded themselves on housing. It sets up the threat of systemic risk – that if there was any shock to the housing market, the repercussions would be huge.
So far, the banks haven’t been convincing in defence of their lending practices.
Westpac’s Bill Evans was talking it up the other day though:
“Consider the ‘quality' of Westpac’s investment property portfolio. Investment property loans (IPLs) are 45.2 per cent of Westpac’s Australian mortgage portfolio.
- Compared to owner–occupier applicants, IPL applicants are older (75 per cent over 35 years); have higher incomes and higher credit scores.
- 65 per cent of IPL customers are ahead on their repayments and 90+ days delinquencies are 0.37 per cent compared to 0.47 per cent for the full housing portfolio.
- Westpac has an interest rate buffer approach to lending linking loan approvals to serviceability at a rate at least 180 basis points above the standard mortgage rate (5 per cent).
- All IPLs are full recourse and specific policies apply to holiday apartments and single industry towns.
Such lending practices, which are likely to be widely practised right across the Australian banking system, should fully allay the governor’s concerns…”
Well, sort of. But Evans defence here is all about what good credit risks investors are. They’ve got high incomes, and good repayment practices.
As I keep saying, INVESTORS ARE NOT THE PROBLEM.
But he says nothing about whether Westpac’s book is too heavily weighted towards housing, and nothing about whether a focus on the low hanging fruit of housing is crowding out business lending.
The other risk that the RBA might want to lean against is the threat of gluts developing in certain segments.
As I’ve written before, housing market ‘crashes’ only happen in markets with severe over-supply. So far we haven’t had those conditions develop in Australia.
But there does seem to be the possibility looming that we’re seeing some over-supplied segments – particularly in inner-city apartments in Melbourne and Sydney. It’s not panic stations yet, but the worse case scenario here is that a price collapse in these segments spreads through out the market.
I’d still rate it as a distant possibility, but monetary policy needs to be forward-looking if it’s to work at all.
It’s these concerns that are weighing on the RBA’s mind I reckon. And I personally reckon we’ll see more geographic targeting than investor targeting once macro-prudential comes into the light.
Any day now.
Watch this space.