Westpac got in trouble with the regulators last week. They know something most Australians don’t.
Credit conditions are about to become a whole lot looser. The signs are there.
And that’s going to put some real drive into the property market.
Remember that is was tighter credit conditions – put in place by APRA – that caused prices to soften across the country.
Without credit, people can’t buy houses. And if people can’t buy houses, prices start to fall.
But it is now becoming increasingly clear that APRA is satisfied with the impact it has had on the market, and is ready to start winding things back.
And that became abundantly clear last week with the wet lettuce that APRA threw at Westpac.
You might remember a few weeks ago that APRA had announced that it was reviewing it’s 7% loan buffer – the requirement that lenders assess borrowers against a 7% mortgage rate – regardless of what rates actually were.
In a letter to ADIs issued today, APRA has proposed removing its guidance that ADIs should assess whether borrowers can afford their repayment obligations using a minimum interest rate of at least 7 per cent. Instead, ADIs would be permitted to review and set their own minimum interest rate floor for use in serviceability assessments.
APRA has also proposed that ADIs’ serviceability assessments incorporate an interest rate buffer of 2.5 per cent
The key thing to note is that this was a proposed changed. It was something they were thinking about. It wasn’t law just yet.
But turns out Westpac didn’t get the memo:
Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent.
A spokesman for Westpac confirmed the policy change saying credit officers would now have the discretion to approve principal and interest loans to owner occupiers who previously fell just outside lending parameters.
Westpac had jumped the gun, but APRA wasn’t having it.
Westpac has made an abrupt about-face, reinstating a key lending restriction on Thursday night after incurring the prudential regulator’s wrath by removing it without approval earlier this week.
Westpac infuriated the prudential regulator after it went rogue and released a handbrake on residential property lending that has been in place across all Australian banks since 2014.
A spokesman for the Australian Prudential Regulation Authority said it was surprised a big four bank had lowered the serviceability floor before a consultation process designed to refine the standard had been completed.
Oh yeah? And so what did APRA do about it?
Kinda nothing. It just gave Westpac a talking to.
I suspect that what happened was that Westpac is just so certain that credit conditions are easing, and that APRA is well into a process of backing off, that they just got a bit ahead of themselves.
Everyone in the industry knows that APRA is looking for the exits.
And when you looking at the lending data – particularly for interest only loans – it is clear that they have achieved what they set out to do.
The flow of interest only mortgages was heavily squeezed:
Bringing interest-only mortgages, as a share of total mortgages, down from 40% to just over 20%.
Job done, boys.
Everyone in the industry knows it. APRA knows it, Westpac knows it.
The only question now is ‘when’. When will APRA complete its withdrawal?
As Westpac learned last week, the answer is “soon, but not yet.”
And so when will prices get a rocket up ‘em?
Soon, but not yet.