The banks are quietly rotating their books. Who wins, who loses?
Let’s stop and think about the APRA restrictions again.
Now we know that APRA have gone hard on the banks about the pace of growth in investor loans, and in interest-only loans in particular.
So far it seems the banks are playing ball. We’ve seen all financial institutions increase mortgage rates, though there has been some pivoting away from investors and interest only toward owner-occupiers in the pricing.
Ask any mortgage broker and they’ll tell you it’s a much tougher credit environment, especially for investors.
Now let’s think about this from the bank’s perspective.
You’re in a competitive industry. Until recently the name of the game was market share – you were growing your mortgage book as fast as profit margins would allow.
But then along comes APRA and totally flips it on its head. You don’t get to say how fast your mortgage book is growing any more – at least to investors. APRA says investor loans can’t be growing at more than 10% a year.
They also put limits on investor only loans, saying they can’t be more than 30% of issuance.
Suddenly an industry that was spread out over a range of growth rates is pulled into a very tight pack. Every bank will want their investor mortgage book growing at 9.99%. They’ll all want 29.99% of their loans to be interest only.
Suddenly they’re marching in lock step.
So maybe you compete on price, but the pricing space was competitive already, so there’s not much you can do there, and you’re funding costs are largely determined overseas so it’s out of your hands.
So what do you focus on to get a competitive advantage? How can you separate yourself from the pack?
Loan quality.
Not all loans are the same. Some borrowers are riskier prospects than others.
So say you’re a bank growing very close to your 10% speed limit. You’ve got one more loan you can make before you’re maxed out. You have two choices in front of you. Which one do you go with?
The one that’s lower risk.
The aim of your game, if you’re growing as fast as you can already, is to start rotating your book into a higher quality portfolio.
That might mean choosing higher quality applicants over less quality ones.
But it may also mean going back through your book and weeding out lower quality ones to make room for higher quality ones.
And that might mean that interest-only investors, when it comes time to roll their loan over, might be facing a very tough time of it. The banks will be looking at them and saying, if I cut this borrower loose, will I be able to replace them with a better one?
I might be able to cut them loose and pick up a higher quality borrower, thereby saying under APRA’s speed limit, but improving the quality of my book.
Now that probably means passing a stricter eye over an individual borrowers circumstances, but knowing what we know about the banks’ business models, it probably also means differential preferencing for different geographies.
Banks might be saying, other things being equal, we’d like to replace Perth borrowers with Sydney borrowers…
… for example.
We are seeing some signs of this. Mortgage brokers in Perth are saying things are pretty tough right now, and APRA’s measures are a ‘sledgehammer’. From mortgage broker mag, The Adviser:
“The Australian Prudential Regulation Authority (APRA) has been castigated by brokers for its nationwide “sledgehammer” crackdown on interest-only loans, which have been labelled as “myopic” and “devastating” for regional Australia.
Damian Collins, managing director of Momentum Wealth in Perth, told The Adviser that APRA’s moves to limit the flow of new interest-only loans were based on a “sledgehammer” approach that neglected to consider the impact on areas outside of Sydney and Melbourne.
… Mr Collins said: “We got told in WA [in April], that for investor refinances, [lenders] are not doing them… so, you can tell APRA is definitely putting the pressure on the banks to manage their loan book growth, which is strange because in WA there aren't a lot of investors doing anything at the moment.
“So, I guess [APRA] aren’t really looking at it state by state, they're just looking at it as a global pull and finding any way they can to make changes.”
The Momentum Wealth MD went on to say that some of his clients in WA had previously been able to borrow around $2 million and, within a couple of months of the macroprudential measures being announced, that figure dropped down to $700,000.
Mr Collins lamented that the regulator had not taken a state-by-state approach.
“It's like taking a sledgehammer to the problem and certainly has affected investors across the country… You'd think [APRA] would be able to do it better, but they haven't,” he added.
Touching on the crackdown on interest-only loans in particular, Mr Collins said that the penalties now made this type of loan practically redundant for investors. According to the Momentum Wealth managing director, the repayments on some interest-only loans are the same now as P&I.
He said: “It's at the stage now where, for a lot of our investor clients, we're saying: ‘Get a P&I loan, it’s just not worth paying that premium for paying interest-only.’”
Looks like a pretty serious wind-back in Perth. But I actually reckon it’s worse than what this bloke is saying.
It is not that Perth is getting hit with the same stick as Sydney and Melbourne. It’s that APRA gave the banks the stick and the freedom to hit whoever they wanted.
For the sake of loan quality, they decided to hit Perth – hard.
That has the potential to create a self-fulfilling prophesy in some of these markets that are struggling.
I’m still watching Perth. I think there will be some bargains to be had. But I also don’t think its time to jump in just yet. Give it a few more months and see how the APRA restrictions and this loan-quality business play out.
Too soon for Perth?
KatM says
There are literally 100 vacant commercial/light industrial properties in every suburb that’s synonymous with industry in the Perth metro. I nearly cried when earlier this year I took the opportunity to closely inspect most streets in one area that’s been decimated by For Sale & For Lease signs (some due to downsizings & relocations). A massive new Vinnies depot opened there. Even business premises in locations next to parks & water views are waiting for people to create jobs. Rents and prices are still tumbling.
ron goddard says
hi jonno, you have made a good point there but it seems that banks should be separated into housing loan banks and commerciaL lending banks including investment loans. that would sort the wheat from the chaff quite readily. housing loans coming from savings by customers and the other by whatever means, say off shore borrowing. that would control the market absolutely if one thinks about the real issues at hand. there is a crossover of interests here at the moment causing uncertainty in the markets both property and financial. of course we can’t expect the ‘experts’ to realise this from their ivory towers..profit and more profit is their thing and bugger the public. from july the first there is gonna be a change, as you know, in the receiving of superannuation payments in that the money will ‘doled’ out like pensions, so the government has virtually hijacked the superannuation funds in oz so that they can pay normal pensions and save the public money which they are liable for. in america(u.s.a.) most pension funds are broke and the government has a king sized headache nationally and state wise. i just learned also that u.s.a. has been ‘hacking’ elections rin 46 countries since 1950, so has russia, but they stopped in 2000 the americans haven’t lol cheers, ron.
Michael Martion says
Seems like it might be a self-fulfilling prophesy: the very markets that APRA is trying quell (Sydney & Melbourne) – through their narrow-minded ineptitude – they end up fueling!
“Hey – let’s dump all the other states coz they’re higher risk; that’ll free up space in our loan book and we can go chase the Sydney & Melbourne Investors!”
Yeah that’s real smart APRA!
They have the ability to discriminate loans based on type (investor/homeowner)- do they not have the ability to discriminate based on region as well? They’d have to. If they don’t, their just plain incompetent not to get on board with it.
Not only do I resent unelected government officials imposing their economic will on me (in particular), worse – they’re making right mess of it buy using blunt skinning knife to perform delicate heart surgery.
A life-long Perth resident, I have a few contacts in the mining industry who tell me everything is just bubbling along, and yet the local market is just gloomy as it’s ever been. The upswing is not feeding through.
I put blame squarely on APRA.
If this keeps going the way it is, no investor will be able to get funding for a property deal. Which will only serve to further suppress the local economy.
Thanks APRA: you’re about to push an economy that was in a mild downturn into a full-blown recession.
Adam Richards says
The cynic in me suggests the Banks will have already to begun digging into establishing ‘alternate’ lending streams (at arms-length of course), after all good debt / bad debt it’s all in the wrapping…
Lindsay Stewart says
This is not only effecting Perth but most rural areas in Australia. We just had enormous troubles getting a small development loan for rural NSW interest only. With the banks focusing on only Sydney and Melbourne due to the higher rate of growth (safer) this is making developments much harder in rural areas and in fact making housing affordability even harder…not easier as was APRA/ScoMo’s intent
Traveller says
A very relevant discussion topic. WA is really hurting economically at the moment. Mining is turning round but the rest of business hasn’t yet started recovery. And the banks are not allowing the recovery to happen. Not only are banks not giving loans in WA they are deliberately forcing foreclosure by slamming borrowers with unaffordable increases on their investment loans – either by hiking interest rates or turning them P&I. This at a time rents when are falling and vacancy rates rising.
As Damien Collins and Martin (below) have said, APRA’s actions have had the opposite effect than they wanted – they are using a sledge hammer to crack a nut but missing and crushing their toes instead!
By APRA’s poor policy and the bank’s deliberate misuse of it, the Government and the banks are severely inhibiting WA’s recovery. Who’s that going to benefit? When the WA economy is pumping it contributes more than its fair share to the Government coffers.
The press don’t help of course – still pumping out doom and gloom when the WA economy is turning.
ron goddard says
hi again jonno,
it seems that, after reading several interesting articles from u.s.a. that central banks worldwide are planning to destroy the economies of most ‘western’ countries including oz i guess.
so with that in mind is perth the ‘canary in the coalmine’? really is apra a servant of the reserve bank(aka fed. subsiduary)? is it under instruction for destruction? how many warnings do we need to get the buggers to heel? they are our servants not our masters. all government, be it federal, state or local are our servants. so it appears that the old adage of a good servant becoming a bad master is most relevant. there is an almighty backlash in u.s.a. right now, though you wouldn’t know it if you walk around with a television set in lieu of a brain. after reading about ‘sheeple’ again it is little wonder that people of oz are like ‘lambs to the slaughter’. let it be, because nobody in oz is listening. the old trick of being an ostrich is very common in our country. let it be.:-)
cheers, ron