The data says that APRA’s restrictions have done their job. Time to let the market run free again.
It’s looking to me like the credit crunch might be about to ease up.
Let’s remember how we got here. Right now, the national property market is in the midst of an orderly and mild consolidation.
And consolidations are expected. The property market moves in cycles, up and down.
Most times that’s driven by dynamics in the cycle itself. Left to it’s own devices, the property market, just like the broader economy, will run hot, then cool and then run hot again.
But that’s the thing. The property market wasn’t left to its own devices. Since 2016, APRA has been getting involved, creating limits, particularly on investor lending. It started with making sure lending to investors wasn’t growing too quickly, and then became about cutting back the pace of Interest Only (IO) lending.
This clamp down on IO lending was across the market, but was particularly focused on investors.
Predictably, as the credit taps were squeezed, price growth began to stall, and over the past year or so, prices actually started to come-off, little by little.
And that’s where we are today.
So obviously if we’re interested in finding out when the market is going to start growing again, then the first question is really, ‘when will APRA back off?’
This is a little hard to predict. One of the things that came out of the Royal Commission was that APRA – who is responsible for regulating the banks – seems to have been a bit asleep at the wheel.
Given the huge list of crimes, misdemeanours and affronts to human decency that emerged from the Royal Commission, you do really have to wonder what APRA were doing.
APRA has been made to look a little silly. But what worries me now is that they might over-compensate – try to play the tough wild west sheriff. And that might mean that conditions remain tougher for longer than they need to.
And the truth of it is that right now, I’m seeing a case for letting up on the restrictions.
Take a look at this chart here from the RBA. It shows what has happened to IO lending since the restrictions came in in 2016.
The orange lines – new lending – is the one to be watching here. As you can see, IO lending pretty much fell off a cliff when the restrictions came in, particularly to investors in the bottom panel there.
But what you see here is the banks very quickly bringing themselves into line.
And after the initial adjustment, things just sort of levelled out – the share of new lending has remained fairly constant in recent months.
If it remains constant, the share of outstanding lending – the blue line – will keep trending lower, and until it re-joins the orange line.
And the structural change in the market that APRA was looking to create, will be complete.
The thing I would note is that once this transition has been made, then the normal cyclical dynamics should start to reassert themselves.
That is, even if the share of new lending remains at around 30%, after a year, that will be the new reality we’re working with – so our annual growth rates (which compare this month with the same month 12 months ago), there won’t be any impact left in there at all.
And so that should mean that we should see price growth should realign with the cyclical trend.
It is possible that these restrictions have caused the cycle to turn. There’s a good chance of that. So I don’t think we’ll see positive growth numbers this year or in the first half of next, but after that, I’d be looking for things to start moving again.
But I’d also be saying to APRA, since you’ve caused the cycle to turn, and you have done what you set out to do with IO lending, maybe it’s time to cut investors some slack.
We certainly don’t need any more restrictions. We don’t need no sheriff out there shooting from the hip.
Here’s hoping cool heads will prevail.