APRA have published some estimates on how their 2015 restrictions have affected the market. It’s been substantial.
One of the big themes for Australian property through 2015 was the APRA restrictions on mortgage lending.
APRA let us know that they were worried that mortgage lending was getting a bit out of hand – growing a bit too quickly and a bit too loosely.
And so they had a quiet word with the banks and got them to pull their heads in.
Some of us were on the pointy end of these restrictions. We saw max loan amounts fall, changes to LVRs that the banks were willing to wear, changes to serviceability calculations, or premiums tacked on to our interest rates.
But did it work?
APRA published some results last week, letting us know that, actually, they’re doing a pretty good job.
When government agencies start patting themselves on the back, I always take it with a grain of salt.
Still, it’s the only data we have, so we’ve got to take it at face value.
And more importantly, we can see it as a signal of where APRA thinks they need to go. And on that front, the good news is, the APRA dog is probably going back on the leash, for now.
Let’s take a look at what they’re saying.
They set the scene by saying that mortgage lending now “underpins our financial sector”, and that’s why they’ve committed so much energy to mortgage oversight.
Housing loans now make up nearly two-thirds of ADI (authorised deposit-taking insitutions = banks etc) portfolios.
So it’s big cheese.
And how “risky” is this portfolio. APRA admits that right now, it’s not too bad. If you take LVRs (loan to valuation ratios) as a proxy, high LVR loans have been falling in recent years, as a share of new loans.
That’s about what I imagined it would be. Loans with LVRs over 90% make up less than 10% of new loans issued.
Nothing too crazy here.
But still, even if LVRs were steady, APRA were worried about how many loans were going to investors. And so APRA let banks know they wanted to see slower investor growth, and that prompted a few banks to put in LVR caps as a way of slowing overall growth.
You can see the effects of this in this chart here. This is the maximum LVR policies for each bank (represented in each bar – we don’t know which bank is which.)
Some interesting results here. Some big drops in Max LVRs for the banks on the right there. One slashed LVRs from 92% to 65%! Another from 97% to 80%.
Interesting that they’re saying that in Dec2014, five banks had max LVRs of 97%. I’ve never heard of anyone getting a loan for 97% of the value of the property, have you? I need to talk to my mortgage broker.
The APRA directive also caused many banks to increase their minimum living expenses assumptions. You can see here that about half the banks in Australia upped their assumptions substantially.
Same story with the interest used in the serviceability assessment. All banks are now using a floor of at least 7%. Some are even nudging towards 9%. Many banks have seen the buffer increase substantially.
So what’s the net effect?
As a result of these changes, APRA estimate that maximum loan sizes have fallen about 6% for owner-occupiers and about 12% for investors.
(That’s the average. Some banks have seen the maximum loan size fall 25%!)
A fall of 6% and 12% might not sound huge, but it’s enough to have an impact. If all investors can only borrow 90% of what they could a year ago, that’s going to be a drag on price growth.
Effectively, you’re looking for income growth to offset the decline in loan size, but we know that income growth is sluggish.
So taking these numbers at face value, Let’s do some back of the envelope calculations. Lets assume nation-wide owner-occupiers outweigh investors 2:1. That would mean that the APRA restrictions alone could knock 8% off price growth.
(That assumes everyone in the market borrows at their max, which obviously isn’t true. But it pegs out the potential.)
Given the market was only growing at about 6-8% last year anyway, you’re probably looking at a pretty flat result this year, with some income growth and foreign buying taking us into positive territory.
(Of course city by city we’re going to see some pretty different stories.)
The important thing to note though is that these APRA changes are a one off. Once they’re done, they’re done. So while they might take 8% off this year, the year after they’ll have no effect.
So 2016 could be soft, but 2017 could bounce right back.
Assuming, that is, people don’t mistake the APRA shift as a cyclical trend. If people do, then expect to hear a lot of news about “the market slowing.”
This won’t be true. I won’t believe in a cyclical downturn until I see prices falling more than 2%, and I don’t see that happening.
But if people start buying the cyclical downturn story, you could see some great bargains pop up, with some easy capital gains in 2017.
Again, city by city, it’s a totally different story.
The other take home is that by the tone of APRA speech, they seem to be happy with how the restrictions have played out. They have made a material difference to bank lending practices, and APRA feels it has made the financial system more stable overall.
To me, that suggests that we’re not likely to see much more action from APRA in the months ahead, if we see any this year at all.
The dog is back on the leash.
Have you been affected by the change of rules?
Are you still finding it easy to borrow money at 80 – 90% lends?