Capital impost coming on investor home loans

JP Morgan’s read of the minutes from the last Reserve Bank of Australia’s (RBA) board meeting is that the regulators will soon resort to higher capital requirements to stem the rise of lending to investors.

In the minutes the RBA said its current forecasts for economic growth and inflation indicate another interest rate cut “may be appropriate”.

But JP Morgan Australia’s senior economist Ben Jarman detected that the RBA is uneasy at the bounce in the Sydney, and to a lesser extent, Melbourne, housing market since it cut the cash rate to a record low of 2.25 per cent in February.

He also sensed the central bank’s unease at a “lack of any meaningful progress on macro-prudential measures to contain” the housing market’s strength.

In December the Australian Prudential Regulation Authority (APRA) said in the March quarter it would intensify its surveillance of “risky lending” such as interest-only loans, loans to investors and loans with loan-to-valuation ratios exceeding 80 per cent.

Research firms and financial comparator websites haven’t seen any signs of lenders changing pricing or underwriting practices as a result of APRA’s announcement.

Lack of market response to APRA’s efforts

For example, in January, Canstar’s finance editor Justine Davies said, “at this stage there doesn’t appear to have been any real change.” She attributed that to the fact that most lenders already complied with APRA’s standards.

Nor had Michael Russell, CEO of Mortgage Choice, Australia’s largest branded brokerage, seen any changes in credit policies in areas subject to the regulator’s scrutiny.

The lack of market response to APRA’s efforts to curtail certain types of home lending “means the RBA is working without a net here,” said Jarman in a report published on Tuesday.

The RBA’s minutes noted the regulatory efforts to “temper housing market risks” but JP Morgan doesn’t think they’ll be effective in slowing down the rampant Sydney market.

Thus Jarman expects APRA to soon announce higher regulatory requirements for lenders that are growing their investor mortgage portfolios faster than 10 per cent per annum.

Even then, Jarman questions whether such a capital impost will have much impact given the RBA’s minutes noted that “banks continued to accumulate capital organically, leaving them well placed to meet any further increases in capital requirements in the period ahead.”

“This increases our confidence that capital requirements will be increasing, but also is revealing on policymakers’ intent – more capital will be reserved to buttress the system, but there is no sense that business as usual lending will be interrupted,” said Jarman.

Relative importance of first-time buyers

One factor driving the strength in the housing market is property investors. What proportion of property investors are from overseas and what proportion are first-time buyers is unclear from the official statistics.

However, Digital Finance Analytics (DFA) has attempted to reveal  the relative importance of first-time buyers, including those not from Australia, in the investment property sector.

From the Australian Bureau of Statistics data for January, DFA calculated that 35 per cent of first-time buyers in January borrowed to buy an investment property.

That compares with 57 per cent who were buying their own home and eight per cent who didn’t require a mortgage and therefore aren’t captured in the mortgage statistics.

It further found that 41 per cent of first-home buyers took out conventional principal-and-interest only loans while 36 per cent plumped for interest-only home loans.

Of the eight per cent or 850 first-time buyers that didn’t take out a mortgage in Australia, 415 were overseas investors that sourced a loan offshore, more than 200 got a loan from their parents, 125 were local purchasers without finance while less than 100 were financed by other sources.

By state, more than 550 of those 850 first-time purchases were for properties in New South Wales and the number in Victoria exceeded 200.

“This equates to about four per cent of all first time buyers and 9.2 per cent of investor first time buyers,” said DFA. “Enough to more than move the dial, especially given the concentration in Sydney.”

DFA predicts the investment housing boom is likely to continue to run as more investors get the bug.

JP Morgan, RBA, investors, APRA, lending, home loans, Canstar, DFA, ABS
Marion Williams,
Article Posted:
March 19, 2015

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