By Kate Parr
In response to the ‘property bubble’ hysteria that arose around budget delivery date, early last month the Australian Prudential Regulation Authority (APRA) moved to require the major Australian banks to hold a larger capital reserve against their mortgage books. As a result the banks have introduced three key changes focused on investment lending; increased the interest rate, introduced stricter servicing requirements and offered lower LVRs. These changes have already seen a reduction in investment lending. If this was the banking regulators intention then on the face of it, it appears to be succeeding. However common sense would remind you that the purpose of tighter regulation was to slow the rapid growth observed in the property markets over the last twelve months in order to allay fears of a bubble bursting. Alarmingly there has been little public discussion regarding the merits of APRAs action.
Increasing the interest rate for existing investment loans is little more than price gouging. As these loans are already established the increased rate cannot act as a deterrent to prevent these investors from entering the market, it may arguably remove some from the marketplace but even this is quite unlikely. Instead the increased interest rate creates larger profits for the bank and increases the possible tax deduction for those who are utilising negative gearing. The extra interest payment creates a larger tax deduction for the investor, which means ultimately it is the tax payer who is providing the bank’s capital reserve.
Simple supply and demand will tell you that reducing the number of potential buyers is likely to slow the rate of growth; same supply less demand. By making it more difficult for investors to borrow it may seem logical that there would be fewer investors in the market, after all property investors rely on being able to leverage their minimal cash deposit. However this logic relies on the assumption that investors are borrowing. What APRA have not accounted for is the enormous amount of money being brought in from overseas.
The media would have you believe that this money comes via foreign investors. Sensational headlines are frequently suggesting that Chinese buyers are pricing first home buyers out of the market. However foreign investors account for only a tiny slice of the investment market and should the Government choose to, would be very easy to stop. Instead we see Australian residents with overseas connections bringing foreign money into the country and resting it in Australian property. The motivation here is twofold; not only do these investors want to ride the wave of Australian property they also need to get their cash out of less stable marketplaces and are happy to pay for the privilege. Thus providing deposits of 40% against LVRs of 60% still represent a great opportunity, APRAs regulations have no relevance to these investors.
In fact the only investor affected is the small time Australian investor, those with limited cash for a deposit looking to purchase their first or second investment property, usually with the intention of creating security for their retirement or paying off their mortgage. Thus the Australian investor looking to reduce their future reliance on government pensions is prevented from doing so. It is hard to see how this is sensible or responsible policy.
An unfortunate side effect of these changes is born by those people who purchased property off the plan prior to these lending changes. These investors bought these properties with the understanding that they were making a responsible, informed investment based on the bank’s lending policies at that time. Many of these purchasers now find themselves unable to obtain sufficient finance to settle on these properties, not because they have been irresponsible with their finances or have lost their jobs, but because the regulatory body designed to protect investors have moved the goal posts. These investors are exposed and stand to lose tens of thousands of dollars when they ultimately default on their purchase contracts and face the consequences of rescission.
These regulatory changes were brought in without consultation and jeopardises the retirement plans of hundreds if not thousands of middle class Australians who had hoped to improve their situation. As long as the media continues to complain of investors keeping first home buyers out of the market the government is unlikely to back down on these changes. We can only hope that the reduction in investment lending is felt by the shareholders in the major banks and that they vocalise their displeasure by pressuring the banks to then pressure the government. In the meantime the industry is forced to work with alternate lending institutions, many of whom have drastically increased their fees in light of this new captive market.