After spending most of their careers trying to grow loan books, big bank executives are now in the bizarre position of coming up with ways to reduce the amount of money home buyers can borrow.
The way major lenders are thinking about the investor loan space is the biggest challenge facing the banks as they seek to meet the banking regulator’s edict to curb the growth in investment property loans.
Just how far banks are willing to go to actively manage this down became clearer this week when Westpac significantly changed the rules for its customers.
Property buyers seeking to borrow money from the bank for an investment property will now have to pay Westpac a deposit of at least 20 per cent instead of as little as 5 per cent previously.
Take Sydney’s median house price of almost $1 million as an example, and this equates to a whopping $250,000 per investor once you throw in another $50,000 or so in stamp duty.
This locks out of the market a huge number of potential investors, particularly first-time buyers who cannot afford to live in the first place they buy.
MOVE RAISED EYEBROWS
The move raised eyebrows amongst the other major lenders, who are now wondering if they need to take more drastic measures to meet the Australian Prudential Regulation Authority’s (APRA) 10 per cent benchmark for investment property loan growth. Some are asking if it will get to the point where they stop writing investor loans completely in order to meet the target.
It was not a move Westpac took lightly. About 51.6 per cent of the bank’s mortgages written in the first half of the current financial year were for investment housing, according to figures from the company’s last results presentation.
Loan-to-valuation ratios (LVRs) are a measure for the way banks assess risk by weighing up the amount borrowed against the value of the property. Westpac’s 80 per cent LVR cap announced this week compares with a 90 per cent limit ANZ and National Australia Bank are putting in place.
While Commonwealth Bank of Australia’s investor loan growth is within the APRA target, it is also looking at ways to manage the issue. As the country’s largest lender with high volumes, it could easily breach those targets.
The new rules creeping in are the culmination of months of pressure behind closed doors by the banking regulator to temper booming housing markets.
APRA first started writing to the banks in December, warning them they had to start watching their investor loans. The discussions have been more active in recent months and APRA staff are said to be regular visitors to the headquarters of the major banks in Melbourne and Sydney. APRA wants the banks to have the issue under control by September rather than in March next year as previously expected.
RANGE OF RESPONSES
Banks and other lenders have been gradually introducing a range of responses over the past three months, tweaking pricing to remove discounts and tightening discretionary credit decisions. But it is the bigger policy decisions such as tightening LVRs that will have the biggest impact.
Working out what APRA chairman Wayne Byers wants can be like reading tea leaves for the banks at times but the regulator’s approach appears to be working, and the lenders prefer the approach to the restrictions imposed in New Zealand.
No one wants to get on the wrong side of the regulator, but is has not spelt out what the penalties would be for lenders that do not meet the benchmark.
While it has not been discussed much in public, the big question bank executives are asking at the moment is: ‘what happens next?’
There are a number of scenarios. The number of loans written will fall, excess investor loans will flow through to other institutions and owner-occupier loans will become more attractive.
While there will inevitably be a decline in investor loans, a lot of money is still going to flow through to tier-2 and non-banking lenders.
‘LIKE SQUEEZING A BALLOON’
“It is like squeezing a balloon, isn’t it? The market goes elsewhere. It gives those other institutions an opportunity,” says John Flavell, the chief executive of one of the country’s biggest mortgage brokers, Mortgage Choice.
Mortgage Choice data shows investment loan approvals fell from 33 per cent to 29 per cent in June but overall lending did not come off. Flavell says there is already evidence of investor loans shifting to other players not governed by the APRA requirements. These are the so-called non-Authorised Deposit-taking Institutions, which are regulated by the Australian Securities and Investments Commission (ASIC) rather than APRA.
Analysts also say it could open up the opportunity for non-banker and regional lenders to compete on price and get a foothold.
The major banks are also looking at ways to make owner-occupier loans more attractive to help cushion the slowdown in investor loan growth. They will be trying to find ways to be more competitive by doing things such as improving the package benefits currently on offer with things such as discounts to new credit cards.
Westpac’s limit on owner-occupier loans is 95 per cent, but it also has an option to capitalise lender’s mortgage insurance, to get up to 97 per cent for a new loan.
SAVVY BUYERS WILL LOOK FOR LOOPHOLES
Making investor loans harder to obtain will also encourage savvy home buyers to try and find loopholes to access a owner-occupier loan.
The upshot of all this regulatory change, spurred on by concerns about an overheating property market in a low interest rate environment, is that it will be harder to get a loan to buy an investment property than it has been before.
Mortgage brokers argue that raising the bar for investor loans is the wrong approach at a time when the government is under pressure to address the housing affordability crisis. “I reckon you are taking out the least risky part of the market. Fishing in the wrong pond,” Flavell says. “I would back your ability to find a tenant in any Australian capital. There is greater risk in people relying on their own income.”
The changes add to a host of headwinds for the major banks facing tough new capital requirements. It is safe to assume, though, that the major banks will not be passing on an interest rate cut if there is one, as expected in the second half.
Managing rate cuts is another key strategy dilemma for the banks ahead of the next round of earnings results. CBA lifted some deposit rates as a trade-off for not passing on the last cut in May. But CBA and Westpac’s decision not to renew those promotional discounts, a move that became public this week, are a reflection of the shifting banking landscape.
[“source – afr.com”]