At the start of March I wrote … “If you haven’t heard of APRA and ASIC until now – then you soon will”.
And only two weeks ago I wrote … that “interest only loans to owner occupiers” were of increasing concern.
This is all against the backdrop that Sydney and Melbourne house price is now overheated and that the Reserve Bank’s hands are fairly well tied in terms of using interest rates to dampen them.
Let’s go back to basics – is there a property boom or not?
To understand... long term trends are very important. Long term trend growth for capital city property price is around 7% pa.
In Sydney and Melbourne, where property has risen by an average of 14%pa and 12%pa since the GFC and 19% and 16% last year – this is WELL over trend and headed for a certain decline. There is an unsustainable boom in these two cities.
Brisbane, Adelaide and Hobart have all risen by 2% pa since the GFC, and 4%, 4% and 10% respectively last year. These cities are under their long-term trend lines and are playing catch up on an upswing. There is no boom here - and it is possibly a good time to buy.
Perth and Darwin have risen by 1%pa and 2%pa since the GFC with FALLS of -5% and -4% last year. These cities are still in a downward correction.
Canberra sits in the middle with 5% pa growth since the GFC, and 5% last year – another city where it is also possibly good time to buy.
So being somewhat blunt – Sydney and Melbourne are the problem and the rest of the country is being punished for it.
How is this “punishment” playing out?
History shows that interest rate rises change property cycles downwards (Perth and Darwin are uniquely out of cycle because of the end of the mining boom).
The Reserve Bank’s hands are tied because of world events and a need to get inflation back up to their target range. The Reserve Bank could raise rates, but after this week’s meeting “the dominant view in the market is that official interest rates will stay on hold this year and next” (The Australian p25 Wed Apr 5th).
In the absence of action by the Reserve Bank, APRA and ASIC have been asked to join in and they are the ones making rules to attempt to reign in Sydney and Melbourne. As can happen with rules though, sometimes they lead to unforeseen consequences…
The first rule by APRA was around restrictions on investor lending.
Rule 1 : That investor loans must stay under a cap of 10% growth year on year.
As lenders approach this limit, on a rolling average, they are putting up rates for a month or two, and delaying settlements from “this month to next” (this one is completely ludicrous – how can settling a loan on Sat 1st April rather than Thurs 30th March have any meaningful effect on the economy. This is a real example.)
And now a smaller lender (CUA) has been forced to shut down all investor lending temporarily.
These are the sorts of unintended consequences of managing an economy by regulation. The cost of funds to banks is the same no matter what type of loan they sell. Forcing banks to manage volume by putting up price, delaying settlements and forcing smaller competitors out of the market is simply inflating bank profits. One begins to question the wisdom of this.
And this week : Rule No 2 was invented ..
Rule 2 : That interest only loans must stay under a cap of 30% of all new lending.
The background to this is that 70% of all investor loans (40% of the market) are interest only. That’s a total of 28% of market.
25% of all owner occupied loans (60% of the market) are interest only. That’s 15% of market.
This means that currently 28% + 15% = 43% of all loans being written are interest only. (The Australian p17 Apr 4th)
Very simply, if all interest only approvals to owner occupiers were ceased, the market would be immediately back at 28% - and under the cap. Given that most interest only loans for owner occupiers are written in Sydney and Melbourne to create a false sense of affordability, this macro prudential rule does something sensible.
It will apply most commonly to the Sydney and Melbourne markets – the two markets causing the most concern.
Interest only loans are a legitimate investor product choice. Owner occupied loans should, by and large, be P&I. This new rule effectively discourages loans that should only be approved on a specific case by case scenario.
For the time being this looks like a good rule – but eventually it too will create unintended consequences.
The fundamental problem here is that rules are being applied nationally in an attempt to control a problem only present in two markets.
What should you do? As I said at the start of the year, avoid listening to the noise.
Most certainly, don’t react to short term impulses on your own loan. If you wish to purchase, simply remember that opportunities exist and choose them wisely.
At a broader level - we will eventually reach the stage where it would be better if the Reserve Bank in fact raised the cash rate and let the “rule by regulation” phase disappear. (The Financial Review p 38 Apr 4, The Australian p2 Apr 5)
As always, call or email me anytime...
Alan Heath. 0411 601 459. alan.heath@mortgagechoice.com.au