The Australian Prudential Regulation Authority has been castigated by brokers for its nationwide “sledgehammer” crackdown on interest-only loans, which have been labelled as “myopic” and “devastating” for regional Australia.
Damian Collins, managing director of Momentum Wealth in Perth, told The Adviser that APRA’s moves to limit the flow of new interest-only loans were based on a “sledgehammer” approach that neglected to consider the impact on areas outside of Sydney and Melbourne.
He added that “everyone outside of Sydney and Melbourne should be feeling fairly aggrieved” by the measures.
Mr Collins said: “We got told in WA [in April], that for investor refinances, [lenders] are not doing them... so, you can tell APRA is definitely putting the pressure on the banks to manage their loan book growth, which is strange because in WA there aren't a lot of investors doing anything at the moment.
“So, I guess [APRA] aren’t really looking at it state by state, they're just looking at it as a global pull and finding any way they can to make changes.”
The Momentum Wealth MD went on to say that some of his clients in WA had previously been able to borrow around $2 million and, within a couple of months of the macroprudential measures being announced, that figure dropped down to $700,000.
“We used to have some lenders that, for our clients that had three or four properties already, would have assessed existing debt at actual rate, so they might be paying 4.5 per cent. But, pretty much all the lenders now have switched to servicing everything at 7.5 or 7.25 per cent, so for existing investors with a decent portfolio, it's certainly made it a lot tougher.”
Mr Collins lamented that the regulator had not taken a state-by-state approach.
He said: “It is quite staggering… Maybe they should say: ‘Right, for investor growth in [postcodes] 3,000-3,200 or 2,000-2,200 (or whatever those postcodes are [in Melbourne and Sydney]) any properties secured by IO loans in those postcodes we're restricting’. But, there is just a blanket ban nationally, it's crazy. And it has certainly affected not just Perth but pretty much everything outside of Sydney and Melbourne.
“It's like taking a sledgehammer to the problem and certainly has affected investors across the country… You'd think [APRA] would be able to do it better, but they haven't,” he added.
Touching on the crackdown on interest-only loans in particular, Mr Collins said that the penalties now made this type of loan practically redundant for investors. According to the Momentum Wealth managing director, the repayments on some interest-only loans are the same now as P&I.
He said: “It's at the stage now where, for a lot of our investor clients, we're saying: ‘Get a P&I loan, it’s just not worth paying that premium for paying interest-only.’”
However, while Mr Collins said he expects interest-only loans to go “back to normal” in the future, he was “struggling to see how it’s worthwhile to pay that higher rate for interest-only at the moment”.
‘The most devastating manifestation in the financial sector since the GFC’
Roger Ward, director at Cairns Mortgage Brokers, agreed, labelling lenders’ response to APRA mandates as “city-centric” and “damaging” to investment in regional Australia.
He said: “It should be stated that there is no housing bubble in almost all of the rest of Australia. These lending restrictions are being applied nationally and already are driving down investment in regional Australia, an area which needs additional investment, not less.
“Most places in regional Australia have not experienced the growth in real estate asset values like Sydney and Melbourne and look to be casualties to this developing panic in the financial sector over the Sydney and Melbourne ‘housing bubble’.”
Condemning the “myopic” APRA policies, he said the recent changes to interest-only lending policies look to be “the most devastating manifestation in the financial sector since the GFC and is already costing investment dollars in regional Australia”.
He continued: “It’s my professional opinion that APRA and the banks are going to crush investment in regional Australia, all for fear of a housing bubble in our capital cities.”
Echoing Mr Collins, Mr Ward argued that APRA should have called on lenders to address the “hyper-investment issue” in Sydney and Melbourne on a postcode basis.
For example, he suggested that that investors buying in Melbourne and Sydney should have to provide at least a 20 per cent deposit, and that there should be foreign investment restrictions on certain postcodes in Sydney and Melbourne.
He suggested that these measures “would have dealt with the core issue” without affecting the regions, and could even potentially benefit regional Australia as the “frustrated appetite of investors” would lead them to invest elsewhere.
[Related: Brokers have their say on IO crackdown]