With a lot of recent debate surrounding APRA’s crackdown on investor lending, Loan Market chairman Sam White shares his thoughts on how the issue of affordability should be tackled
I am writing this piece in the first week in June. Glenn Stevens has just called Sydney house prices “crazy” and all the talk is of APRA.
My concern is not so much the level of prices in Sydney now as with the trajectory of prices in unchartered territory.
I haven’t seen a Sydney property market this strong in an environment where interest rates are so low and forecast to continue to be so low. Normally by now, if the Sydney property market was a representation of the broader economy, rates would have risen long ago. Most other markets in Australia are significantly more subdued and in some cases going backwards.
And that is exactly the point: we don’t have a property price problem in Australia – what we have is a very strong market in Sydney. I think most people can agree that it is no one’s interest for large numbers of Sydney families to be excluded from home ownership.
The Sydney market is strong for Sydney factors, not financial market factors. As I argue later, supply is the only solution to the house price problem – but that is a longer-term fix.
In the short term, we need another measure to play the role that raising interest rates used to.
I’ve been on record as favouring some macroprudential measures to slow the housing market as long as they are temporary and targeted.
We lived through this in New Zealand recently where its Reserve Bank introduced measures that, in effect, limited the percentage of over-80 per cent LVR loans of a lender’s book in Auckland with concessions to some of the other regional markets in New Zealand.
It slowed the market and spread investment beyond Auckland, but it also penalised first home buyers in Auckland who couldn’t get together a 20 per cent deposit.
Here in Australia, APRA has tried to avoid this issue by only limiting increases in investment lending, so, in theory, first home buyers should not be affected.
It has only limited the overall growth in investor lending, rather than interfere in specific policies, and has left the door open for some lenders to go higher if they are prepared to pay the price – although it appears that price is excessive and not marginal.
However, there are a number of flaws with the proposed model.
What constitutes an investment loan now?
Looking at official data, there is a lot of confusion about just how much investment lending is occurring. Not all the investors in the ABS statistics are what we might call traditional investors. A recent NAB report pointed out that a lot of investment purchases are down to owner-occupiers trying to get into the market whilst still living at home or renting.
I’m concerned that an inflated number is being used as a baseline.
What about people who take out an investment loan on their owner-occupier residence to invest in shares? How else is someone to save for their own retirement, as the government wants us to do? How will these loans be treated? How accurate and consistent is the data we are all looking at?
Sydney versus the rest of Australia
Those who don’t live within 50 kilometres of the centre of Sydney – especially those who don’t live in NSW – will be wondering what all the fuss is about. Large parts of Australia, particularly in Western Australia and South Australia, need more investors.
Typically, investors lead the market. They often enter markets where the value has been mispriced and yields represent better value.
Far from wanting to restrain investors, these states want to encourage them.
The APRA move doesn’t help those markets – a better solution would have been to geographically target the intervention.
Addressing demand, not supply
As always, policymakers want to restrain and penalise demand because there hasn’t been a systemic solution to increasing the supply of housing. Why?
Because it is harder and takes more money. Expecting to cool the housing market by introducing restraints on demand without addressing supply is like trying to lose weight by exercising while eating donuts and meat pies. If the goal is to increase the affordability of housing, the only long-term solution is to increase supply either by changing development rules, releasing new land or increasing public transport – or preferably all three.
So what effect will these changes have?
In the short term, there will be some confusion. Banks will be resetting policies and consumers will need well-informed brokers more than ever. This should help to drive broker share above 60 per cent in the coming years.
Investors will pay higher rates for their facilities. In effect, investment lending will be a scarcer resource and attract a higher price as a result. Banks will be artificially constrained and will look to finance only the better applicants. This will have the effect of making it harder for less-qualified applicants to obtain finance.
And to the housing market in Sydney? There will be a slowdown, but it’s a slowdown that was probably coming already as investors start to seek more attractive returns in other markets.
The big question is how it affects the markets that have been struggling more than the Sydney market.
Oh, and in case you are interested in what happened in Auckland: since the LVR changes came into effect there, house prices are up 16 per cent and there are now 57 suburbs in Auckland with an average price of over $1 million, compared to 25 suburbs at the start of the year.
However, the key question of why Australians don’t feel as comfortable investing in other asset classes will remain unasked and unanswered.
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