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The carefully targeted shotgun

James Mitchell & Emma Ryan 18 minute read

As the market adapts to two-tiered home loan pricing and higher rates, The Adviser asks regional brokers for their take on the regulator’s national approach to a problem that was effectively driven by two capital cities.

There are a number of factors that contributed to the pricing and policy changes that hit the home loan market in the last six months of 2015. Capital requirements, responsible lending and a speed limit on investor lending are the three primary drivers. However, it is important to remember where these discussions began.

Particularly around strong investor demand, which arguably drove the biggest changes in the mortgage market and resulted in differentiated pricing, LVR limits and other policy changes.

Back in 2014, the RBA was doing plenty of ‘jawboning’ about the strong investor interest in the Sydney and Melbourne housing markets. In its Financial Stability Review, published on 24 September that year, the central bank famously remarked that the composition of the Australian housing market was “becoming unbalanced”.

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“This has been most evident in the current strength of investor activity in the housing market, and in its concentration in Sydney and Melbourne,” it said.

The big figure being thrown around at this time was that 50 per cent of all new home loans written in NSW were for property investment. Regulators were officially spooked. 

APRA jumped on the jawboning bandwagon, as did ASIC, and together they set about launching a strategy to rein in investor lending in an effort to rebalance the market.

However, in places like Perth, Darwin and many regional centres, property prices weren’t growing nearly as fast as those in Sydney or Melbourne – indeed in some places, they were going backwards. Nor were speculative investors leading the charge.

APRA under fire

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While many market commentators understood the reasons behind APRA’s decision, they were confounded by its strategy.

Domain Group senior economist Dr Andrew Wilson made no secret of his feelings about what the prudential regulator had done. For a start, he says APRA’s claims of an overheating market have not yet been proven and that the motives behind its decision require greater scrutiny.

“I don’t think we’ve had a full and detailed modelling and explanation as to the nature of the policy shift and the details as to the actual quantities that have been determined that would be a so-called risky level of investor lending in our market,” Dr Wilson says.

APRA’s decision to put a speed limit on investor lending resulted in countless rate changes from Australian lenders in an effort to take the heat out of their investor portfolios. But according to Dr Wilson, APRA’s measures were misguided.

“Where’s the heat? I don’t understand where the heat is,” he says.

“We have the lowest level of mortgage defaults we’ve seen. Affordability is still below average levels.

“The only issues we really have in the Sydney market are low levels of first home buyers and that’s just a reflection of the internationalisation of the Sydney market that has become so expensive.”

Dr Wilson highlights that APRA’s approach has been a “one-size-fits-all model” that ignores cities outside of Sydney and Melbourne. “We’ve had a lot of sloganeering happen over the last 12 months, particularly about housing market bubbles [and] international buyers,” he says.

“We’re now seeing a moderation in housing market activity in Sydney. We’ve had interest rates on hold for … months, so that means affordability has plateaued and price growth will plateau as a consequence. This is the nature of our housing markets and we’re very fortunate that we have those in-built stabilisers in our housing market. I think once we see policymakers interfere in that process, the downstream consequences are really problematic.”

While the lending crackdown was intended to balance the market out, Dr Wilson fears it could have the opposite effect.

“The danger is that we’ll create imbalances in the marketplace down the track,” he says.

“I don’t know what the modelling is, what historical evidence of risk that APRA are trying to avoid here because our housing markets have a reputation over the longer term of orderly growth and correction phases.”

While he doesn’t necessarily believe APRA should come under investigation, Dr Wilson says the prudential regulator has a lot to answer for.

“It’d be good to have some more transparency about the actual modelling behind the crackdown,” he suggests.

“APRA’s said that they don’t want to have investor lending growing by more than 10 per cent [but] I’m not sure where they’ve got that particular number from and they’re saying that the reason behind this is to guard against risk in the housing market. Again, I’m not sure if we’ve had them explain clearly what these risks are exactly and what their modelling is.

“I just think that we need to have those questions answered by APRA. What is their modelling? Where is their evidence of an overheating market? Why is this a one-size-fits-all model that would restrict residential property investment and economic activity downstream in markets that are crying out for that at the moment, which really are most markets with the exception of Sydney and Melbourne?”

Shackled by policy changes

The speed at which some lenders implemented their pricing and policy changes rubbed some brokers the wrong way. Others were left baffled after having deals turned away by lenders with whom they’d been writing investor home loans for years.

Queensland broker Richard West, of Top Ten Home Loans, says the overnight credit changes of one lender shackled his client, leaving them unable to grow their portfolio unless he took them to another lender and swallowed the clawback.

Mr West told The Adviser that one particular non-major bank changed its lending policy towards investors, which in this case meant that if more than 50 per cent of the servicing was supported by investment rental income, then this income source was capped at 50 per cent, down from 80 per cent.

“I had a client who was looking to refinance five properties. This deal settled in February. It was quite a complex deal because they were getting significant investment property rental income,” Mr West explains.

“After a lot of organising, I placed them with a non-major bank. I gave the bank five deals worth approximately $2.3 million.

“That same customer came back to me in August wanting to purchase another investment property, pushing their portfolio to six. I approached the bank, as they understood them as a client and understood the exceptional returns they were getting on their investment rentals.

“The bank said they would provisionally do the deal. We had the valuation done and the loan docs were signed ready to submit, but the bank changed their policy overnight, from allowing 80 per cent of investment rental return to 50 per cent.”

As a result of the policy change, Mr West says the deal fell through.

“There was absolutely no way that I could go with the bank. That meant the customer was completely shackled. They couldn’t move, they couldn’t expand, and they couldn’t grow if they stayed with the bank,” he says.

Rather than refinancing all of those deals with the bank, Mr West refinanced one to a different lender, in order to generate additional equity from one property to be used for the client’s new purchase.

“I took one of the five properties away from the bank to another lender that would allow 80 per cent of that investment rental return,” he says.

“I got a clawback on that deal.”

The other four of those original five loans stayed with the original bank.

“We run around like crazy trying to get these deals done,” he says.

“I left four deals with the bank and took one away, simply because my customer could not move if I hadn’t. But you get penalised for it with a clawback. It’s a sickness in the business.”

The Queensland broker said that while there are legitimate reasons for clawbacks, such as preventing unnecessary loan churning, he believes it is “very unfair” to have commission taken away simply because a bank changes its credit policy.

“What are you supposed to do when a customer is shackled and you have no other choice than to take them to another lender because of the restrictive policy changes that have been imposed on your client without warning? It’s just crazy.”

Mr West says he was clawed back 75 per cent of the commission he received from the deal, as the loan had been with the bank for only six months. He believes brokers are being unfairly penalised by changes in bank policy.

“In this bank’s case, regulatory pressures drove them to change credit policy – that’s not my client’s fault, but they are the ones who get shackled and I am the one who gets the clawback.”

He added that the client has a portfolio of holiday rentals with significant rental yields which had previously been acceptable to the bank.

Brokers not consulted

With mortgage brokers writing more than half of all home loans, one would think that the regulator could have consulted the third-party channel, if only to
get a better picture of the investor market from those who write the bulk of mortgages.

But this wasn’t the case, according to WA broker and House+Home Loans managing director Rael Bricker, who believes that APRA has not captured a holistic picture of the Australian mortgage market.

“APRA never contacted the brokers or the MFAA, they only contacted the banks,” says Mr Bricker. “In that way, they were only getting a 50 per cent
view of themarket.”

Mr Bricker believes that APRA “knee-jerk reacted” by cracking down on investor lending.

“They have gone out with what I call a carefully targeted shotgun, aiming at specifics and they’ve caught everyone else in the spray,” he says.

“I don’t think their guidelines are actually going to stop this swell in the Sydney and Melbourne market, if you consider that it could be being
driven by non-resident investors payingcash.”

Mr Bricker says that despite higher rates and tighter conditions on investor loans, he himself has seen very little impact to his business.

“Am I struggling to get deals across the line? Not really,” he says. “I do a lot of public seminars on investment: I do at least one a week. My message to everybody is that APRA guidelines have come in but the banks are still lending. They can’t a ord not to lend.”

Mr Bricker says three of the four majors are “still heavily pricing investment loans” and are “still giving signi cant discounts
that they have always done”.

Over time, he expects more lenders to enter the investor loan market and rates to become more competitive as banks begin to hit APRA’s 10 per cent speed limit.

Looking on the bright side

Despite a number of brokers becoming frustrated by the changes we’ve seen in the industry over the past 12 months, at least one broker is choosing to rise above it all. Easy Loans’ Leonie Hastie-Gordge says while the changes have been challenging, she has decided to take them on the chin and move on with the task at hand.

“The changes have certainly changed the way we do lending; however, there are still options available to write business with other lenders in the marketplace that are not as affected by the changes as some of the major banks,” she says.

“They have allowed me to diversify my options for customers and use some of the non-major lenders who are offering a great range of products and services at competitive pricing.”

Ms Hastie-Gordge says while the policy changes may have set out to target Sydney and Melbourne, they have “given other states and cities the opportunity for a look in for property investment”.

She adds that while some of her clients have felt a slight strain by the changes, this is not cohesive across her entire database.

“The changes have, in some cases, limited their spending,” MsHastie-Gordge says. “However for others, it has simply allowed them to spread their investment portfolio over different banks and to look at other investment strategies, giving a balance over their investment portfolio. 

Ms Hastie-Gordge notes that brokers shouldn’t feel threatened by the changes but should embrace and use them as an opportunity to talk to clients and build stronger relationships. Looking ahead, MsHastie-Gordge remains positive about the mortgage broking industry, regardless of what challenges it will continue to face from regulator forces.

“As a mortgage broker in the Northern Territory, I say bring it on,” she says. “Change can mean more opportunities – I believe it will be a successful year!”

INSIGHT

Tungsten Home Loans director Brad Quilty says 2015’s raft of policy changes were not only inconsiderate but completely unfair to the general public

“It was a completely unconsidered way to control property values when in all reality, the market will control itself anyway. It appears to be a convenient way to make lending even more profitable for the lenders, rather than in any way controlling property values or actually limiting investment. What is with that anyway? If the demand is there, why do limits need to be placed on investing?

We had already had many news reports all year telling people that they are better off renting over buying a property and there is a definite trend towards the general population choosing renting over buying. Furthermore, the restrictions seem to take investing away from the less wealthy people or first time investors, but it remains much easier for an already wealthy person to continue to do so.

The major impact here is that people that want to buy a home, or an investment, are finding it harder due to affordability. So they are unable to buy a home, or increase their wealth, to be in a better position. It’s unfair to the general public.

If the real purpose is to “cool” a property market that is increasing too quickly, why also restrict other markets that haven’t moved in years?

In fact, wouldn’t one method actually be to make investing in other areas easier? If you want to slow growth in Sydney and Melbourne, make Brisbane, Adelaide and Perth look more attractive to investing.”

SCOPING OUT THE DANGERS

RE/MAX Australia and New Zealand managing director Michael Davoren explains the danger of APRA’s national approach

"In all the talk about the effect that APRA’s restrictions may have on the property market, there are a few things that strike me," says Mr Davoren.

"Firstly, there is a very real danger in applying a national remedy to a problem that is not national. Everything is not same-same across Australia – there is no ‘boom’ evident in most places outside Sydney and Melbourne – and even within those markets, it’s not in all suburbs. There should be more engagement with financial and real estate industries before decisions are reached.

"Look what happened in New Zealand when the Reserve Bank there introduced lending restrictions on people buying houses in Auckland. It didn’t really impact where they wanted it to, but it did cruel the first home buyer market. Don’t strangle a market when and where you don’t need to.

"Markets in Brisbane, Adelaide, Perth and Canberra, let alone Australia’s provincial and regional centres, are not in the same ballpark as those Sydney and Melbourne markets that many commentators focus on. The vast majority of markets don’t need to slow down. Some are already deflated.

"In CoreLogic’s September 2015 Housing Market and Economic Update , I see: 

  • Sydney where home values are consistently trending higher, median house price is $900,000 and median apartment price is $670,000. 
  • Melbourne having the strongest quarter of any capital city, median house price is $620,000 and median apartment price is $475,000. 
  • Brisbane with moderate capital growth, median house price is $482,400 and median apartment price is $382,200. 
  • Adelaide with a slowdown in annual rate of value growth, median house price is $430,000 and median apartment price is $350,000. 
  • Perth with declining home values, median house price is $520,000 and median apartment price is $415,500. 
  • Hobart with values lower than five years ago though on the rise, median house price is $341,000 and median apartment price is $275,000. 
  • Darwin with a sharp decline in home values, median house price is $580,000 and median apartment price is $450,000.
  • And Canberra with falling values year-on-year, median house price is $587,800 and median apartment price is $415,000.

"Look at the market differences – the different stages they are at in their property cycles – and these are just the capital cities!

"Property market activity – anywhere – is underpinned by supply and demand. This is effectively what moves markets through their property cycles.

"Undoubtedly there will have to be a shift, with some markets moving past their peak. Others will be on the upswing. That’s the way things work. The danger is in taking a statement like ‘property prices to fall’ and thinking it applies to every market, every micro-market, in Australia."

CASE STUDIES

Sam Crowley, managing director of Darwin-based Able Finance Services

Q. What are your thoughts on the raft of policy changes the broking community has seen this year as a result of regulatory forces which were originally set out in many ways to target rising property prices in Sydney and Melbourne?

Unnecessary really. It has had a big impact on the Darwin market. It basically killed the investment market in the north.

Q. Do you think the changes are unfair to brokers outside of Sydney and Melbourne, specifically those in regional areas?

Certainly do. The Darwin market was not overheating; in fact it was a little stagnant. Now it is dead.

Q. What impacts has it had on you as a broker and your ability to operate?

It has reduced our volumes by 30 per cent. We have been in Darwin for 17 years, so we are okay, but more recent brokers must be struggling.

Q. What impact has it had on your clients?

Six months ago, they could quite easily purchase an investment property. The raft of serviceability and policy changes have now made it extremely difficult.

Q. How do you expect things to pan out in your business in 2016 in light of these changes?

Interest rates are low. Property prices are falling. At some point next year, confidence will rise and the market will start moving again.

 

Tracy Wright, Loan Market Mount Barker in South Australia

Q. What have these changes meant for your business?

I think the changes to the policies are completely unfair to our market. The Adelaide market is nothing like the Melbourne and Sydney markets.

Q. How has this impacted your clients?

The changes to the servicing criteria have made it very difficult for mum-and-dad investors when they either already own or want to buy an investment property. The restrictions on the banks to slow their investment lending have made it difficult for clients to get one investment property, let alone trying to buy another one.

Q. It’s been said that regional areas are the ones hurting the most from these changes. What are your thoughts on that?

Buying in rural areas has been made even more difficult by most of the big lenders having stopped capping the LMI on a 95 per cent LVR. First home buyers now need to come up with the five per cent deposit plus approximately five per cent stamp duty and now also the LMI fee. Living in a rural area is hard enough as it is. They are also limited to certain banks, as most of the banks don’t like properties above approximately 20 acres.

The carefully targeted shotgun
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