Investment lending continues to be a hot topic. The Adviser explores how the industry is navigating the changing landscape amid fears of further regulatory intervention.
A resurgence in investor lending towards the end of 2016 prompted a fresh round of fears that more regulatory measures could be on the way. According to the latest figures from the Australian Bureau of Statistics, investor lending is now up 21 per cent year-on-year after a 4.9 per cent surge in November – the fastest growth rate since the first half of 2015 when APRA implemented its macro prudential regulations.
A closer look at the RBA’s Financial Stability Reviews and subsequent announcements from APRA provide a decent reading of how lending curbs reach the market. Take the RBA’s September 2014 Review. The key phrase came when the central bank warned that “the composition f housing and mortgage markets is becoming unbalanced”.
The Reserve Bank acknowledges that this had been most evident in the strength of investor activity in Sydney and Melbourne.
Less than three months later, in December 2014, APRA came out with its “three-point plan” to target high LVR loans, lending to property investors and interest-only loans.
The most recent Financial Stability Review from the RBA, released in October 2016, warned that the foreshadowed risk of oversupply in some apartment markets is nearing and could see off-the-plan purchases fail to settle, particularly in Brisbane, Melbourne and Perth.
But the biggest indicator that more lending curbs could be on the horizon came from APRA chairman Wayne Byres, shortly after the release of the RBA Review.
Addressing the Senate economics legislation committee in Canberra on October 20, Mr Byres said APRA’s supervisory work on housing lending standards is ongoing, and that more may need to be done to avoid an erosion of existing lending standards.
“Given the environment of heightened risks, our objective has been to reinforce sound lending standards, particularly in relation to the manner in which lenders assess the capacity of borrowers to service their loans,” Mr Byres said.
“Over the past year, we believe the industry has appreciably improved its lending standards. But risks within the housing and residential development markets remain elevated,” he said.
“We are therefore giving thought to how best to have improved standards firmly embedded into industry practice, such that they are not eroded away again over time.”
A few days after this speech, APRA announced that it would be requesting more mortgage data from banks and tweaked its mortgage lending guidance, particularly around serviceability requirements.
Some industry professionals believe APRA has done more than enough intervention already. Others, like Digital Finance Analytics principal Martin North, argue that more needs to be done.
“My own view is that the Reserve Bank and APRA have been very slow to come to the realisation as to how much risk is actually in the housing market,” he says.
“I don’t think they have done enough. I think we have significant risks in the investor housing sector.
“I think they should be looking much more firmly at debt servicing ratios and loan-to-income ratios.
“Those are the measures from a macroprudential sense around the world that are being recognised as the most powerful and effective when it comes to controlling the risk in the market,” he says.
“I would recommend they look at what the UK has done, where they have very significant rules around loan-to-income.”
APRA’s supervision of mortgage lending is ongoing. Given the regulator’s recent public announcement about “heightened risks”, it would be fair to consider that further curbs could be on the horizon. However, any bold moves from APRA towards the banks are unlikely to be as publicised as the lending curbs we have seen so far.
It is more likely banks will be privately pulled aside or tapped on the shoulder should their lending standards start to slip.
While no further measures have been introduced as yet, what is clear is that Australian lenders are keeping a close eye on the growth of their investor loan books.
So how are brokers navigating this new lending landscape, and which lenders are still open for business?
Beyond the big four
Melbourne-based broker Mark Davis of the Australian Lending & Investment Centre (ALIC) receives about 90 per cent of his business from property investors.
While demand has remained consistent he admits that it has become a lot tougher to place investors with the major banks.
“The capping of the investment loans by the banks at 10 per cent probably hurt us a little bit, because if institutions were getting close to their cap then they weren’t as hungry for our business.”
This forced him to look beyond the big four banks for alternative options for his clients. Mr Davis says keeping an open mind and being flexible is important in the current environment.
“If you just keep amending and keep changing and adapting to the latest changes, I think you’re going to be okay.”
While the big banks have been busy monitoring the growth of their investor loan books, Mr Davis has been shopping around for lenders that are happy to take his business. The process led him to the non-banks.
“We do a huge amount of business with the non-banks now where we never did before. We don’t have a lot of risk at one institution or as much risk as we used to,” he says.
“It’s opened our eyes up a little bit. Before, we had an attitude of ‘why would you use anyone one but the majors?’ Now the attitude’s changing, and I think it is for a lot of the 12,500 brokers out there.”
The latest AFG Competition Index shows that the major banks have been steadily losing their share of investor mortgages.
The big four reached a peak in June 2016 with 77.14 per cent share of broker-originated investor loans. It has since dwindled to 68.74 per cent in November. The non-major banks and non-bank lenders have picked up the slack in a big way. Their combined share of AFG broker-originated investor business increased from 22.86 per cent in June to 31.26 per cent in November.
Liberty Financial is one nonbank lender that has been active in the investor space over the last 12 months. The group’s chief executive, James Boyle, believes two key segments have been responsible for a significant increase in investor lending over the year: “One was mum and dad investors looking to borrow for an investment property, and the other was a segment of professional investors who might have multiple properties and invest through trusts and various other vehicles,” Mr Boyle explains.
“They are more focused on wealth creation. We have seen growth in both of those areas over the last 12 months and it really hasn’t abated. That’s definitely been part of our growth story over the last year.”
The non-bank sector has largely benefited from APRA’s regulatory efforts to curb investor lending, according to Mr Boyle.
“When those changes occurred it definitely created a platform for those lenders able to operate outside the banks and offer customers solutions for their needs. The needs didn’t change, but the banks’ appetites did. The non-banks were the beneficiary of that.”
Adelaide Bank general manager Damian Percy believes the amount of funding available to property investors actually hasn’t changed.
The bigger issue for investors, he says, have been the changes to serviceability.
According to Mr Percy, the view of the regulators and their position on serviceability has been a moveable feast — there have been a lot of changes.
“That has created a degree of complexity. At a macro level, it has the effect of reducing the amount that people can borrow, particularly those people who have significant investment portfolios,” he says.
Melbourne-based broker Matthew Mannaert is an investment lending specialist who has found that the sector has tightened up considerably over the last 12 months. He says there used to be quite a variance in the serviceability levels of different lenders.
“Given the same parameters, you might have been able to borrow $300,000 with one lender and $500,000 with another. That has all come back into line now. Pretty much all the lenders are on the same level. They have tightened up the buffers they use for servicing considerably.”
Last year he saw some non-major banks pull out of investment lending, while others wouldn’t allow investors to ‘cash out’ and release equity. Meanwhile, some lenders have changed their policies to require greater information on an investor’s existing debts, forcing brokers to obtain more documentation from their clients.
Mr Mannaert has noticed how clients with multiple investments are struggling to service their portfolios. Lenders now want to see buffers of principle and interest (P&I) repayments on investments.
“I’ve got a feeling that there will be further tightening in 2017,” he says.
“From what I have read, it seems that APRA and ASIC still believe the highest risk sector is the investment sector. Whether that will translate into lower LVRs, tighter servicing requirements or higher interest rates on investment lending. I think investor rates will increase. Investment lending will definitely get more expensive.”
Investor lending in 2017
Towards the end of 2016 central bank governor Philip Lowe made a number of warnings about the rise in household indebtedness, remarks that led CBA economist Savanth Sebastian to conclude that more regulation could be on its way.
Mr Sebastian says housing has been off the Reserve Bank’s “wall of worry” for a while, but recent speeches show it is now firmly back on the table. He added that the Reserve Bank is a good lead indicator when it comes to regulatory measures.
“Housing is back in the discussion. Wait and see, but I certainly think the regulators will have a look very closely once again at that end of the spectrum.”
AMP Capital chief economist Shane Oliver went a step further, saying that APRA is likely to “tighten the screws” further on bank lending standards as Sydney and Melbourne’s property markets have remained “remarkably strong”.
While the investor lending growth cap for banks remains at 10 per cent, Mr Oliver says APRA might decide that it should be lowered to 6 per cent, or might introduce further directives along the lines of tightening lending standards generally.
One of the boldest calls came from former CBA boss and Financial System Inquiry chair David Murray, who remarked in December 2016 that property investors acquiring multiple dwellings have created a housing bubble that could end in economic disaster.
In an interview with Peter Switzer on Sky News, Mr Murray said the Australian economy is vulnerable because “there is a bubble in the housing market”, which he likened to ‘tulip mania’.
“All the signs of a bubble are there. Many of the signs are the same as the Dutch tulips – people’s behaviours, people’s defensiveness about any correction in the market. If the economy tracks okay it might turn out that this thing sorts itself out. But when those risks are there something needs to be done about it in a regulatory sense. The RBA and APRA need to stay on it,” Mr Murray said.
“When we get a momentum in a market like this, when we get these self-amplifying price spirals that go on longer than expected, it’s another sign that it’s not very healthy.
“We have more investors in the market than we have had historically. Those investors, even the ones on lower incomes, own multiple properties that are often cross-collateralised and they are the people who become forced sellers. That’s the risk to the system.”
Despite all of this conjecture, APRA is yet to announce further measures.
Opportunity for brokers
Brokers have already been the beneficiaries of a more complex lending landscape. Regardless of whether more lending curbs are introduced or not, banks are being forced to hold more capital, rates are on the rise and serviceability buffers and growth caps are still in place.
The second annual Property Investment Professionals of Australia (PIPA) Property Investor Sentiment Survey of more than 1,000 property investors found that mortgage brokers remain a key source of finance.
According to the survey, 65 per cent of investors secured their last investment loan through a broker, and 71 per cent plan to secure their next investment loan through a broker.
PIPA chair Ben Kingsley says that in the complex borrowing environment we are now facing, brokers continue to play a key role: “They tend to better understand the investment lending landscape,” he says.
The survey also showed that despite tightening investor lending policies, more than 70 per cent of respondents think that now is a good time to invest in property, up five percentage points on last year.
While 32 per cent of investors said that recent changes to lenders’ investment policies have affected their ability to secure finance, 58 per cent said that they are still looking to buy a property in the next six to 12 months.
The survey also found that 72 per cent of investors are not worried about the potential removal of negative gearing, and further, only 2 per cent consider the current negative gearing concessions to be a key attraction of real estate investment.
“Most property investors are looking past short-term challenges, remaining focused on the long-term wealth benefits that are available from residential real estate, including the potential for capital growth and rental income,” Mr Kingsley says.
However, he warned brokers against providing investment advice to their clients.
“It is important that anyone looking to invest in what is a very mixed market out there in 2017 understands that not everyone is going to make profits in bricks and mortar,” he says.
“As a broker, you don’t necessarily want your fingerprint on the loan or have some verbal confirmation on a good investment if you really don’t know what you’re talking about.”
Forecasts for residential property in 2017 have been mixed, but the broad strokes suggest that Sydney and Melbourne could experience slower growth than they did in 2016. Fears of an oversupply in apartments in areas of Brisbane and Melbourne continue to be a central theme.
ALIC’s Mark Davis says there is “plenty of noise” that is reducing demand and could present opportunities for property investors if the market starts to cool.
“Investors will come out to play,” Mr Davis said. “Our business wants rates to go up a little bit or a bit of noise in the media, so we can perform better, because our clients will play harder and want to buy in Sydney and Melbourne and those types of places where the market is at the top.”
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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