Only a week ago I asked the question ‘Does it still make good sense to invest in residential property?’
In my post Making Sense of Property Investment I looked at how best to answer that question. One key point was how loan policy across the sector was being impacted by APRA policy, sometimes negatively.
However, on April 26th APRA (The Australian Prudential Regulation Authority) announced plans to remove investor lending benchmarks and embed better and notably long-term policies.
The policies I think reflects the increased complexity of property investment which, can no longer be approached in a ‘catch-all’ perspective across all markets.
What APRA announced were plans to remove the investor loan growth benchmark and replace it with more permanent measures to strengthen lending standards.
As noted in published details the previous 10% benchmark on investor loan growth was a temporary measure, introduced in 2014 by APRA as part of a range of actions to reduce higher risk lending and improve practices.
APRA has also noted that in recent years, author deposit-taking institutions (ADIs) have taken steps to improve the quality of lending, raise standards and increase capital resilience.
APRA’s removal of the investor growth benchmark for ADIs required them to provide assurance on the strength of their lending standards.
In summary, for the 10% limit to no longer apply, ADI boards are expected to confirm to APRA that:
- lending has been below the investor loan growth benchmark for at least the past 6 months;
- lending policies meet APRA’s guidance on serviceability; and
- lending practices will be strengthened where necessary.
This ‘relaxation’ of policy comes with a clear policy that requires ADIs to maintain prudent standards and close any remaining gaps in lending practices. The changes should not be seen as the starting gun for a free-for-all in investor lending although, the markets have been impacted with some lenders slashing interest-only rates.
APRA continues to look for improved lending standards, that strengthen the assessment of borrower expenses and existing debt commitments, and the oversight of lending outside of policy, also taking into account of the total borrowings of an applicant, rather than just the specific loan being applied for.
APRA have stated ‘the (lending) environment remains one of heightened risk and there are still some practices that need to be further strengthened.’
There’s also a direct sting in the tail of this policy change as ADIs that do not provide the required commitments to APRA, the investor loan growth benchmark will continue to apply and so restrict the ability to grow additional business in this area.
In announcing the policy shift APRA Chairman Wayne Byres said: “In the current environment, APRA supervisors will continue to closely monitor any changes in lending standards. The benchmark on interest-only lending will also continue to apply. APRA will consider the need for further changes to its approach as conditions evolve, in consultation with the other members of the Council of Financial Regulators.”
Since the announcement many lenders have moved to cut their interest-only rates and the headline interest only 2 and 3 years fixed rate sit near 4.34%, other measures by non ADIs have included a reduced monthly surplus for residential loans and reduced application fees.
Investors Increasingly Watchful
The APRA changes outlined have had an immediate impact, partly in response to a big fall in the demand for investor loans. However, I do not expect a rush into the market.
Investors are entitled to take a positive view of the changes but they will also take into consideration supply, population growth and the continuation of low interest rates.
Any investment purchase is a complex move and markets are never uniform in a city, suburb and even in a single street and I find buyers are alert to all these factors.
As we have so many private investors the appeal of direct property investment is a key to the supply of rental accommodation and the APRA regulations do take this into full account. However, investors are always sensitive to industry regulation and that includes tax policy and any possibly flow on impact from the Banking Royal Commission. Careful investors can however clearly benefit from the changes and this should lift demand but I do not see any reason to suggest an unqualified surge in activity, market and investor stability is important and that does appear to be one of the aims of these revised lending policies.