More Tightening on the Way? What the APRA May Have in Store for 2018
By now, most investors will have felt the effects of the APRA tightening guidelines at the start of 2017. But is that all that the organisation has in store? More tightening may be on the way.
Australia’s investors have gotten hit quite hard in recent years. The Australian Prudential Regulations Authority (APRA) has imposed several guidelines. The most recent of these placed a tough cap on interest-only lending.
Early data suggests that the guidelines may have had the desired effect. First-time buyer activity shot up towards the end of 2017. Moreover, lenders offer far fewer investor loans in the current climate.
It’s been over a year since the APRA released its guidelines. But what can we expect to see during the rest of 2018? This article examines the outlook. But first, let’s dig into the current guidelines in a little more detail.
The Current Guidelines
In March 2017, the APRA asked lenders to place a cap on the amount of interest-only loans that they approve. It said that yearly output of such loans shouldn’t be any more than 30%.
The idea behind this move is a simple one. Interest-only loans create two problems.
Firstly, they place Australia’s property market at risk. Many who take out such loans struggle to keep up with their repayments once the interest-only period ends. Such borrowers may end up defaulting, which places a burden on lenders and banks.
Secondly, the availability of such loans makes things tougher for residential buyers. Interest-only loans give investors the ability to compete for more properties. This leads to an increase in demand, which causes sellers to raise their prices. Residential buyers often found it hard to access the financing that they needed to buy their own properties. It’s likely this issue was also behind the increasing number of people choosing to rent in recent years.
Thus, the 30% cap intends to lower the risk that banks take on. Plus, it aims to make things easier for owner-occupiers to access loans.
But the regulations stretch deeper than just the lending cap. The APRA specifically asked lenders to restrict approvals for interest-only loans worth over 80% of the value of the property. Such loans require smaller deposits. But they also create an even larger principal sum. This can create more problems for investors once their interest-only periods end.
The guidelines also suggested tighter measures when it comes to serviceability. The APRA doesn’t want the banks lending to people who may struggle to repay their loans in the future. As a result, many lenders have tightened their serviceability criteria. You may need to show higher figures for your income to secure a loan in the current market. Moreover, lenders may use higher assessment rates when determining your serviceability. This runs in line with another guideline that asks lenders to take on fewer high-risk loans.
Finally, the APRA recommends that lenders curb investment growth to less than 10% per year. Again, this makes it harder for property investors to access loans of any kind.
These guidelines had an unsurprising result. By the end of 2017, loans made to investors were at their lowest point in over a year. Property investors want to hold fire. They’re waiting for more favourable conditions in the market.
This has opened the door for owner-occupiers. First-time buyers, in particular, seem to find it easier to access property in the current market. Moreover, the lack of investment activity seems to have had a direct effect on some of the major capital markets. Both Sydney and Melbourne have seen property values decline. Some experts believe that prices may drop by 5% in both areas by the end of 2018.
In short, it seems like the APRA’s measures have achieved what the group hoped for. But does that mean that 2018 will see a stable financial climate with no changes? Some think that’s unlikely. In fact, the APRA may have geared up to create further guidelines.
Further Tightening Possible
Some experts predict that the APRA intends to create a new set of measures for 2018. However, it seems like these measures won’t focus solely on investors. Instead, the organisation may place more of an emphasis on responsible lending.
This prediction comes from the UBS bank. Moreover, the bank is wary of the implementation of tighter measures. It believes that they may have a negative impact on the housing market.
According to the bank: “There is a growing risk the consensus view on the outlook, including the RBA (Reserve Bank of Australia), is under-estimating the downside risk from tightening lending standards.”
“<This> is an important consideration to balance against the upside from household tax cuts and booming global growth,” it continues.
So, what has gotten the banks so worried about possible further tightening?
It seems to come down to the APRA no longer trusting the benchmarks that many lenders use. An example of such a benchmark if the Household Expenditure Measure (HEM), which is widely used in Melbourne. The APRA argues that such benchmarks don’t offer enough realism in terms of mortgage expenses.
In the HEM’s case, the lack of consideration for mortgage or rent payments seems to be a problem. Other benchmarks may have their own issues.
The organisation has also pointed to loans made to borrowers with small income surpluses. An income surplus is the amount of money you have left over after dealing with your mortgage expenses. The APRA argues that many benchmarks don’t take various expenses into account that might eat into this surplus.
The UBS analysts expanded on this train of thought. “All this suggests that APRA is now less concerned with financial sector stability than they are with financial stability for individual borrowers and households and that they are not yet done with macroprudential policy.”
What’s the possible end result of this increased concern for individuals? Many anticipate even more stringent home loan criteria to come. Moreover, these criteria wouldn’t just affect investors. They’d cause issues for anybody who’s trying to secure a home loan. If the APRA does create tighter guidelines, various types of buyers will struggle. In particular, those with low incomes or low deposits may find themselves unable to secure loans.
This is all conjecture, at the time of writing. But several banks believe that this is the direction that the APRA wants to head in.
The Silver Lining
This all makes it seem like borrowers will face harsher criteria by the end of 2018. And that’s likely to be true, at least if you believe the analysts. But there is a silver lining out there for investors.
While the APRA has no intention of repealing its interest-only loans cap, it is looking at another cap. Namely, the cap it’s placed on investment loan growth.
In place since 2014, this cap has limited growth to 10% per year. It was also reinforced as part of the March 2017 guidelines.
But APRA chairman Wayne Byers recently suggested that the cap may come to an end very soon. In speaking to a Senate committee, he recently said: “The 10% investor growth benchmark we introduced some years ago now <is> probably reaching the end of its useful life.”
Soon after that hearing, the organisation made an announcement. The cap on investment growth gets lifted in July 2018.
But what does this mean for investors?
First, there’s the good news. Lenders will feel more confident in targeting their products towards investors once the cap gets lifted. As a result, they’re much more likely to lower the interest rates that they attach to investor loans. In recent months, investors have seen interest rates on investor loans increase. It’s to the point that they’re higher than those for owner-occupier loans.
The removal of the cap will likely prompt a reversal in these interest rate hikes. Lenders won’t feel the need to push investors towards owner-occupier loans. As a result, those looking to secure an investor loan may find they enjoy a smoother application process. Furthermore, lenders that have held fire on their investor loans business will likely re-enter the market.
But there’s still an issue. Though the APRA has lifted the growth cap, it’s keeping the interest-only cap in place. This means that investors likely won’t see improved access to such loans, at least not on a wide scale.
It’s possible that the lenders that re-enter the investment space will improve the availability of such loans. But many investors will still have to plump for principal and interest loans.
Now, couple that with the predictions of tighter lending standards for all home loans. If those come to pass, investors will still face plenty of difficulties in securing their loans.
It’s a complex situation and it seems like 2018 will spark even more change in the property sector. The APRA seems to be both tightening its guidelines and loosening some of its restrictions. This has the potential to create some chaos in the market, especially as lenders try to figure out who to target their products towards.
The Final Word
It appears that 2018 may be something of a mixed bag when it comes to APRA guidelines. The first thing to note is that the 2017 guidelines will stay in place, for the most part. There won’t be a lifting of the 30% cap on interest-only loans.
But there is a bright side for investors. From July 2018, lenders won’t have to meet the 10% cap on investor loan activity growth. This should lead to lower interest rates on investor loans. You may also be able to benefit from more special features and discounts as an investor. Moreover, this may eliminate the need to take out an owner-occupier loan on an investment property so you can benefit from a better interest rate.
Unfortunately, speculation on future tightening tempers this announcement. It’s possible that the lifting of the cap will come with tighter restrictions across the board. But the APRA has yet to make an announcement in this regard.
Whatever the case may be, there’s one thing that you can rely on. The team at Cohen Handler will always be here to help you secure a good price on an investment property. Contact one of our buyer’s agents today to get the ball rolling.