Should property investors be worried about potential changes to lending rules?
The strength of the property market in our country’s two largest cities is giving the Reserve Bank of Australia (RBA) a bit of a headache.
Prices have risen strongly over the past year in Sydney and Melbourne, encouraged by low interest rates, and the central bank is concerned the housing market may be becoming overheated.
Specifically, the RBA is concerned about the unbalance in the market from a disproportionately high number of loans being approved to investors.
Property investors have been busy snapping up residential property in droves and the RBA believes that if commercial banks are participating in risky lending, then that could make the market vulnerable to a downturn.
The RBA clearly doesn’t want to lift interest rates because of the negative impact it will have on the country’s transitioning economy.
So instead, it is working with the Australian Prudential Regulation Authority (APRA) to consider various macroprudential policies that could potentially curb property investor mortgages.
The goal is to stop banks making ‘high-risk’ property investment loans that could fuel a housing market bubble and cause a subsequent crash.
We are expecting an announcement from the RBA by the end of the year.
What type of measures could be introduced?
There are a few likely candidates and some more ‘left-of-field’ options.
There could be a cap placed on loan-to-value (LVR) rations or debt-to-income ratios, though this seems unlikely.
The New Zealand model, where lenders can only provide a certain proportion of low LVR loans, also seems unlikely from comments made by the RBA.
Another option is to make lenders perform a strict ‘stress test’ to measure new investment borrowers’ capacity to absorb a significant increase in interest rates. Most lenders already perform this sort of test but regulation could set the bar higher.
Many people believe the likely option is that banks will be made to hold more capital for interest-only loans, essentially incentivising them to promote principal and interest loans. This would make interest-only loans more expensive and therefore less appealing in the market.
How could these measures (whatever they turn out to be) affect the everyday property investor?
Any restrictions to lending could obviously make it harder to get an investment loan or reduce a person’s borrowing capacity. It could also restrict some investors from expanding their portfolio beyond a certain point.
More broadly, lending restrictions could weigh on the property market and potentially trigger a downturn, but this is unlikely.
There are also potentially positive effects from such changes. These measures could do what they are supposed to do and take out the heat of any speculative markets, therefore helping to avoid a potential downturn.
Perhaps a less obvious benefit of new macroprudential policies is that interest rates could remain low for longer and may even drop further, especially if unemployment and the dollar remain stubbornly high.
When the Sydney and Melbourne markets slow down, housing will probably take a back seat as the RBA tries to facilitate the rebalancing of the economy away from mining investment, and I wouldn’t be surprised if this meant a cut to the cash rate.
My belief is that new macroprudential policies would only target a small portion of the market and focus on short-term measures, which shouldn’t disrupt the market overall. The RBA won’t want to severely damage the investor market, just correct the imbalances. And the measures probably won’t be as strict as some people are suggesting.
There is also the remote possibility that all the RBA’s talk about macroprudential policies could simply be ‘jawboning’ to help talk down the market without having to regulate.
While some investors may panic and try to load up on debt while they can, that probably wouldn’t be wise. If and when measures are introduced, clever finance brokers should still be able to find solutions for investors who genuinely have the capacity to carry a loan.