Removal of ‘redundant’ APRA curb unlikely to trigger rebound

According to CoreLogic’s latest Australian Housing Market Update, published in conjunction with NAB, easing housing market conditions have been “entirely driven” by a drop in lending to investors.

However, CoreLogic’s director of research, Tim Lawless, has said that the Australian Prudential Regulation Authority’s (APRA) decision to lift its 10 per cent cap on investor lending growth would not spur a rebound in investor activity, which he claimed has been dampened further by broader credit tightening.

“With APRA lifting the 10 per cent cap on investment lending this month, there has been some speculation that this could see a rebound in investment lending. However, we believe this is unlikely,” Mr Lawless said.

“The 10 per cent speed limit has become largely redundant, with broader limits on interest-only lending, more focus on debt-to-income ratios and greater scrutiny of borrower expenses and incomes likely to continue to muffle investment-related credit growth.”

CoreLogic’s research analyst also observed that despite the 0.8 of a percentage point fall in home values recorded by CoreLogic’s Hedonic Home Value Index, a slump in market conditions could be further driven by increased lender scrutiny on borrower debt-to-income ratios, particularly in Sydney and Melbourne where dwelling values are higher. (One of APRA’s expectations for banks removing the benchmark is a commitment to develop “internal risk appetite limits on the proportion of new lending at very high debt-to-income levels where debt is greater than six times a borrower’s income.)

NAB recently dropped its DTI ratio to 7.0. CBA will now be “monitoring” all loan applications with a DTI higher than 4.5, while applications with a DTI higher than 7.0 will be subject to a manual credit approval check.

“With lenders now scrutinising borrowers with a debt-to-income ratio of more than six times, housing markets where prices are high relative to incomes could see less activity as prospective buyers find their borrowing capacity reduced,” Mr Lawless continued.

The director of research also pointed to recent out-of-cycle rate increases announced by smaller lenders, claiming that as investors are paying an average premium of 60 basis points on their mortgages, such increases could hamper prospects of an investor rebound.

“Although the market expects official interest rates will remain on hold until 2020, there is growing pressure on lenders to lift mortgage rates due to higher funding costs being experienced overseas,” Mr Lawless noted.

“Smaller banks and non-banks have more exposure to international funding markets, which has seen some of these lenders start to adjust their mortgage rates higher.

“Considering households have become very sensitive to changes in interest rates due to record high indebtedness, higher interest rates, along with tight credit conditions, could place additional downward pressure on housing market conditions.”

Moreover, Mr Lawless said that potential changes to negative gearing proposed by the Labor opposition could place further downward pressure on investor activity.

“With the federal election campaign imminent, we could see investor confidence impacted further if changes to taxation polices related to investment housing are debated,” the research director said.

“Rental yields are improving from a low base; however, it’s likely that the majority of property investors are offsetting their cash flow losses against their taxable income. Changes to negative gearing would likely add a further material disincentive to investors.”

Additionally, the property analyst echoed the sentiment of ANZ head of Australian economics David Plank, claiming that a continued lull in housing market activity would subdue economic growth.

“A weaker housing sector would likely show a flow-on effect to economic conditions, creating some drag on consumer spending as the wealth effect reverses and dwelling construction winds down, as well as creating challenges for those industries that are at least partially reliant on housing turnover,” Mr Lawless said.

[Related: Housing finance sentiment ‘worst on record’: ANZ]