Falling Investor Home Loan Approvals May Hasten the RBA’s Next Rate Cut

The RBA’s next rate cut may come a lot sooner than you think. The central bank received a boost in their bid to lower interest rates below 2%. The RBA likely gave thought to lowering the cash rate to 1.75% in April. But they got cold feet as the property market continued its surge.

So what’s changed since April? 

The biggest difference is that home loan approvals are showing signs of decline. Prudential regulator APRA released figures showing bank lending to investors has fallen since last year. In total, residential home loans fell to $82.3 billion in the first quarter up to March. That’s a substantial drop of $10.9 billion in new loans since December 2014.

APRA have been on a crusade against banks in recent months. They want banks to limit lending growth to 10% a year for investors.

The banks have clearly been taking heed of APRA’s advice. That’s why they’ve cut back on discounts for investors, while tightening credit lending requirements.

One measure has been the introduction of an 80% loan to valuation ratio cap for investment properties. That just means the amount of money lent to investors has been capped at a lower, more manageable level.

More importantly, the number of interest-only loans fell. Interest-only loans made up 42.3% of total approvals between January and March. This was in contrast to 43% in the previous December quarter.

Interest-only loans are those in which only the interest is repayable. Unlike a regular loan, the principal loan remains unchanged. APRA worries about these loans because they’re targeted at investors. And with investors the leading cause behind the housing boom, its reduction may be the most encouraging sign for APRA.

So it appears APRA’s concerns over the housing market have had an effect on banks.  If this trend continues, the RBA will have less reason to worry about the property market.  As home loan lending to investors slows down, the RBA will find it easier to lower interest rates. That would make it easier for the central bank to boost the rest of the economy through a new round of credit expansion.

But there is another side to this story, and it concerns non-banking lenders. Markets and Money Editor Callum Newman wrote about this in his column today (which you can read here). As Callum points out, APRA don’t regulate non-bank lenders. Their recommendations don’t apply to the so called ‘shadow banking’ sector. So while banks are lending more responsibly, it doesn’t mean that non-banking lenders will do the same. I urge you to read Callum’s column to understand why this is so important.  

How do interest rates influence the property market…and vice versa?

The relationship between loan approvals and interest rates is simple enough to understand. Lower interest rates help increase spending in the economy, as borrowing becomes cheaper. But it also props up the housing market as investors take advantage of lower borrowing costs.

At the same time, the health of the property market is a key factor in interest rate levels. A growing housing market gives the RBA less room to lower interest rates. The RBA want cheaper borrowing to result in spending across all sectors of the economy. But investors have a tendency for rushing to real estate when credit is cheap. That’s why they’re more reluctant to lower rates when it looks as if the housing market is growing too quickly.

Now that bank lending is slowing down, the RBA have an added incentive to lower rates. They’ll do just that if the economy shows no signs of recovery.

Mat Spasic,

Contributor, Markets and Money

PS: Banks may be curbing their rampant lending practices, but the property market remains on fire. Rising house prices in Sydney are a clear sign that investors have an insatiable appetite for real estate. It seems certain that the housing market will get bigger before it contracts.

None of that is news to Markets and Money’s Phillip J. Anderson. Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade. He was right on both accounts.

In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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