Why APRA Regulations Failed to Prevent Growth in Property Investments

Recent measures taken to limit lending to property investors are failing. That’s the takeaway from the new housing finance figures for April. The data showed that investor loans grew by 2.6% during that month.

It’s yet another sign that prudential regulator APRA’s stricter guidelines are making little difference. They’ve been banging on about growth in investor lending for months. Despite that, we’re still seeing the investors market growing. At least this figure was slightly lower than rise in loans made to owner-occupiers. But it still accounted for half of all new issued loans.

But we shouldn’t be surprised that investor confidence remains strong. With the RBA lowering rates in February, it was bound to result in only one outcome. No one can blame investors for lining up to take advantage of cheaper credit.

Yet it means that lenders will need to do much more if they’re going to quash investor lending growth. Let’s not forget that APRA’s crusade against lenders started ramping up as far back as December. In the four months up to April their measures have had little effect on lending. So these results will come as a severe disappointment.

Why investor lending could still rise over the next few months

There are two barriers that could prove stumbling blocks to APRA’s aim of limiting lending to investors. The first of these is the future outcome of the RBA’s interest rate cut in early May.

We’ve seen that the February rate cut had a positively impacted borrower demand. Needless to say, we can expect the May rate cut to have a similar effect. But even if its lasting effect is minimal, there’s an even bigger worry for APRA. Let me explain.

Investors can just as easily circumvent banks to secure loans. It’s important to remember that APRA only regulates authorised lenders. That means their measures are aimed strictly at institutions like banks and credit unions. In other words, APRA have little say in how other mortgage finance companies conduct their business. That leaves borrowers with options.

Non-authorised lending institutions may overlook risks associated with certain borrowers. If APRA’s regulations only lead people towards riskier financial services, it could offset the effect APRA are having on banks.

So it’s possible that we’ll start seeing larger drops in investor lending over the next few months, as stricter lending impositions take their toll. But we’re just as likely to see more investors avoid banks altogether as a response to stricter lending measures. That may make it difficult to rein in investor lending growth.

What lenders are doing to curb property investment loans

One of the main regulations lenders are taking on board is APRA’s 7% interest rate floor. Basically, that means that lenders need to gauge whether borrowers can meet repayments in the scenario that home loan rates reached 7%. Not long ago, many lenders had been assessing eligibility based on lower benchmarks ranging between 6.25—6.5%.

But such regulations could just as easily deter owner-occupiers from borrowing. And that’s not what APRA are interested in. Their regulations are aimed at limiting lending strictly for investors.

That’s why some lenders, like ING Direct [NYSE:ING], have implemented new loan-to-value limits that only affect investment properties. They now also require all investors to put up 20% of the value of a property to secure a loan. Previously, investors were only required to put down the standard 10% deposit.

Just as importantly, investors are being hit by banks that are cutting interest rate discounts for investment loans. That may yet prove to have the biggest effect on investment lending. The discounts, which often lowered rates below 5%, could put off a raft of potential investors in the future.

These measures are likely to have some effect on investor lending. But it will be interesting to see if investor lending will grind to a halt over the next few months. APRA’s measures are likely to have an effect on authorised lenders. But there’s no telling the extent to which investors will seek out non-authorised lenders for loan approval.

Right now, however, the signs are that the housing market continues to grow unabated. According to our property expert Phillip J. Anderson, the Aussie real estate still has a long way to go before it hits its peaks. In fact he believes this boom we’re in will last for another decade.

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 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.

Mat Spasic,

Contributor, Markets and Money

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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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