The Australian Prudential Regulation Authority (APRA) is an independent body that supervises banking institutions and has been a useful tool for the Reserve Bank of Australia (RBA). 2 years ago the RBA board knew that the housing market was overheating in both Melbourne and Sydney. But nowhere else in the country was the housing market firing in the same way, and the rest of the economy was not up to the required pace to raise interest rates to curb investors appetites for property in Melbourne and Sydney.
Enter APRA with a cap on investor lending. By slowing down the amount and numbers of investment lending across all banks, the heat has been taken out of the Melbourne and Sydney property markets, without affecting large businesses which could have been decimated if the RBA had raised interest rates.
The banks are playing ball with APRA at the moment, they have made debt serviceability more rigorous and capped their investors loan books as well as the number of interest only loans. And whilst the Royal Commission into banking is running I believe the banks will remain compliant with APRA’s wishes even though it will seriously affect their profit margins.
The biggest question to answer is, “What happens when the banks begin to release funds to investors again?” Tim Lawless from Core Logic said this morning, that the first relaxing of some of the rules by APRA (the 10 per cent cap on investment lending) has been lifted but he doesn’t think this is likely to change the market. In my opinion this is because the banks haven’t relaxed their debt serviceability calculators yet. But the banks will.
When this occurs, we can fall back on the three main factors that create house price growth. Population Growth, Low unemployment and cheap money (low interest rates).
Population growth is massive and not likely to change anytime soon. Unemployment was thought to skyrocket when the car manufacturers left our shores – there was talk of 10% unemployment and we are currently still below 6% (which is why we need the population growth via immigration!!) and lastly nearly all the economic commentators agree that interest rates will not be raised anytime soon as it could have a devastating effect on business and turn that very good looking unemployment rate on it’s head.
Currently, whilst there are limited buyers able to get finance, it is a brilliant time to buy. This will change soon. I don’t think it will occur overnight, but it will be soon. And the sooner the banks are out of the Royal Commission’s spotlight, the quicker they are likely to go back to easier lending criteria and the house prices in Melbourne will skyrocket again.
If you are considering buying or selling in the current market, please feel free to give the office a call. We would be happy to have a chat.
Ian James
Director JPP Buyer Advocates.