It’s no wonder that APRA moved this week to force home lenders to hold more capital against interest-only loans which are predominantly done with investors, especially self-managed funds.
Data yesterday on lending in October from the Australian Bureau of Statistics (ABS) revealed that home loans to investors hit a near-record level in October, while lending to owner occupiers fell.
What the data shows is that investors are piling into the nation’s priciest property markets and crowding out first home buyers in numbers not seen for years.
Lending to property investors jumped to $9.7 billion in October, the ABS lending indicators report revealed.
The 1.1% jump marks the 12th consecutive monthly growth in home purchase loans to investors.
The ABS said this was the highest level since a record $10.1 billion in April 2015 at the height of the last interest only lending boom that was only crimped when APRA and the Reserve Bank forced banks and other lenders to reclassify tens of billions of dollars in loans from interest only to principal and interest because of dodgy documentation.
That and rules forcing lenders like the banks, to obtain more information from potential borrowers and to boost interest buffers in home loan deals also helped pop the bubble.
The ABS data showed that overall lending fell 2.5% for housing, thanks to a 4.1% fall from owner-occupiers. First home buyer activity dropped 3.8% in the ninth consecutive monthly fall.
Economists said the fall in lending to owner occupiers and first home buyers especially confirmed that investors were pushing prices above the top limits for many ordinary wannabe buyers.
The ABS said There was ongoing strength in new investor lending in Queensland (up 8.9%), rising to a record high of $2.1 billion. But South Australia saw a 15% surge), New South Wales (up 1.3% to $3.8 billion), Western Australia (up 4.4%), the Northern Territory (up 78.7% – a smaller, more volatile series) and Tasmania (up 3.3%).
Victoria and the ACT both saw falls in new lending of 3.8% and 12.1% respectively.
The fall in owner occupied lending was led by NSW where there was a fall of 8.4% in the month. WA saw a 7.4% dip, Queensland, 3.6%, South Australia down 4.88. Tasmania saw a rise of 3.3% and Victoria saw a rise of 2.6% after a big slide in September in the lockdown.
That clearly shows the drop off in interest from owner occupiers which also helps explain the slowing in price growth in house prices in recent months – the latest CoreLogic report said house prices rose 1.3% in November, down from 1.5% and the peak of 2.8% in March.
Canstar group executive of financial services Steve Mickenbecker said the recent APRA reforms requiring the banks to hold a bigger capital buffer to support investment lending was primarily to ensure the system remains stable but is “surely targeting a slowdown in investment lending”. The regulators also tightened loan serviceability rules in November requiring lenders to test borrowers’ ability to repay against a higher interest rate.
On Monday APRA, the main bank regulator revealed that banks and other lenders will be required to set aside more capital for higher risk interest-only and investor mortgages.
This change (along with the announcement on Thursday that banks will have to boost their capital buffers by half or 4.5% to provide more protection in times of stress) has been long-planned changes to regulation that aim at making banking and the financial system generally more resilient to future stress and shocks.
The Australian Prudential Regulation Authority (APRA) on Monday finalised its new framework for bank capital, which acts as a critical buffer to protect the financial system in economic crises. The changes on interest only loans and investor mortgages generally will apply from 2023. The proposed increase in bank capital buffers will start from 2024 but come into force from January 1, 2026.
APRA said on Monday the new framework would not force banks to raise more capital, but confirmed that it would impose higher capital requirements on mortgage lending deemed to be higher risk.
The higher capital buffers though will see banks raise more money by issuing high grade debt.They could be forced to raise more capital, but the major babks all still have a lot of excess capital even after their final dividends and share buybacks this year.
But you can bet that the idea of share buybacks by the big four especially will be pushed to the sidelines now by these two changes in capital requirements.
