euro the logical conclusion of what you're saying is that from here every investor that's just been cut off by the first tier lenders now looks to FM, ADL and a handful of mortgage managers. This could substantially increase their market share, especially in the investment space.
What have the regulators been saying to these lenders? How will they respond?
So far we've heard very little from the second and third tier lenders, yet they're deploying very aggressive lending policies by todays standards. At some point they are likely to become a target.
I think the 2nd tier and non banks have such small market share that even if it tripled tomorrow, it would still be an insignificant percentage of the market.
In the end, if brokers and customers do divert business towards the 2nd tiers and non banks it's probable they will raise APRA's eyebrows in time and may have some constraints forced upon them, but lets all remember what APRA is specifically trying to achieve. It wants a dramatic reduction in I/O debt , as they see it as systemic risk to the banking sector. Had banks kept year on year growth for I/O debt below 10% as APRA had repeatedly requested, APRA would quite likely not have intervened. It is not specifically house prices that APRA is concerned by, because only Sydney and some parts of Melbourne are priced speculatively. It is the systemic risk from I/O loans more broadly that is their target. They have said as much, more than once. If they wanted borrowing capacity specifically curtailed across the board, all lenders would have been forced to act simultaneously to reduce capacity.
Take Adelaide Bank for example. If their book is primarily P & I (and I dont know whether it is) APRA may be happy for them to see a 10% increase in I/O business. Same for FM or ME Bank or others who may now offer the more competitive borrowing capacity.
I think you'll also see banks create incentives for Variable P & I to be the preferred choice of product, as time passes. Pricing differentials are already evolving between P &I and I/O, and will probably continue to evolve. For example, banks may choose to pass on the next 25 bpts to P&I loans and not to I/O loans. Fixed rates ( where extra repayments are limited) are also being increased by many lenders even when we know funding costs arent increasing. As fixed rates allow limited extra repayments, this may also be part of many banks strategies to satisfy APRA's wishes that they start to see some de-leveraging of their books.
But in the end, whether there are further interventions from APRA is anyones guess.