macroprudential tools on the way to curb investors?

[Marty McDonald]

http://www.smh.com.au/business/the-...ten-screws-on-home-loans-20140924-10l9eb.html

Looks like we may be in for some policy changes that impact investors. No more servicing other banks debts at actual repayments perhaps? Looks like they won't follow NZ and apply LVR restrictions though.

"Treasurer Joe Hockey last week suggesting the RBA was considering so-called "macroprudential" tools to curb hot demand for housing, the review suggest that loan-to-valuation limits on bank lending are not being considered, given the share of bank loans approved with an LVR of more than 90 per cent has fallen over the past year. The review notes that it is investors rather than first home buyers who are driving prices, and investors typically have higher levels of equity and hence relatively low LVR loans.

But the RBA suggested it and APRA are considering alternative macroprudential policies. The central bank did not specify in the review details about the further steps, but they could potentially include a tightening of "interest rate buffer" guidelines, under which banks apply an interest rate add-on to current mortgage rates when assessing a borrower's capacity to service their loans. RBA governor Glenn Stevens said requiring banks to hold a bigger buffer was a promising potential macroprudential response to rising house prices when he appeared before a parliamentary committee in March.

It is understood most banks currently add a 2 per cent buffer to prevailing rates. The RBA on Wednesday suggested a higher buffer might be necessary, because the combination of a low interest rate environment, rising house prices and price competition in the mortgage market meant "there is some risk that households may attempt to take out loans that they would not be able to service comfortably if interest rates were to rise".
Read more: http://www.smh.com.au/business/the-...home-loans-20140924-10l9eb.html#ixzz3ECniskoO

 

[starter]

Has there been any rise in mortgage defaults?

 

[Redom]

Has there been any rise in mortgage defaults?

Just been through the report (FSR biannual report).

No rise in mortgage defaults.

Massive massive rise in investor home loans in NSW (risen over 100% in 3 years).

The rhetoric of the report is very strong compared to the last report.

 

[starter]

Just been through the report (FSR biannual report).

No rise in mortgage defaults.

Massive massive rise in investor home loans in NSW (risen over 100% in 3 years).

The rhetoric of the report is very strong compared to the last report.

Sounds like they're just trying to cover their backside then. If these measures do go through I think properties at the lower end and with better cashflow will benefit, fine with me.

 

[Paul@PFI]

If they curb lending through requiring banks to hold more capital it will result in less lending demand. It may be inflationary. Rents go up. Demand for IPs goes up then, not down. A change to the economy may take several years to be measured. Even the I argue it wont work. Easy to bypass.Just use existing equity in other IPs + new 70% LVR and its still a 100% lend. If variable rate for IP loans was 5.5% I reckon many would see the extra $1k per 100K borrowed as a trivial issue or pass it on.

The only measure that they can use to curb leveraged demand for IPs may be to blend policies eg curb tax breaks as well. Perhaps an end to capital allowance claims - But that could harm new builds v's old property.

 

[Corey Batt]

If they curb lending through requiring banks to hold more capital it will result in less lending demand. It may be inflationary. Rents go up. Demand for IPs goes up then, not down. A change to the economy may take several years to be measured. Even the I argue it wont work. Easy to bypass.Just use existing equity in other IPs + new 70% LVR and its still a 100% lend. If variable rate for IP loans was 5.5% I reckon many would see the extra $1k per 100K borrowed as a trivial issue or pass it on.

The only measure that they can use to curb leveraged demand for IPs may be to blend policies eg curb tax breaks as well. Perhaps an end to capital allowance claims - But that could harm new builds v's old property.

My understanding is that the RBA is looking at sensitised rates, not effective rates to try slow down large portfolio growth.

 

[hobo-jo]

Easy to bypass.Just use existing equity in other IPs + new 70% LVR and its still a 100% lend.

The suggestion in the OP is not an LVR cap, but higher interest rate buffers which might be more difficult to work around (especially if lenders were required to add the larger buffer to an investors entire loan portfolio).

"...could potentially include a tightening of "interest rate buffer" guidelines, under which banks apply an interest rate add-on to current mortgage rates when assessing a borrower's capacity to service their loans."

 

[Redom]

Sounds like they're just trying to cover their backside then. If these measures do go through I think properties at the lower end and with better cashflow will benefit, fine with me.

Haha that is NZ's experience to date.

 

[Marty McDonald]

The suggestion in the OP is not an LVR cap, but higher interest rate buffers which might be more difficult to work around (especially if lenders were required to add the larger buffer to an investors entire loan portfolio).

"...could potentially include a tightening of "interest rate buffer" guidelines, under which banks apply an interest rate add-on to current mortgage rates when assessing a borrower's capacity to service their loans."

Correct I think we are looking at situation where they will mandate all debts need assessing at P&I over 25 years @ circa 8.50% pa like ANZ and Suncorp currently already do.

The thing is this wouldn't really stop the mum and dad investors just the large portfolio holders so may not work either.

 

[Redom]

The suggestion in the OP is not an LVR cap, but higher interest rate buffers which might be more difficult to work around (especially if lenders were required to add the larger buffer to an investors entire loan portfolio).

"...could potentially include a tightening of "interest rate buffer" guidelines, under which banks apply an interest rate add-on to current mortgage rates when assessing a borrower's capacity to service their loans."

LVR caps arent that great at targetting risk of managing increases in rates.

Income type ratios are much better at targetting this risk.

 

[Redom]

Co
The thing is this wouldn't really stop the mum and dad investors just the large portfolio holders so may not work either.

Thats who they'll be targetting Marty. Mum and Dad investors arent the problem from a financial stability point of view.

Speculative credit fuelled demand is.

 

[Paul@PFI]

The suggestion in the OP is not an LVR cap, but higher interest rate buffers which might be more difficult to work around (especially if lenders were required to add the larger buffer to an investors entire loan portfolio).

"...could potentially include a tightening of "interest rate buffer" guidelines, under which banks apply an interest rate add-on to current mortgage rates when assessing a borrower's capacity to service their loans."

My understanding is the margin is scaled. Higher LVR = higher margin like the olden days. Once upon a time us oldies remember when a IP loan was 1.5% more than owner occupied and always was. If you moved from PPOR you needed bank approval (not automatic) and if they agreed up went the rate. The margin was based on LVR at the point. If so it can be bypassed by some.

 

[Peter_Tersteeg]

Leaves me wondering when the RBA started dictating lenders risk assessment and internal policies.

 

[Marty McDonald]

Thats who they'll be targetting Marty. Mum and Dad investors arent the problem from a financial stability point of view.

Speculative credit fuelled demand is.

Disagree as usual Redom! Define speculative credit fuelled non Mum and Dad type investors, is it 2 or more IP's?

What % of all investment property owners currently have 2 or more investment properties? I have no idea but wouldn't be much more than 5% of all investors I'd guess.

So drilling down the larger portfolio holders are not really systemically important. Mum and Dad investors are much more systemically important with their low LVR 1 IP's and the proposed buffers wont stop them...

If I was making policy I'd put a moratorium on all foreign ownership. This would create an oversupply as stock comes on and we could all settle down until things stabalised then gradually re-introduce.

 

[hobo-jo]

Leaves me wondering when the RBA started dictating lenders risk assessment and internal policies.

You don't think they should have a say in factors that may affect the stability of the financial system given they backstopped the banks during the GFC?

Normally they might be able to raise the cash rate target, but that's probably off the table given the weak state of the economy/business conditions.

 

[Redom]

Disagree as usual Redom! Define speculative credit fuelled non Mum and Dad type investors, is it 2 or more IP's?

What % of all investment property owners currently have 2 or more investment properties? I have no idea but wouldn't be much more than 5% of all investors I'd guess.

So drilling down the larger portfolio holders are not really systemically important. Mum and Dad investors are much more systemically important with their low LVR 1 IP's and the proposed buffers wont stop them...

If I was making policy I'd put a moratorium on all foreign ownership. This would create an oversupply as stock comes on and we could all settle down until things stabalised then gradually re-introduce.

Haha, love healthy debate Marty.

From APRA's perspective, what they're guarding against is financial stability shocks. That shock is likely to come about because people can no longer afford to repay their debt.

A mum and dad investor with 1/2 IP's and 500k of debt isn't going to be a 'high risk' of defaulting, even if they have high LVRs.

Whereas someone with 10 IP's and 5million of debt are more likely to experience a significant shock if interest rates increased 1-2%.

Macroprudential tools are designed to target financial stability. They are targetting asset price growth that is driven by credit. Not house price growth driven by supply/demand dynamics.

 

[Redom]

Leaves me wondering when the RBA started dictating lenders risk assessment and internal policies.

Agree with Hobo-jo (as usual! ).

Financial stability is now well and truly part of the RBA's job (APRA mainly). Its explicitly stated in their latest MOU with the government.

They should play a large role in setting the environment to lending - banks do not experience the full costs of failing and hence have a bias to lend out as much as possible.

Although the main criticism of macroprudential tools is that they're exceptionally interventionist (for the reasons you've said above).

 

[bumskins]

Haha, love healthy debate Marty.

From APRA's perspective, what they're guarding against is financial stability shocks. That shock is likely to come about because people can no longer afford to repay their debt.

A mum and dad investor with 1/2 IP's and 500k of debt isn't going to be a 'high risk' of defaulting, even if they have high LVRs.

Whereas someone with 10 IP's and 5million of debt are more likely to experience a significant shock if interest rates increased 1-2%.

Macroprudential tools are designed to target financial stability. They are targetting asset price growth that is driven by credit. Not house price growth driven by supply/demand dynamics.

The average Mum and Dad investor (1-2 IP's) have a less diverse portfolio and less diverse income streams. Their salary and the rental income from their single IP are chunky parts of their income.
For someone with a larger portfolio, their salary and rental income from individual rentals form much lower percentages.

So the Mum or Dad investor is far more susceptible to increasing unemployment, increasing cost of living, rental vacancies...

And as Marty mentioned, people with big portfolio's aren't likely to make up a very large percentage.