Interesting thread, some thoughts from my time as a regulator:
1. Geographic based policy - while completely unusual, it is talked about and being investigated by the regulators. The problems were arising in Sydney. I'd assume it was just background analysis and talk (just like Treasury model Negative Gearing removal every year!). Nonetheless, if it did apply, i think it'd feed through via targeting of Sydney valuations, rather than Sydney investors. The risk that Sydney has that no other market really has is in relation to asset quality/asset valuations. Given the strong rise in market prices, regulators are very aware that valuations may be inflated as a result of low rate cycle.
Chances: I rate the chance of this happening as quite slim - but definitely not impossible. It was unexpected to see it part of discussion though.
2. 'LVR restrictions' - Regulators never liked this in Aus. Doesn't target the specific risks that are built in our financial system. The stats never showed much here, at least as at this time last year. Quite ironic, our regulators played a pretty instrumental role in the Kiwi LVR restrictions 18-24 months ago.
Chances: This ones the media's favourite as its easily understood and very transparent, but not popular amongst those in charge. Slim until data points otherwise.
3. 'Interest only' - interesting comments Dan. Applying the regulator hat on, they don't like excessive speculation in property markets. That is, purchasing based on the expectation of continued price growth. The regulators are fully aware that prices can move backwards and HAVE done so all around the world plenty of times before. Interest only means people are purchasing properties without ever intending to pay down that debt. Thats not a healthy position to be in in terms of financial system regulation. If prices don't rise, stagnate, or even fall - people will be holding negative equity.
The incentives of the tax system mean that I/O set ups are very much part of the system. Add to it the impact on borrowing power calculators and you have a pretty unhealthy combination from a financial system oversight point of view.
4. 'Serviceability calculators' - now this is the real kicker. Regulators talk about how there is a sensitivity to interest rate rises in calculators. This is definitely true with a 'soft' floor set at 7% P&I repayments. This captures the majority of the market.
However, investors can 'slip' through this regulation oversight by simply switching lenders to those that take your actual repayment with debt that you hold with other financial institutions.
So a borrower may have $5m in existing debt, they then walk into a new lender and ask for another $500k. That new lender will only apply that buffer to that $500k, and leave the $5m without a buffer.
This assessment in current calculators, when well utilised, is a potent way to grow a very large portfolio. I've talked about it a lot on the forums, with average income households being able to borrow multiple millions in todays low rate environment.
Will APRA change this? They've made AMP move to the opposite end of the borrowing power spectrum. If they do so to the other lenders, then i'd guess there'd be a massive impact on the investor market and a slowdown in price growth.
If you're on 80k p.a. you'll go from being able to grow a $3m+ portfolio to under $1m very quickly.
Chances of this happening: even with AMP moving, this would be a big move. Putting my regulator hat back on, this is what i'd do if i wanted to slow down investors while continuing to grow the economy. Will definitely impact house prices. If the boom gets out of hand, this may be deployed over time.
Cheers,
Redom