Banks face tougher restrictions on property investor loans

Banks face tougher restrictions on property investor loans

24 March 2017


Australian financial regulators are preparing “to impose a fresh wave of constraints on banks to slow investor lending growth, crack down on interest-only loans, and force buyers to stump up more equity on purchases,” reports the Australian Financial Review.

Speaking at a conference in Sydney on Monday, the Australian Prudential Regulation Authority (APRA) chairman, Wayne Byres, joined forces with Greg Medcraft, his opposite number at the Australian Securities & Investments Commission (ASIC), to call for banks to exercise more restraint.

Their remarks echoed comments made by Australian Treasurer Scott Morrison last week. Mr Morrison urged financial regulators to use “the levers that they have” to relieve “pressures that have built up again over the last few months.”

“We are in an environment of heightened risk,” Mr Byres declared, states a separate report from The Sydney Morning Herald. “House prices are high and particularly in this one (Sydney) they’re rapidly rising.”  He declined to describe the property market as being in a “bubble” but warned, “if everyone is not careful the risks are going to rise.”

ASIC chairman Greg Medcraft, however, chose not to mince words: “I have been saying for a while that I thought it (the property market) was a bubble and other people are catching up now,” he warned.

According to Bloomberg, Australia’s housing market continues to run hot despite regulatory measures that were introduced in 2015. Those measures required banks to set a 10 percent limit on annual loan growth to housing investors. They also outlined tougher requirements for how banks assess loan affordability. (Compare this Bloomberg Q&A piece on Australia’s booming housing market.)

So, what comes next?

Hinting at several “things that remain on the radar,” Mr Byres referred reporters to the 2014 APRA Prudential Practice Guide, which identified investment loans, interest-only mortgages, and high loan-to-value loans as high risk areas.

Nevertheless, Michael Pascoe wrote in The Sydney Morning Herald that current regulator attempts to cool housing investment “are, at best, second rate,” and “the most effective tools for the present circumstances remain locked in Treasury’s cupboard.” According to Pascoe these include: (1) Limit negative gearing to new properties, (2) reduce the discount on capital gains tax, and (3) actually build affordable housing.

The only certainty is that the verbal stoush will continue.
The APRA chairman’s warning seems prescient: “Watch this space.”