Special report: APRA tries to take the heat out of the market

By Jack Needham and Vivienne Kelly

Concerned that investor activity in Australia’s two largest capitals is pricing first-time home buyers out of the market, the Australian Prudential Regulation Authority (APRA) has introduced directives aimed at curbing investor borrowing.

The new directives from APRA come at a time of intense growth in the residential property sector in Melbourne and, in particular, Sydney.

The median house prices in each city stand at $706,000 for Melbourne (REIV) and $930,000 in Sydney (REIA), and winter auction clearance rates have been at record highs.

The heat in each market is largely attributed to a high level of investor activity fuelled by the low interest rate climate, and is being blamed for pricing first home buyers, and other low-income purchasers, out of the game.

In December 2014 APRA announced tighter home lending standards for investors, with the aim of keeping annual growth in residential property investment loans to 10 per cent or less year-on-year.

This appeared to have little effect on investor home loan approvals, with reports in May indicating that several major banks were close to exceeding the threshold.

Again in May, APRA announced its preference for banks to adhere to a 7 per cent ‘stress test’ when assessing lenders borrowing capabilities.

In a speech at the COBA CEO & Director Forum in Sydney in May, Wayne Byres, APRA chairman, said Australia needed to ensure it didn’t place its historically stable banking sector at risk.

“The current economic environment for housing lenders is characterised by heightened levels of risk, reflecting a combination of historically low interest rates, high household debt, subdued economic growth, and strong competitive pressures. Many of these features have been emerging over a number of years, and APRA’s supervision has been intensifying in response,” he said.

Mr Byres said as “housing-related risks have potentially grown” the regulator has sought to “turn up the dial” in terms of scrutiny and management.

APRA investigations into hypothetical borrower scenarios found that “common sense was sometimes absent” when it came to the banks’ treatment of borrowers’ income sources and credit assessment processes.

He also said lending standards were “a little disconcerting in places”.

Several major banking institutions have made significant changes to their investor lending policies in recent weeks and months, largely in response to directives and comments issued by APRA.

These have ranged from changes to serviceability requirements and approval terms right through to the suspension of all loan approvals.

In the final weeks of May, several banks announced changes to their loan serviceability calculations, including ‘stress test’ requirements and the removal of negative gearing concessions from their calculations.

Other changes included tighter restrictions to the maximum loan-to-value ratio requirements and the removal of discretionary pricing on investor loans.

For investors, this essentially translated to increased deposit requirements during the approval phase of a loan, and an increased onus on proving their ability to service the loan throughout its term.

At the end of June, APRA released a temporary directive for five banks to retain capital that would otherwise have been released in the form of home loans.

APRA ordered ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank to increase the amount of capital required for their residential mortgage exposures, meaning they will have to retain billions of dollars that would otherwise have gone out in home loans.

The result of this announcement was widely touted as translating to more expensive mortgages and reduced mortgage volumes.

In the past two weeks, ANZ, CBA and NAB (amongst others) all announced increases to variable rate home loans for investors.

Some banks, including CBA and ANZ, simultaneously announced reduced rates or concessions for fixed rate owner-occupier products.

This week, AMP announced the suspension of new and existing investor home loan application approvals until later this year.

More institutions are expected to announce changes within the coming weeks.

APRA Special Report: 

 Special report: APRA changes to meet with mixed success

Special report: first-time investors hit the hardest 

Special report: pain and gain for existing investors  

Special report: investors unfazed by lending changes

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