How regulators seek to amend lending market

Basically, the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission and the Department of Treasury sit down to discuss the current state of the market and whether they need to amend existing rules to maintain a healthy economy.

“They come together and think about what is happening with lending, housing markets, the financial system and whether they need to make any changes,” Mr Syed highlighted.

In 2014, the discussions started to highlight the increasing house prices and the hike in investor lending. This spurred significant changes in the lending market, including the cap on interest-only loans, which aims to ‘rebalance’ the property market by limiting the growth of the number of interest-only loans.

Fast forward four years later, the situation was reversed. Prices started coming down rapidly, which caused worry among regulators.

Before the end of 2018, the interest-only cap was removed, almost at the same period as the conclusion of the banking royal commission.

According to Mr Syed: “They’d be quite happy with price falls to happen in a orderly fashion but they definitely don’t want house prices to crash. They don’t think that’s going to happen at this point or anything like that but they do have discussions regularly about this.”

Following the discussion of these regulatory bodies through their interventions can give investors a good grasp on the current movements of the market, the economist said.

“If we pay attention to the signals that have come out in 2018, we may see that they have been talking in a way that expresses that they may have a little bit of worry as to what’s happened and what may happen in 2019 if it continues at this pace.”

“The sentiment has changed from the regulators and that really has an impact on investors. Obviously, you’ve got to drill down a few steps and, on that basis, follow what they say very closely. If we do that, I think we can sort of make some assessments as to what may lie ahead in 2019.”

Intervention process

Moving forward into 2019, regulators may continue to intervene with existing rules in order to maintain the balance in the market and avoid any detrimental crash.

However, significant changes to rules and the general market may not come as quickly as expected.

According to Mr Syed, the regulators will, first and foremost, investigate and monitor the market, especially in lieu of the removal of the interest-only cap mere months ago.

Then, based on their findings, they will review the possible actions to take and determine which option protects the health of the economy – all without being too controlling of the market.

“None of these regulators particularly aim to control house prices, so that’s important, but they do want to ensure financial stability and a healthy economy.”

“Falling house prices on its own isn’t that dangerous, but house prices falling quickly and house prices falling off a base of negative 10 per cent already does start to become dangerous,” Mr Syed said.

Finally, regulators will work out the possible implications of their chosen actions before implementation.

The economist explained: “Right now, they’re at a point where they’re sort of jawboning. The RBA governor said that lending may have gone too far the other way. Following that, the Treasurer said banks need to open up. These are all indicating that lending is slowing down too fast and that they may have tightened the screws too much.”

“There’s been a lack of common sense by the end of 2018 and much of that is probably lender sentiment and fear associated with the royal commission and maybe an overreaction from credit providers. That overreaction has created a little bit of worry and now they’re starting to take action.”

“One of the first actions was to remove the interest on the cap. Of course, that cap wasn’t really doing too much, but they’re still taking soft action and that will ramp up over the course of 2019 if these trends continue because the last quarter of last year saw all the indicators were really poor – investment lending down, credit growth are half the average pace of the last 10 years, house prices in Sydney falling 4 per cent in one quarter. These are dangerous signals.”

“Growth figures also fell for the economy, unemployment went up a little bit. Some of these things are just trending in a little bit of the wrong direction. They’re at the early point of investigating, but if these trends continue over four consecutive quarters, then there’d be serious action tape,” he concluded.

Tune in to Redom Syed's episode on The Smart Property Investment Show to find out what investors can expect from the finance sector in the year ahead.