Last year was dubbed as the ‘year of finance’ following the great influence of tightening credit conditions on the property market. Moving forward into the new year, how will the changes in the lending market affect the real estate landscape?
Regulatory interventions and the banking royal commission have had a great impact on the property market since their establishment a couple of years ago.
Prior to the end of 2018, the interest-only cap was removed by the Australian Prudential Regulation Authority (APRA) and the banking royal commission was concluded, prompting a sigh of relief from investors who sought more credit options as they aim to grow their portfolio.
While the credit environment remains tight due to the new serviceability assessment, which focuses on scrutinising living expenses, experts believe that borrowing couldn’t get any worse for investors in 2019.
According to former Federal Treasury economist Redom Syed: “I can't imagine it getting any tighter than the backend of 2018.”
“Some of the decision-making processes from lenders probably took out common sense in a lot of cases and everyone was just a little bit scared because of the royal commission and all the negative media associated with it. The good news this year is it’s not going to get any worse.”
Still, this ‘good news’ around the future of the credit environment largely depends on how the market moves throughout the year, the economist said.
Moving forward into 2019, regulators are still likely to ‘tinker’ with existing regulations and credit policies, only this time, their aim would be to support credit growth, according to Mr Syed.
“They will do this only if they feel they need to do it. If credit growth figures remain really low or if they continue trending the wrong direction, then you’ll probably find that there'll be more gradual loosening over the course of the year into 2020.”
By loosening credit policies, Mr Syed expects a considerable improvement on the borrowing power of investors across the country.
One way to positively influence credit growth is by making amendments in the ‘APRA rulebook’.
Mr Syed said: “They can adjust what I call the APRA rulebook that all the lenders abide by, or the APG 223 (Residential Mortgage Lending). That rule book sort of prescribes exactly how lenders should run their serviceability assessments.”
“What APRA could do is have conversations with the lenders and allow them to, at the margins, just bend the rules a little bit and apply these lending policies more favourably than harshly. Since they’ve been taking conservative treatments in 2018, perhaps they can take more lenient assessments in 2019.”
Mr Syed also expects other, ‘more aggressive’ levers to be pulled by other regulatory bodies in order to further assist credit growth, including rate cuts or debt assessment rate changes.
As it makes borrowing easier, these changes can ultimately promote market activity and, thus, support prices and lending.
While the regulatory changes that could be implemented in 2019 definitely sound like good news for investors, it could be a reflection of something more negative for the general property market as well as the national economy.
According to Mr Syed, when regulatory bodies start implementing drastic measures to influence market movements, it could very well be a sign of a significantly poor performance by the property market.
“In general, if those actions are taken, it’s probably a reflection of the market performing really poorly. There should be extreme worry if the RBA is cutting rates, as nice as that may be for investors.”
“It’s a double edge sword. It reflects poor market outcomes, things that people don’t really want to see happening. For instance, the economy slowing down would have to happen for them to cut rates,” the economist highlighted.
At the end of the day, regulatory bodies would be implementing changes they deem necessary based on the current condition of the market, as well as the national and local economies.
“They merely tinker with the different levels. They might not do it so prescriptively, they probably just have conversations with lenders and allow them to do it, because regulators in Australia like to take a soft-touch approach rather than a hard stance.”
“APRA is always continually talking with lenders, their boards, their key decision makers. That way, they can improve confidence and that will really help support the market,” Mr Syed concluded.