ANZ Bank says Australian home loan restrictions are likely to get even tougher

  • APRA, Australia’s banking regulator, has announced that it will remove the 10% annual cap on investor housing credit growth on some Australian lenders.
  • ANZ Bank says investor lending is likely to accelerate in the months ahead.
  • Despite the removal of the 10% cap, it suspects that an additional tightening of lending standards is likely.

APRA, Australia’s banking regulator, has announced that it will remove the 10% annual cap on investor housing credit growth on some Australian lenders.

After just over three years being in place, coinciding with a slowdown in investor credit growth and a noticeable deceleration in home prices, APRA said the policy had served its purpose, especially with other restrictions on interest-only lending already in place and unlikely to change anytime soon.

The question now is what will happen next?

To David Plank, Head of Australian Economics at ANZ Bank, investor lending growth is likely to accelerate a bit in the period ahead, albeit at levels far lower than what have been seen in the past.

“We think it likely that there will be some acceleration in lending to investors over coming months,” he says.

“Removing the cap will allow some ADI’s [Australian authorised deposit-taking institutions] to compete more aggressively. One criticism of the blanket cap was that it effectively fixed market share. There may be some downward pressure on investor interest rates as a consequence.”

Plank says there’s already some evidence emerging to suggest a pick-up in loans to investors is already underway, pointing to the chart below.

Source: ANZ Bank

“The trend has shifted from a monthly decline of more than 1% in the flow of investor loans in the first half of 2017 to close to zero now. This has been driven by the fact that in four of the five months to February 2018 investor housing loan growth was positive in seasonally adjusted terms,” he says.

“We’ll find out in the week ahead if the recovery in investor borrowing continued in March. We suspect it did.”

So has APRA made a policy mistake by removing the 10% annual cap on investor lending just as it is shows signs of accelerating?

While some may think so, Plank believes that rather than loosening lending standards, they’re actually likely to become more strict.

“We believe that the focus of APRA on household expenses and high loan-to-income lending, plus the fallout from the banking Royal Commission, will see at least some additional tightening of lending standards,” he says.

On Thursday, APRA announced that it “expects ADIs to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers”.

It defines debt greater than six times income levels as a very high debt to income level.

As it had previously communicated last year, APRA added that ADIs should commit to “improving where necessary the collection of information on borrowers’ actual expenses, to reduce reliance on benchmark estimates”.

Plank says these process improvements are likely already underway.

“We understand that a number of banks have recently taken steps in this direction, a move that will be reinforced by APRA’s requirement that each ADI’s Board confirm in writing that their policies and practices meet the regulator’s expectations,” he says.

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