Conservative approach – bank revelations make the call on the apartment market
Australia’s banks appear to have called the end of the growth in Australia’s apartment market. Using lending limits and loan to value ratios, the banks are winding back their lending in the most vulnerable sectors of the market.
Although it isn’t universally the case, the target continues to be reigning in investor loans, which continue to be stronger than desirable. In May 2015, investor’s accounted for 54.6% of al loans for housing.
After regulator and bank attention on the associated prudential risks saw the proportion of loans issued to investors fall quickly to 43.8% in just half a year, by November 2015. Since then, as the green line on the chart below shows, the investor share has risen again, reaching 47.7% in August 2016.
To go straight to the dashboard and take a closer look at the data, click here.
Inevitably, and entirely a consequence of the role of investors, first home-buyers have been losing out. From a high of 13.1% in November 2015, their share fell to 9.4% in August 2016. This is towards the bottom of their share in recent history, suggesting that the original attempts to shift the balance of housing finance more broadly were short-lived.
The latest data comes amidst escalating concerns about bank liquidity ratios and loan to value ratios. The big four banks are tightening their lending criteria in hundreds of suburbs, requiring larger deposits (some as high as 30%) and therefore, lower loan to value ratios (LVRs). Prudential regulators, including the RBA, are increasingly alert (though they profess to remaining unalarmed) to the possibility of increasing loan defaults, property price deflation and a potentially ugly credit crunch as a result.
Regulator antennae, which are notoriously twitchy anyway, appear concerned that future interest rate rises could expose banks in a sub-prime kind of way.
Colourfully, perennial commentator Deloitte Access Economics’ Chris Richardson suggested Australia was in the midst of a ‘Faustian bargain’, where the capacity to repay loans, despite low borrowing costs, appears, at least at a national level, to be linked to prospective income to be earned from higher commodity prices.
Richardson told the Australian Financial Review’s Jacob Greber that “There comes a point where past performance starts to become a guarantee of an unwinding of future performance.” (AFR 16/10/16)
In other words, after decades of housing being the safe bet and often the best bet for investors, it might be set to under-perform, significantly, for a protracted period, especially relative to other investments.
So in this context, bank action where the risks are greatest is prudent and perhaps even overdue.
Couple this with the notable fact that the suburbs on the ‘watch list’ are not generally those where owner-occupiers predominate. They include most capital cities.
We have discussed previously the multi-speed nature of Australia’s residential dwelling boom. This bank ‘hit list’ is the latest evidence that whether the apartment market is over-cooked or not, there are plenty of people involved, who are certain it is.