Will increased investor credit lead to MacroPrudential Controls? | Pete Wargent

The Reserve Bank released its Financial Aggregates data, and the figures revealed a tentative tick in the box for low interest rates biting just a little more than they have been.

While personal credit growth remains the definitive laggard, total credit growth for housing is up at a healthy annualised 7 percent clip, and business credit growth is slowly making its way back to respectable levels.

Business credit grew by 4.3 percent year-on-year following a better 0.7 percent result for the month.

Business Credit

As the below chart shows, business credit growth, while historically speaking only modest, is now tracking in the right direction again and at its best annual rate of growth since the month of June 2012 at 4.3 percent.

 

This chart gives us an interesting insight into the state of the economy through the financial crisis.
No technical recession, perhaps, yet effectively business was in recession before stimulatory policy reversed the trend.

Housing Credit

With an expanding population and an inflationary economy we would expect to see outstanding housing credit growing over time, and indeed the total of housing credit outstanding passed a new high at more than $1.4 trillion in October.
$1.4 trillion is not an easy number to conceptualise but as a point of comparison the Australian Bureau of Statistics puts the total value of residential dwelling stock at around $5.3 trillion, and CoreLogic-RP Data calculates $5.6 trillion.

 

 

Given that total outstanding housing credit generally just increases faster and then slower again, it is the rate of change which is of interest.

Notably, seasonally adjusted investor credit has been leading the way in this cycle as mortgage lending rates have become more attractive.

The below chart shows the annual rate of growth on a rolling 12 monthly basis.

Notably, while both forms of housing credit continued to expand in the month of October, the rate of investor credit continues to grow more quickly than that of credit written for owner occupier housing loans.

 

Investor credit surged by another $4.8 billion or 1 percent in October, the largest monthly jump we have seen in well over a year.As a result the total share of investor credit is now at the highest level in Australia’s history at 34.1 percent.
This skewing towards investor credit is a broad trend which appears likely to continue over the decade ahead, for a whole host of reasons (higher capital city house prices, casualisation of the workforce, households forming later in life etc.) and as such investor sentiment and activity will be a key driver of capital city housing markets at both the macro and micro level.

 

 

Indeed, this is already the case.Witness for example the dearth of investor in activity in Adelaide which has increased dwelling values by only 2.8 percent of the past year (recording a 0.3 percent fall over the past quarter) as compared to the investor frenzy in Sydney which has pushed a great many inner suburban prices up at a 15-20 percent pace.

Regulation

There has been a good deal of discussion of the deployment of macroprudential tools to slow the rate of investor lending, and the October aggregates data must clearly keep this issue in the spotlight.
While the Reserve Bank of Australia (RBA) does not have a mandate for “picking winners” it does have a mandate for financial stability, and it is under the latter heading that investor lending will be categorised as an issue for scrutiny.
There are some notions in which the RBA will not indulge, including a return to the unsuccessful experiments with quantitative restrictions on credit such as seen previously in the 1960s and 1970s.
Moreover, the RBA believes that prudential measures are largely an issue for the prudential supervisor (APRA), and as such the central bank will remain respectful of the supervisor’s expertise – a simple enough point, one would have thought, but the Reserve kindly drew us a stick man cartoon to clarify the issue, just in case.

Interest Only Loans

A related but slightly separate issue is the rise of interest only loans.

APRA’s latest API Property Exposures data released this week showed that 34 percent of loans outstanding related to investors while a record 36.8 percent of mortgages outstanding as at Q3 2014 were interest only loans. Most strikingly, some 42.5 percent of mortgages written in Q3 were interest only loans.

While this may appear to be inherently risk-laden, it is surely not a surprising trend given the nature of today’s interest only loan products, and any real devil must be within the detail.

Low doc loans, for example, which do tend to be comprise some “riskier” lending, have fallen to just 2.7 percent from 3.6 percent a year ago, the lowest level for low doc loans ever recorded in the data series.

Meanwhile, in the absence of any regulatory intervention, interest only loans are also likely to increasingly (perhaps even rapidly) become the product of choice for home owners as well as investors.

Why? Simply because the modern variable rate interest only mortgage is a superior product for the responsible borrower, due to its flexibility and the option to make repayments to the principal but on the borrower’s own terms.

The major bank lenders will tell us that effective prudential measures are already in place, with loan books showing very low delinquency rates and 180bps serviceability buffers in operation.

Meanwhile, the RBA’s own research has shown that most borrowers are well ahead on repayments largely thanks to the unique structuring of interest only loans in Australia and some smart management of household finances in the prevailing low interest rate environment (an issue we looked at here on Property Observer last month).

Can homeowners in aggregate be trusted to use interest only home loans sensibly?

“Crackdown” to be Delayed

The Reserve Bank’s rhetoric has suggested all along a reluctance to take specific actions to cool a housing market which it had itself wanted to heat up (in order to stimulate dwelling construction and consumption) other than the odd bit of jawboning aimed at Sydney investors from the Governor and other members.

With house price growth threatening to stall (CoreLogic-RP Data’s index shows home “values” as having decreased in Adelaide and Melbourne over the past quarter, and by $18,000 or 2.6 percent in November alone in Melbourne’s case), any potentially rigorous macroprudential changes appear likely to be delayed further.

More stock is hitting the housing market with auction numbers at or around record levels, and this has taken much of the sting out of investor credit growth.

APRA Chairman Wayne Byres announced on Friday that any regulatory crackdown in predatory lending would be delayed, with the supervisor not wishing to make stringent changes which may then need to be subsequently reversed if housing market sentiment cools.
Byres has hinted that APRA has clearly identified its possible risk areas including investor credit, interest only loans, the adequacy of stress testing and longer loan terms, but the regulator seems to be unclear why an owner occupier would take out an interest only loan (surely obvious to those on the ground, for the reasons discussed above).
However, APRA will clearly not be rushed into the making of any rash decisions, and as such housing market sentiment will be watched with much interest after the Christmas break.


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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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