Topic of Interest: APRA Tightening Up

May 27, 2015


The recent announcements from The Australian Prudential Regulation Authority (APRA) that they will be stepping in to prevent the inflation of the property market has stirred up the investor sector and put some undue stress into some. APRA is an independent government agency that oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies and most members of the superannuation industry.


The spectacular growth that has been achieved in the Australian property market over the recent years (primarily in Sydney and somewhat Melbourne) has been causing concern for these governing bodies who would like to ensure a similar situation to the pre-G FC USA does not eventuate in Australia. The property market inflation can quite quickly be restricted by the RBA but increasing interest rates but that is not always the best solution. Currently Australia needs to stimulate the economy by devaluing the Australian dollar and hence increase over seas investment and trade into Australia. Increasing interest rates would eventually lead to an increased AUD value, which would hinder the economy so an alternative solution to slowing the property market had to be found. 


APRA has the ability to step in and influence the lending criteria of the banks to slow down the flow of lending into the property market and hence slow down inflation of prices. They do not however want to slow down the production of property as there is still an underlying undersupply of property in the country so who is on the chopping block? Investors. 


There are a few ways that APRA could slow down inflation. They could change the loan to valuation ratios (LVR) that banks are allowed to issue to purchasers. Some banks have already imposed a maximum 80% LVR restriction for investor loans. It would not be surprising if ARPA places this same 80% restriction on all banks at least for property in Sydney and possibly Melbourne.


The second way APRA could step in is to restrict the debt-service-to-income ceilings. This would restrict all borrowers (not just investors) from borrowing far more than their incomes could support. Some consideration to how much of rental income was considered in serviceability calculations would need to be taken as this could actually make investment more attractive in serviceability calculations vs. owner occupiers. 


The third way could be higher bank capital requirements. Similar to how us investors need to put in some capital to get a loan the banks would need to hold more assets relative to their outgoing loans.


To investors who still realise that here is no bad time to invest (careful strategizing is required) there are plenty of ways to secure finance and the big banks are in no way out of the picture. 


First a quick visit to the loan comparison website Mozo shows that out of 83 lenders on Mozo, 48 are non-bank lenders and hence not strictly under regulation by APRA. Some of these lenders offer very competitive interest rates but may be reviewing loan applications more strictly. 


The closing statement to this is that investment is still alive and strong in Australia. Those wishing to be involved and pursue financial gains in the property investment sector will just need to be more diligent with their planning, asset selection and financial structuring. Having access to a skilled and knowledgeable mortgage broker is becoming more and more important. With the right team of people in their corner, investors have a considerable advantage over others who have already been told “no”. Be sure to get professional advice before making any financial decisions so you know you are stepping down the right path in this economic setting.


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