Anxious Australian property investors, homeowners, and politicians in need of votes are looking to APRA to ride to the rescue of Australia’s faltering residential property market after it announced the removal of restrictions that curtailed credit growth to property investors.
As of now the rule that limited investor lending growth to 10% annually has been scrapped, so the banks are free to lend more to investors if they meet other ‘strict’ lending requirements.
APRA’s move has been eagerly anticipated as a response to falling residential property prices across Sydney and other regional capitals like Darwin and Perth.
As the prudential regulator, APRA works in unison with and under pressure from the government and central bank, as although statutorily independent it does have some accountability to parliament which places it squarely in the sights of overbearing politicians.
As such political pressure can be exerted to consider changing rules for authorised deposit taking institutions (ADIs or lenders) when it’s felt that the prospect of falling house prices could hurt the economy and bring political upheaval.
Of course APRA itself is also mandated to maintain a stable financial system.
Other rules it has enforced to manage risk in mortgage lending include limits on interest-only lending not to reach more than 30 per cent of total residential lending, while banks must also apply other limits on the volume of interest-only lending on loan-to-value ratios above 80%.
These rules have been a headwind for the banks as the more they can lend at profitable rates of return the greater their returns on equity, cash profits and dividends.
Long-term interest-only lending against secure collateral in Australian homes is just about the most profitable business going for Aussie banks on a risk-adjusted basis and the likes of Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) will welcome today’s news.
However, the banks still face other regulatory pressures as they must retain a greater proportion of capital in reserve against higher risk interest-only loans for example, while the Royal Commission is almost certain to result in some costly recommendations in atonement for past malpractice across the financial advice space in particular.
APRA made its move now as it’s widely believed the Reserve Bank’s next move in base lending rates will be higher, which means property prices are likely to come under pressure via reduced borrowing capacity.
As such the move is likely to be popular with bank and property investors, but whether it’s a case of kicking the can down the road remains to be seen.
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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.