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APRA Macroprudential: Westpac, ANZ and CBA raise interest rates for property investors by 0.27%; NAB raises rates on interest-only home loans by 0.29%
Topic Started: 23 Jul 2015, 05:33 PM (10,739 Views)
John F. Kennedy
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peter fraser
28 Jul 2015, 10:43 PM


Frankly I see all of this as paying lip service so that APRA and politicians can say that the job is done. It's a way of forcing a change in the statistics on a superficial level without annoying people too much and threatening the housing industry.

This is a Claytons style regulatory change that the players will soon adjust to.

You really believe this? Its just a statistical fudge that the banks have conspired with APRA for PR reasons? The banks won't really collect any extra revenue? Really.
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peter fraser
28 Jul 2015, 10:43 PM
When I first started in lending loans on rental homes were at a higher rate, including PPOR buyers who perhaps moved to another city to find work and rented their house out. It was a complete pain in the ass and the banks spent more on checking returned mail and making small rate adjustments than they received in added income. We used to coach customers on how to avoid being caught.

Given that people are simply much more mobile it will be in the "too hard basket" Banks will determine at the outset which pigeon hole the loan fits and that's where the loan will stay for the term of it's natural life.

Frankly I see all of this as paying lip service so that APRA and politicians can say that the job is done. It's a way of forcing a change in the statistics on a superficial level without annoying people too much and threatening the housing industry.

This is a Claytons style regulatory change that the players will soon adjust to.

Given that serviceability is more lenient for investment loans than PPOR loans, aren't a large proportion of investors in effect forced to disclose that the loan will be for an investment property?
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Trojan
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A Lurker
29 Jul 2015, 12:07 AM
Potential rub may come if the ATO was to doubt the sincerity of tax deductions claimed for interest costs. The ATO may ask to see the loan application to determine the original intention/purpose of the loan. One could get oneself into a bind.
The ATO doesn't care about what is stated on the loan application - what they care about is whether rental income was collected for the period where interest expenses are being claimed.
If rental income was declared and taxes paid on it, then interest (and other holding expenses) will be tax deductible. Do you really think the ATO will let you not pay tax on the rental income (and the corresponding lack of deduction of expenses) because it says "owner occupier" in the loan application?
peter fraser
28 Jul 2015, 10:43 PM
When I first started in lending loans on rental homes were at a higher rate, including PPOR buyers who perhaps moved to another city to find work and rented their house out. It was a complete pain in the ass and the banks spent more on checking returned mail and making small rate adjustments than they received in added income. We used to coach customers on how to avoid being caught.

Given that people are simply much more mobile it will be in the "too hard basket" Banks will determine at the outset which pigeon hole the loan fits and that's where the loan will stay for the term of it's natural life.

Frankly I see all of this as paying lip service so that APRA and politicians can say that the job is done. It's a way of forcing a change in the statistics on a superficial level without annoying people too much and threatening the housing industry.

This is a Claytons style regulatory change that the players will soon adjust to.

Fwiw, it was the bank itself who told me to put "owner occupier" on the application form to secure the lower rate. Sounds a lot like paying lip service to APRA to me.
Edited by Trojan, 29 Jul 2015, 01:32 AM.
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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stubby
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peter fraser
28 Jul 2015, 10:43 PM
When I first started in lending loans on rental homes were at a higher rate, including PPOR buyers who perhaps moved to another city to find work and rented their house out. It was a complete pain in the ass and the banks spent more on checking returned mail and making small rate adjustments than they received in added income. We used to coach customers on how to avoid being caught.

Given that people are simply much more mobile it will be in the "too hard basket" Banks will determine at the outset which pigeon hole the loan fits and that's where the loan will stay for the term of it's natural life.

Frankly I see all of this as paying lip service so that APRA and politicians can say that the job is done. It's a way of forcing a change in the statistics on a superficial level without annoying people too much and threatening the housing industry.

This is a Claytons style regulatory change that the players will soon adjust to.

I fully recognise the pragmatic instincts in play at the coal-face. The salesguy loan officer just wants to make quota, the borrower is happy to trouser the rate differential, head office doesn't care as long as the right boxes are ticked and nothing blows up...

And yet, it's still fraud. It's the same kind of thinking that, carried a little further, takes us into NINJA-loan territory, or Storm Financial territory. "Hey mate, this is the box we need ticked in order for the deal to go through at that special rate we talked about. Are you right with that? Sign here."

The problem looms at the macro level. APRA has invented a new set of capital-allocation rules for banks that are designed to make them safer--less subject to economically disastrous outcomes in stressful conditions. One might quibble about any number of issues about their approach, but they are tackling a serious problem, and their heart is in the right place. Certainly there have been recent large-scale lending disasters to learn from in other countries...

What APRA needs, in order for its prescriptions to be effective, is a high degree of actual compliance at the coal-face. And it faces, at that level, the "pragmatic instincts" described above.

What has changed, IMHO, since the "complete pain in the ass" days of pursuing regulatory compliance, is the cost of identifying and flagging non-compliant situations. There's a vast array of customer data captured at the banks, and in IT terms we are now in a new era of Big Data tools. It is now both cheap and easy to flag potentially non-compliant loans, i.e. to flag logical disconnects between the original (possibly fudged) loan documentation, and the wide array of other transactions the bank has awareness of.

Left to their own devices, the banks won't bother looking, even though they have the capability. But APRA could force them to, and needs to do so until it is sure that its macro-level prescriptions are actually being adhered to.
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John F. Kennedy
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Some of you are off on a tangent. This is what's really happened:

* The RBA has had a profound change of mind. They have suddenly given up trying to stimulate the economy and have accepted lower growth as the new normal.
* The interest rate rises are face-saving, defacto-official rises that substitute for the RBA having to say "sorry the last interest rate cuts were pointless." Obviously some time will have to pass before they can "officially" change IR trajectory.
* Those who think this is just PR, window dressing, statistical fudging or lip service, haven't noticed the culture shift.
* Banks will profit from these changes so will not allow a wink-and-nod escape from the higher rates.
* To maintain bank profitability, another 50 or so bps rise will be necessary in similar fashion, when it is politic, over the next weeks or months.
Edited by John F. Kennedy, 29 Jul 2015, 01:58 PM.
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peter fraser
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stubby
29 Jul 2015, 11:05 AM
I fully recognise the pragmatic instincts in play at the coal-face. The salesguy loan officer just wants to make quota, the borrower is happy to trouser the rate differential, head office doesn't care as long as the right boxes are ticked and nothing blows up...

And yet, it's still fraud. It's the same kind of thinking that, carried a little further, takes us into NINJA-loan territory, or Storm Financial territory. "Hey mate, this is the box we need ticked in order for the deal to go through at that special rate we talked about. Are you right with that? Sign here."

The problem looms at the macro level. APRA has invented a new set of capital-allocation rules for banks that are designed to make them safer--less subject to economically disastrous outcomes in stressful conditions. One might quibble about any number of issues about their approach, but they are tackling a serious problem, and their heart is in the right place. Certainly there have been recent large-scale lending disasters to learn from in other countries...

What APRA needs, in order for its prescriptions to be effective, is a high degree of actual compliance at the coal-face. And it faces, at that level, the "pragmatic instincts" described above.

What has changed, IMHO, since the "complete pain in the ass" days of pursuing regulatory compliance, is the cost of identifying and flagging non-compliant situations. There's a vast array of customer data captured at the banks, and in IT terms we are now in a new era of Big Data tools. It is now both cheap and easy to flag potentially non-compliant loans, i.e. to flag logical disconnects between the original (possibly fudged) loan documentation, and the wide array of other transactions the bank has awareness of.

Left to their own devices, the banks won't bother looking, even though they have the capability. But APRA could force them to, and needs to do so until it is sure that its macro-level prescriptions are actually being adhered to.
It won't be at the suggestion of the loans officer or broker. These days everyone is so aware of these issues, and it's sites like this and Somersoft where issues like this are candidly discussed over and over. They will even discuss it at MB.

Now picture yourself as an aspiring property investor buying your first property. Do you tell the bank that you will be renting it out and pay the extra 0.27% interest or do you tell them that your intention is to move into it and get a discount.

Of course someone living in a $2 Mansion and who owns a string of $350K homes as renters isn't going to be able to spin that tale when they buy their next rental property, but the FTB investors will have that option, and I'll bet that more than 90% of them will take it once they wise up.

I ask you, is a loan to an owner occupier FTB more stable than a FTB who lives at home with family support PLUS the rental on the home that he has just bought? In my view if the borrower can service the loan as an owner occupier, then they are more stable living with mum and dad as well as receiving a healthy rental.


Now can you point out where this big picture Macroprudential risk is if we see this behavioural change?

What exactly is APRA fixing here, or are they just rearranging the deck chairs to tidy up their stats to keep everyone happy?
Edited by peter fraser, 29 Jul 2015, 02:15 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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Quote:
 
AMP slaps ban on loans to property investors as expert sees end to housing bubble

Michael Janda

One of Australia's largest second-tier lenders is suspending new property investor loan approvals until later this year to comply with the bank regulator's limits.

AMP Bank released a statement today saying it would not be accepting new, or assessing existing, property investor loan applications from today.

The banking division of the wealth management giant said the suspension of new investment lending is expected to last until later this year.

Existing property investment borrowers with AMP are also being slugged with a 0.47 percentage point increase in interest rates, about 20 basis points more than increases announced by three of the major banks last week.

The latest APRA banking statistics for May 2015 show that AMP had grown lending to property investors by 13.1 per cent over the year to $2.92 billion, above the bank regulator APRA's 10 per cent speed limit.

That growth rate is above all the major banks except for National Australia Bank, which grew property investment loans by 14 per cent; but Macquarie Bank reported a massive 86.7 per cent annual increase in investor loans to $8.8 billion.

"Australia's property market is experiencing high levels of investor property lending growth and we are supportive of the regulator's intention to slow this growth to appropriate levels," said AMP Bank's managing director Michael Lawrence in a statement.

Over the past few months, banks and other financial institutions have started imposing tougher income tests and interest rate buffers on property investors, with many also increasing the amount of deposit that buyers must put up.

Those moves have accelerated over the past fortnight after APRA announced that it would require the big four and Macquarie to hold more reserves to offset potential losses on their mortgages.

That was the latest in a series of moves to force the large banks to comply with a speed limit of 10 per cent annual growth in property investor lending imposed by APRA in December.

That prompted ANZ and CBA to lift their interest rates for variable investor loans by 27 basis points, while NAB increased rates on interest-only loans (mostly held by property investors) by 29 basis points.

Property boom soon to peak on loan limits: analyst

A leading property analyst says Australia's latest home price boom, focused on Sydney and Melbourne, is nearing its peak as these investor loan limits start to bite.

Leading property analyst, Louis Christopher from SQM Research, said that the latest auction clearance rates have edged back just below 80 per cent in the leading boom market of Sydney.

"Trusted sources on the ground including agents and mortgage brokers in Sydney are informing me of would-be buyers now holding back," Mr Christopher observed in his latest note on the real estate market.

Mr Christopher said the changes "will knock out most of the weaker borrowers", which is what they are designed to do, but the rate rises by the banks may see other investors also choose not to buy, or even to start selling some of what they own.

"SQM expects total residential property listings have surged in July, though the final result will not be known until early August," he added.

"The problem is, property investors can be a fickle bunch. A number of them are momentum driven - buy when the market is moving higher and sell when the market is heading lower."

Despite Mr Christopher's belief that the Sydney market is well overvalued, he does not see the catalyst for large price falls caused by the regulatory action and response from the banks.

He said it would take a much more substantial interest rate rise to really crunch the market.

"I believe rates would need to go up by at least 1.5 per cent and at a time when there is some type of massive supply overhang on new stock. Neither seems likely at this point in time," Mr Christopher concluded.

Bank profits under threat

Business reporter Stephen Letts looks at the possible new bank rules that may threaten profits.

The major banks announcing investor loan rate increases have partially offset that with cuts to fixed interest rates for owner-occupiers.

However, bank analysts at Morgan Stanley said in a recent research not that the majors are likely to add 10 basis points to their full portfolio of variable interest rate loans to help prop-up their earnings amid higher capital requirements.

The analysts warned that owner-occupier borrowers may not see the full benefit of any subsequent RBA rate cuts, just as CBA, Westpac and NAB customers missed out on the full 25-basis-point official rate cut in May.

"We believe that another RBA rate cut could provide the opportunity for the majors to re-price," they observed.

Read more: http://www.abc.net.au/news/2015-07-29/housing-market-close-to-peak-as-investor-limits-bite/6656000
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John F. Kennedy
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peter fraser
29 Jul 2015, 02:14 PM


Of course someone living in a $2 Mansion and who owns a string of $350K homes as renters isn't going to be able to spin that tale when they buy their next rental property, but the FTB investors will have that option, and I'll bet that more than 90% of them will take it once they wise up.

FTB buyers are currently about 25% of all buyers, but that includes buyers who are really "investors". In Sydney, about 60% of FTB's are really "investors" (currently). That makes 25 x 60 = 15% of buyers eligible for the dishonest fudge that you mention, or, 85% can not fudge the changes. It seems fanciful that 90% of FTB's will not live in the house that they buy, but a slight further rise in the dishonest fudgers does not seem material to market forces ...
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peter fraser
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John F. Kennedy
29 Jul 2015, 02:46 PM
FTB buyers are currently about 25% of all buyers, but that includes buyers who are really "investors". In Sydney, about 60% of FTB's are really "investors" (currently). That makes 25 x 60 = 15% of buyers eligible for the dishonest fudge that you mention, or, 85% can not fudge the changes. It seems fanciful that 90% of FTB's will not live in the house that they buy, but a slight further rise in the dishonest fudgers does not seem material to market forces ...
What I was meaning to say is that 90% of FTB investors who would normally state their true reason for buying as an "investment" will choose to tell the bank that they intend to live in the house.

Of course that's just a guess, we won't know for some time. If I'm right we will see the FTB home buyer return and the investors numbers shrink without any appreciable difference in the overall market.

In all probability some FTB investors won't be able to buy their house or unit without the rental income, so I would expect to see some tapering of overall numbers, but not as much of a drop as most expect, although FTB numbers will magically increase and the newspapers will be all agog at their "return"

Time will tell if I am correct.
Any expressed market opinion is my own and is not to be taken as financial advice
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John F. Kennedy
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peter fraser
29 Jul 2015, 02:57 PM
What I was meaning to say is that 90% of FTB investors who would normally state their true reason for buying as an "investment" will choose to tell the bank that they intend to live in the house.

Of course that's just a guess, we won't know for some time. If I'm right we will see the FTB home buyer return and the investors numbers shrink without any appreciable difference in the overall market.

In all probability some FTB investors won't be able to buy their house or unit without the rental income, so I would expect to see some tapering of overall numbers, but not as much of a drop as most expect, although FTB numbers will magically increase and the newspapers will be all agog at their "return"

Time will tell if I am correct.
I understand your point Peter, I'm just saying that FTB investors are a small minority of the overall market, so, whatever happens, they won't influence much. While its hard to get a clear story, my reading of ABS stats (I will stand corrected if necessary) is that PI and OO are currently running about 50/50 in number of purchases, of which the FTB "investors" are only 15 out of the 50. So, what I'm saying, is that the majority of investors will be hit by the APRA changes, and won't avoid it.
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