Is APRA’s restriction on home lending necessary?

The Australian Prudential Regulation Authority's clampdown on lending to property investors will increase the Reserve Bank of Australia’s scope to cut official interest rates in the face of a faltering economy without risking a housing bubble.

APRA’s decision is a response to two main factors: a hefty increase in investor spending and the “emerging pressures in the housing market” – that is, a housing bubble.

It is true that the level of investor spending has increased. Compared to the previous year, investor spending has increased by 40 per cent, and in the six months to June 2014 investment financial commitments stood at $3.4 billion. The investor finance market now amounts to 41 per cent of the mortgage market, which is an increase of five percentage points in 12 months.

Let us ask ourselves: does the increase in investors accommodate or contradict market needs?

June 2014 saw monthly value of residential work totalling $12.2 million, representing a strong annual increase of 14 per cent. Dwelling approvals have also been growing, and over the 12 months to June 2014 jumped by 21.6 per cent. This brings us to 15,967 dwelling units, which is the highest number in 20 years. We may even see an oversupply in some markets.

From the above numbers, I am confident that the increase in investor spending is, in fact, accommodative of market needs, particularly in relation to its after-effects on the rental market.

If investor lending is restricted, how will it impact sales volumes of upcoming dwelling stock that developers are currently promoting? What would be the impact on rental pricing, which is already on an increasing trend? If the number of investment properties decreases, would this not spur higher competition in the rental market, thus increasing the cost of living for renters?

Some might say that restricting lending requirements will drive prices down, as we will have fewer investors in the market, particularly foreign investors, who are suspected to be pricing out first home buyers and fellow Australians.

We know that the percentage of sales to international buyers have increased, although with a national average of 3.4 per cent, this is not as high as suspected. Regional areas have benefited from international buyers – however, at a mere 1.5 per cent, this would not result in price-skyrocketing impact. In fact, most regional areas have suffered a softening in price growth in the second half of 2014, except for New South Wales (0.8 per cent), Queensland (8.8 per cent), and Northern Territory (7.9 per cent).

However, what is the percentage level of foreign investors who borrow from our banks? A large number of foreign investors would be able to source funding from their country-of-origin banks, and many are paying in cash.

If it becomes difficult to obtain a loan for investment purposes, does that not put our fellow Australians at a disadvantage in comparison to foreign investors?

Yes, the prices may dip slightly, as there are fewer property investors in the market; however, is this sustainable in the medium to long term, once foreign investors realise the impact of such lending restrictions on Australian investors?

A key factor in APRA’s decision is “emerging pressures in the housing market”, and a fear of investors driving up prices to such a level that we have a housing bubble.

My question would be: has APRA considered the Australian property market holistically or just certain capital city pockets?

It is no surprise that the three main capital cities – Sydney, Melbourne, and Brisbane – have had price growth over the past 12 months, albeit a softening in the second half of 2014. However, is that the case in each state’s metropolitan – and, most importantly, regional – property markets? Let us not forget that our property market is not just restricted to capital cities.

Median price growth in Sydney for Q1 2014 was 11.6 per cent, however, the figure shrinks rapidly as we look at metropolitan areas (6.3 per cent) and regional areas (2.4 per cent). The same can be said for Queensland: price growth in Q1 2014 for Brisbane was 3.2 per cent, however, growth declined by 0.9 per cent in regional areas. Granted, the regional market does experience greater fluctuations than capital city markets; nevertheless, it dispels the notion that all of Australia is experiencing a housing bubble.

I therefore re-state my claim: Is APRA’s restriction on home lending necessary? And would such a move have a positive sustainable impact on the property market? 

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Dr Diaswati (Asti) Mardiasmo

Dr Diaswati (Asti) Mardiasmo

Dr Diaswati (Asti ) Mardiasmo is the National Research Director at PRDnationwide; responsible for delivering property asset related research services to all PRD franchises across Australia and beyond. Asti has completed a PhD in Asset Infrastructure and Management, Master of Business (Research) in Public Administration and Governance, and worked on numerous research projects for government and industry.

Asti has published her work widely in a range on internationally acclaimed academic conferences, practitioner conferences, journals, book chapters, and published reports. Asti is also a sessional academic at Queensland University of Technology, providing lectures and tutorials in subjects such as economics, international business strategy, intercultural communication and negotiation, and entrepreneurship.

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