28 Jun Lender restrictions hold the market back – John Flavell
The Mortgage Choice Annual Investor Survey has found that investors are being affected by lending restrictions introduced by the banks. What sort of restrictions have the banks had to make and how does this affect borrowers? John Flavell, Mortgage Choice Chief Executive joins us to outline what is happening.
Kevin: Over the last 16 months, most of Australia’s lenders have been forced to tweak their policy and pricing in order to stem their level of investment lending growth. Let’s get a bit of an insight on this. Mortgage Choice chief executive John Flavell joins me.
John, thank you for your time.
John: Thank you very much for having me.
Kevin: There is a changing landscape, isn’t there? But even in recent times we have heard that some of the lending criteria may actually just be being loosened again, John. Is that correct?
John: I think our markets find their own level after a while, don’t they? We saw quite a lot of change starting with the September/October period last year in relation to policy and pricing, specifically regarding investment lending on the back of the Prudential Regulator’s desire and direction to our lending institutions to cap the growth on investment lending to no more than 10% annually.
Kevin: The Mortgage Choice Annual Investor Survey found that investors are being affected by lending restrictions introduced by the banks. Tell us about those restrictions. How strong are they?
John: Sure. As I said, the intention from the regulator was to cap the growth in investment lending to 10%, and in order to limit that, you saw a number of changes from a policy front and also from the pricing front. Both of those things actually have an impact of subduing demand and also restricting supply.
From a pricing perspective, you see differences in pricing for investment lending compared to owner-occupied – it may be 0.8% or 0.9% – and then from a policy perspective, a lot of lenders turned around and capped the loan-to-valuation ratios on investment lending and may have made adjustments in terms of concessions for proportion of rental income that can be contributed to debt servicing. Then they may have precluded lenders from certain geographies or lending in certain geographies, and all of those things have changed the shape of the market a little bit.
Kevin: Of course, all of this is on the back of people wanting to make housing more affordable. Do you think it’s really having that impact?
John: It’s an interesting thing because I suppose at the end of the day, when I went to school, the worth of an asset was always determined by supply and demand, and in the instance of housing, then housing affordability is also determined by the cost of credit and the access to credit. You don’t really change the overall demand, but what you end up doing is changing the shape of the market.
What we’ve found is that those investors who have been pushed out of the market are the ones who are actually the would-be first-home buyers who are looking to use an investment property as a leg up into the market.
Middle age, middle class Australia who have equity in their home who are typically paying higher rates of tax, then these sorts of changes haven’t taken them out of the investment market, but the younger people who are saying, “Look, I can’t quite afford to buy my first owner-occupied place, but I’ll get in an investment property and leg myself into the market,” they’re the ones who are being pushed out of the market, so it’s a real challenge.
If you’re saying that the object of the exercise in some parts is to actually increase housing affordability or access to housing, then the people who you want to encourage and give a leg up to the most are the ones who are being pushed out.
Kevin: As we head towards a Federal election, typically at this time we tend to see the market slow down. But that certainly is not what we are seeing. Let’s have a look at Brisbane, as an example, where we’re seeing a lot of investors now flocking back into the market. How much of that has to do with trying to get in just in case Labor win the next election and play around with negative gearing?
John: It’s a great question. You’re always going to have an impact on the market when you talk about legislative changes. There will be those people who, as you’ve said, are saying, “Goodness. In advance of the change, I’ll make my move now,” and they might accelerate activity. There will be people who are possibly contemplating selling investment properties who are saying, “Geez, if I sell this investment property, my ability to get these sorts of concessions under a Labor government might not be there in the future, so I won’t sell.”
It distorts markets. Even talk of legislative changes – to your point – distorts markets. There probably is a good portion of acceleration in the market at the moment in anticipation or in the off-chance that there might be some changes, and that’s not unique to this market.
If you look at the buy-to-let market in the United Kingdom in particular, where there is a raft of legislative changes coming in to restrict the tax concessions to investors, what that has done over there is effectively stalled the market. People are not selling property at all. It’s actually driven prices up, and it’s also driven rents up, as well.
So you have to be very careful about what you even utter, let alone what you do, because it does have an impact and it does distort markets.
Kevin: We’re certainly seeing that right now. I guess the politicians will never learn those kinds of lessons. They tend to play around the edges.
Let’s talk about interest rates. Where do you see them going? There is talk that there may even be another drop in the next 12 months. Do you subscribe to that?
John: If you take the widest and best-considered view of the market, then you look at the forward rates, and if you have a look at the forward rates, then the market is actually pricing in another cut in the cash rate over the next 6 to 12 months. It’s in the forward rates there.
If you ask yourself the question, “Where does this go in the next 12, 24, and 36 months?” then things that are happening globally have an impact on that. In the US just last week, Yellen made comments to the effect that the Fed was contemplating actually upping rates again and that they were probably going to consider doing so moderately. The last time she said that, of course, that led to a real sell-off in the equities markets.
The markets globally are very, very, very, very, sensitive. But if you looked at this next 12 months or 24 months, the market is pricing in another cut to the cash rate over 12 months. And if you look further out, the market is actually expecting the cash rate, within Australia certainly, to stay at these lower levels. There is not a pricing in there with an expectation of a rate increase in the next 12 or 24 months.
Kevin: It’s always great talking to you, John. Thank you very much for your time.
John Flavell, Mortgage Choice chief executive. Thanks for your time, John.
John: Thank you for having me. Bye-bye.