While many would regard electricity prices and water security as Australia’s two biggest priorities, it’s been suggested that the single most important task for our political leaders to address right now is to clip the wings of the banking regulator, APRA.
According to respected property market research firm, Propertyology, what was supposed to be an exercise in reviewing Australian credit standards has quickly become a course of economic destruction which the federal government must swiftly address.
The downward trajectory of national housing finance approvals is a much deeper issue than falling property prices in Sydney and Melbourne.
Propertyology Head of Research, Simon Pressley, says that the extent of recent intervention by Australian Prudential Regulation Authority (APRA) was completely unnecessary and that anyone who aspires to see a strong national economy should be concerned.
“The grip that APRA have on national credit supply is now so tight that we now have a significant blockage of a major artery of the economy. If the federal government don’t quickly intervene, much of the good work of the last few years will be quickly undone and 25 million Australians will pay the price,” said Mr Pressley.
Over the last 12 months, the median house value in Sydney and Melbourne has fallen by $80,000 and $40,000, respectively. Those who purchased during the last 12 to 18 months will already be feeling more than a little queazy.
What started out, in 2015, as a series of regulatory meddling aimed at investors to take the heat out of Australia’s two most expensive cities, it now affects every Australian who wants to borrow money for real estate. From first home buyers, to renovators, downsizers and upgraders.
“This will soon become a drag on retail spending and job creation. It will stymie any chances of the wages growth that everyone has been waiting patiently for. And it will create a big red hole in state government finances due to the signification reduction in property taxes and GST receipts.”
It’s time to back off
Mr Pressley said while the credit policy changes may have been well-meaning back in 2015, there was always going to be unintended consequences given its sledge-hammer approach to credit policy nationwide.
“The property boom barely got outside of Sydney and Melbourne, yet the entire nation was subjected to the changes. Other states would actually benefit from stimulus, not tightening.”
He said the second round of APRA intervention had taken the sector to an entirely new level of woe with creditworthy everyday Aussies struggling to secure finance.
“I estimate that APRA’s actions have directly resulted in a 5 to 7 per cent drag on property prices nationally over the last 12 months. But, make no mistake, if the federal government doesn’t intervene very soon there will be a big knock-on affect to the economy.”
Pressley says that, given the technoligal advancements of the last 10 to 15 years, we should have seen significant improvements in loan application efficiencies. If we were aspiring for a world-leading banking system we’d be aiming to approve something as simple as home loan within 24 hours. Instead, the loan assessment processes has blown out to 3 or 4 weeks.
“We’ve replaced the Apple Mac with an abacus.”
As for credit policy, Pressley says that Australia never had poor credit policies in the first place.
While the Banking Royal Commission did reveal a caustic sales culture, he says that didn’t mean that the national loan book was horrendous quality, nor did it mean that the public were the ones who should pay the price for bank misconduct.
Coming out of the GFC, Australia was touted world-wide as having one of the most prudent credit policies on the planet. Recent data released by Core Logic shows that home loan arrears, delinquencies and foreclosures are at all-time lows, and reducing.
“Whether buying your first home, expanding for a bigger family, or investing for future financial independence, most of life’s biggest financial decisions require credit. APRA’s actions are completely baffling.”
The current loan assessment criterion is bordering on farcical, he said, with borrowers grilled on minor expenses as well as having to stand up to hypothetical future interest rates that have no bearing to reality.
“For decades, a borrower’s ability to service loans has always been stress-tested with an interest rate loading of about 1.5 percentage points higher than the rate on offer,” Mr Pressley said.
“Today, a borrower might apply for a loan with a 4 per cent interest rate but the bank will be assessing affordability using between 7.25 and 8 per cent. To put into context just how ridiculous that is, there hasn’t been a single increase to the RBA cash rate for more than two years – borrowers may be dead before we see 16 rises of 0.25 per cent a pop.”
The biggest challenge that today’s borrower faces is APRA enforced changes to assessing a borrower’s living expenses. For generations, banks had applied a benchmark annual living cost that was determined by how many adults and children were in a household. APRA now require borrowers to itemise 30 separate living expense categories.
Credit officers are now declining loan applications based on arbitary assessments of spending on things like netflix, uber eats, pet food, a new dress and expensive haircuts.
Mr Pressley says credit assessors appear to be blatantly disregarding a borrower’s ability to maturely adjust their discretionary expenditure and honour financial obligations.
“This isn’t America. Australian borrowers have their own skin in the game when they buy a property. They are required to stump up a genuine deposit and can’t simply hand the keys back if they don’t want to pay the loan back,” Mr Pressley said. “If they fail to honour obligations, their poor credit history becomes public knowledge and their entire financial future is grossly in jeopardy.”
“That’s always been the way. An overwhelming majority of Australian borrowers will do whatever is required to stop their home loan or investment loan falling into arrears. Our nation’s track record of low home loan arrears and low bankruptcies proves that. If it aint broken, why fix it?”
The Law of Unintended Consequences
The national reduction in property transaction volumes is largely due to en masse absurd questioning of a buyer’s ability to repay and Mr Pressley said the law of unintended consequences was about to come home to roost.
He said there is an apparent lack of appreciation for the importance of the property sector to the overall health of the economy and a complete lack of coordination between government bodies (from the Prime Minister’s office, to APRA, the RBA, and Treasury).
“Just when a couple of really strong years for job creation was starting to apply pressure to the supply of labour, that long-awaited wage growth is now at risk of being further delayed. The frustrating things is that it’s totally self-inflicted. Why?” said Mr Pressley.
“Circulation of money through Australia’s economic system diminshes when someone turns the credit tap off. Funding for much-needed infrastructure dries up when state and federal government revenue reduces because fewer people are paying fewer property taxes.”
“Australia already had responsible lending policies. Clearly, we needed better policing of those existing policies. Instead, what we’ve seen from APRA is radical and unreasonable reform that, unless stopped, poses a real risk of a road to recession.”
“If someone doesn’t grow a set of balls and intercept quickly, that snowball of financial woe that has started rolling down the hill will have built up a significant head of steam that may ultimately cause considerable economic destruction.”
Propertyology is a national property market research firm and buyers agency. We help everyday people to invest in strategically-chosen locations all over Australia. The multi-award-winning firm’s success includes being 2018 winner of Buyers Agency of the Year in REIQ Awards For Excellence and a finalist in the 2017 Telstra Business Awards.