Treasurer Josh Frydenburg is urging the banks to ease their lending clampdown for the public good. (Aust Financial Review – Nov 9th 2018). Josh noted that credit growth is half of that three years ago, driven predominantly by a slowdown in lending to investors. I am not too sure whether I would be pointing the finger at the banks for instigating the slowdown, the Government and Regulator seems to have had a reasonable hand in the downturn.
The Regulator, APRA imposed a growth limit of 10 per cent to investor lending growth in 2014. In March 2017, APRA imposed a 30 per cent limit on interest only lending. In mid-2017, APRA announced targets in uplifts in capital resilience, as the industry makes progress towards being “unquestionably strong”.
The current Government fought off calling a Royal Commission for quite some time, but finally relented after political pressure, including Nationals senator Barry O’Sullivan drafting a bill calling for an inquiry and two other Nationals threatening to cross the floor to support the bill. Amongst many egregious examples of bad behavior exposed by the Royal Commission, the banks were discovered using a thing called House Expenditure Measure (HEM) to determine borrowing capacity. UBS stated in the vast majority of cases the “basic” lifestyle assumption is used. This saved the banks the trouble of actually working out what your expenses were. The example used was that someone on an $80,000 income with ‘basic’ expenses of $32,400 could borrow $337,000. Using a more realistic expense measure of $50,000 results in the borrowing capacity falling to $196,000.
So, to be fair, the banks really haven’t tightened their credit standards themselves – they are doing what they have been told, because if they don’t, there probably is a fair chance the consumer can make a complaint.
The State and Federal Government also stacked on a few taxes to overseas investors as both a revenue measure and placating the locals with doing something about overseas investors buying local property and pushing up prices.
State Govt Special land tax – additional 6.5% tax on the purchase price, on top of the standard 5.5%.
State Govt Vacant Residential Land tax – 1%
Federal Govt – Absentee Owner Surcharge
Application by overseas resident to purchase property – varies but around $1.5%
Same fee applies each year after purchase.
But the cold hard reality is that the Government and the Property Industry needs a healthy Property market. The current Prime Minister, Scott Morrison, was the National Manager for Policy and Research for the Property Council of Australia from 1989 to 1995. He will understand that a falling property market will not be healthy for various sectors of the economy.
With interest rates at 1.5 per cent, there is not much fire power left in Monetary policy, and a decade of stagnating wages hasn’t given the consumer much room to move if they cannot rely on capital growth. My guess though, is that interest rates are more likely to fall than rise.