With about half of all investment in property being for investors rather than occupiers, has made Australia a property-banking island. About two thirds of bank business is mortgages, and the banks dominate the stock market. So Australia's economic fate very much depends on the soundness of these two elements in the economy. Especially with household debt soaring to about 100% of GDP, much of that being mortgages.
UBS notes that investment property lending is growing at 11% annualised; the frenzy continues despite the high prices. In part this is because there is so much money chasing so few assets in Australia. As the super pool trillion gets bigger than the stock market the amount of capital is becoming larger than the options available. Especially when investors are keen to get better options than cash. UBS argues that APRA, the regulator, is becoming concerned:
Strong growth in lending to property investors – APRA is concerned about growth in investment property portfolios materially above a 10% threshold. This will be an important risk indicator for APRA in considering if additional action is required.
We see this having significant implications for the banking system. The 10% threshold has been selected after discussions with the Council of Financial Regulators which took into account a range of factors including income growth and recent trends in the housing sector. It is not a hard limit but is a key risk indicator for more intense supervisory action. Such supervisory action may include increased reporting obligations, mandated reviews by external parties and higher capital requirements.
This focus by APRA is very important, in our view, as system investment property lending is currently growing at 9.9% year on year and is continuing to accelerate.
Over the last 3 months system investment property lending growth has grown at 10.9% annualised. As a result any bank which is winning or even maintaining market share risks breaching APRA’s guidelines.
Although bank Boards and Management have been asked several times by APRA not to loosen underwriting standards, we believe they are likely to heed formal announcement and act to actively slow Investment Property credit growth.
APRA data suggests Major banks have grown the flow of lending to Investment property by 25.2% in the last 12 months
Westpac has shown the strongest growth in flow, +40.5% y/y CBA has grown flow the slowest of Major peers, +17% y/y
However, it must be noted that growth in Investment Property credit (and all credit) is an output which is outside the direct control of the banks. While banks can manage loan approvals and funding flows, other mortgage flows such as mortgage redraws (which are often part of a contractual facility), property sales, external refinancing and property paydowns are largely outside their control.
Although data specifically on Investment Property mortgage flows is not readily available (only total housing credit is) from APRA and bank data we estimate that banks will need to reduce new Investment Property approvals (funding flows) by around 10% to reduce credit growth by 2%.
Such action is unlikely to have a material impact on bank earnings as we estimate a 2% reduction in investment property lending would only slow total credit growth down by ~40bp. This would reduce EPS ~50bp, all else equal.
However, by reducing investment property funding availability by 10% this is likely to have a cooling effect on some of the hottest parts of the housing market which we believe is sound ‘macro prudence’.
There are growing signs that regulators are looking to slow the flow of investor capital into property. It was a theme in David Murray's Financial Services Inquiry. Borrowing in SMSFs is likewise being questioned, and may be prevented. And Australia's economy is slowing. It seems like the macro-prudential shackles may soon come on property.