Analysis: The investor lending dilemma

In its latest statement on monetary policy the Reserve Bank made some important remarks that have largely been overlooked by the mainstream media. The central bank effectively warned that the most likely trigger of a housing downturn would be pulled by property investors. But not in the way you might expect.

“Low rental yields and slow growth in rents could refocus property investors’ attention on the possibility of oversupply in some regions,” the bank said.

“Although investor activity is currently quite strong, at least in Sydney and Melbourne, history shows that sentiment can turn quickly, especially if prices start to fall.

“Softer underlying demand for housing, for example because of a slowing in population growth or heightened concerns about household indebtedness, could also possibly prompt such a reassessment.”

There has been plenty of talk about the number of investors in the market, about financial stability and the mortgage market becoming imbalanced, and lending curbs, rate hikes and capital requirements. However, very little has been said about how the market would cope without investors.

The RBA makes a strong point: oversupply, low rental yields, slow rental growth, potential price falls, concerns about household indebtedness — these are all real concerns that weigh heavily on the minds of property investors.

Until now there has generally been an expectation that investors will just keep on buying, regardless of tighter credit and the regulatory pressures being heaped on the banks.

In December, the value of housing finance for investors fell by 1 per cent on a seasonally adjusted basis. This is the first time it has fallen since April, when it dropped by 5 per cent. For seven months between May and November 2016 investor lending had a remarkably strong run.

“Surprisingly, the RBA’s level of concern around the property market does not appear to have increased despite a further pick up in lending to property investors and rapid price growth in Sydney and Melbourne,” AMP Capital Shane Oliver noted last week.

“This appears to partly reflect the RBA’s assessment that lending standards have tightened, the supply of property is set to rise with longer than normal lags and that part of the recent upswing in investor credit may reflect investors paying for properties bought off the plan some time ago,” he said.

“There still remains a case for a precautionary lowering in APRA’s 10 per cent investor credit growth limit though.”

Australia’s largest mortgage provider has already started pulling back on investors. CBA’s investor loan portfolio, which is valued at $137.3 billion, has been growing faster than any of its big four peers. As of this week the bank will no longer accept new investor refinance applications until further notice. Investors get hit.

Meanwhile the group’s subsidiary, Bankwest, dropped a bombshell by removing negative gearing benefits from its serviceability calculators. Investors get hit.

APRA’s 10 per cent cap was always going to have interesting side effects. Investors are either offered great deals or terrible ones depending on how close the banks sail towards — or in some cases beyond — that magical 10 per cent growth rate.

No one can doubt Australia’s love affair with property. But are property investors being taken for granted? How much more can they put up with before their enthusiasm starts to wane?

“History shows that sentiment can turn quickly,” says the RBA – a clear warning that investors won’t hang around forever. Particularly when money gets more expensive and prices start to cool.

[Related: RBA says property investors could trigger housing downturn]