Our finance expert, Andrew Mirams from Intuitive Finance, has been looking into the impact of the new APRA rules on investors and in today’s show we ask Andrew if APRA’s grip on the banks is too tight.
Kevin: There is a lot of talk at present about what APRA is currently doing – the prudential authority – in terms of putting the screws on the banks and maybe restricting lending to investors. Let’s find out if those APRA restrictions are having any impact and, if so, what impact are they having?
Andrew Mirams from Intuitive Finance has been looking at this. Hi, Andrew.
Andrew: Good day, Kevin. How are you?
Kevin: Well, thank you. Andrew, tell us firstly, what is APRA doing? Can we have a look at what, if any, the impact is?
Andrew: Firstly, APRA is the Australian Prudential Regulatory Authority, and they are charged with looking across the banking sector, making sure the banks are lending in a good manner, they have enough capital to meet all their requirements, etc. Over the course of the last year or so, they’ve had some concerns about the amount of investment lending that has been growing.
You and I both know that the share market has its ups and downs, and if there are not as many opportunities for superannuation and people to put that in, they’ll gravitate back to property which is an Australian favorite. It just appears that with low interest rates and the markets moving quite well in Melbourne and Sydney that APRA is a bit concerned that the weightings of investors and owner-occupiers have got a bit out of hand.
They have just recently started to put a few little measures in place to try and cool the markets and maybe restrict some of the lending practices from some of their lenders to investors.
Kevin: What are you seeing? Is it having an impact at all?
Andrew: Well, it is and it isn’t. The first thing that the banks did and the best way to raise capital is to raise your interest rates, so the first thing that everyone noticed was that people, all of a sudden, were paying a little bit more. To an owner-occupier, that’s a concern.
We’ve done a previous interview about this. Would higher interest rates to investors actually have an impact? My opinion then, as it still is now, is investors will invest on the back of what their end goal is and the wealth creation that property gives them. The fact that they have to pay 0.2%, 0.3%, or maybe 0.4% more than what their home might be at the moment isn’t really a great prohibiter. They’re still in an all-time record low interest rate environment.
It’s not going to stop them because that’s still tax deductible. If anything, it’s giving them a greater tax deduction to still hold that property. Good markets still have their wealth creation happening.
The other thing we are seeing is that some of the lenders that were really specifically involved in investment lending, some of the tweaks they’ve made with their servicing capacities and their ability to lend to investors have really been wound back.
I would argue there is probably a little bit of unintended consequence here because some of your niche players and your strong investment lenders have had to really pull back. They’re reporting their numbers are down by up to 40% on inflows, on applications, so it’s had an impact here. If investors are still in the market, what it’s actually done is it means that now the major banks are actually benefiting from that.
I’m not sure they’ve quite got the tweaks right, and I’ve said this to you previously. I do agree with a lot of the measures they’ve implemented, but maybe not all of them.
Kevin: The one thing we do want is a healthy banking situation in Australia. We don’t want to see a repeat of what happened in America. We’re certainly not headed down that path, I wouldn’t have thought.
Andrew: No. Our banks are rated in the top ten in the world, our Big Four. What Australia has done is, through the lessons of the recession we had to have in the 1980s and 1990s and the ups and downs, Australians are pretty good learners. I think our regulators in the past have done a pretty good job at implementing legislation and responsible lending practices and making sure clients can afford them. Our banks are pretty good at that.
At the end of the day, the banks make money by lending money and holding it on deposit, so they want to continue to go with those practices, but there has to be a balance to all of that. That’s where we’ve recently seen the banks coming out with some capital raisings and things like that to make sure they’re holding enough capital, that if anything was to go wrong, they’re well protected.
Kevin: Always good talking to you. Andrew Mirams from Intuitive Finance. Andrew, thank you so much for your time.
Andrew: A pleasure, Kevin. Thank you.