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@https://au.pfinance.yahoo.com/our-experts/michael-yardney/article/-/25144782/what-property-investors-need-to-know-about-impending-macro-prudential-controls/ =What property investors need to know about impending macro prudential controls = September 30, 2014, 4:13 pm Michael Yardney Yahoo7 Finance With property prices (particularly in Sydney and Melbourne) continuing to rise at a rapid rate, the RBA and the Australian Prudential Regulation Authority appear are considering introducing macro prudential policies to ease mounting pressure in Australia’s property sector. Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. Michael has often been called Australia's leading expert in wealth creation through property and his opinions have been featured in major newspapers and magazines throughout Australia. [|Full Bio »]
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We all know it has to come to an end at some time. Something is going to stop this property boom, which has been particularly strong in Sydney and Melbourne. And while most of us thought that it would be the Reserve Bank of Australia (RBA) raising interest rates, things may in fact be slowed down by macro prudential controls on “high risk” lending. Now since this latest buzzword is not in the vocabulary of many property investors let’s look at it in more detail with a Q&A session: What are macro prudential controls? These are financial regulations aimed at minimising the risk to the financial system as a whole, while traditional micro-prudential regulation limits stress to individual institutions. In essence we are talking about measures that are not associated with monetary policy (raising interest rates) which are designed to slow lending, particularly to property investors. These could be policies such as capping Loan to Value ratios or capping Debt to Income Ratios or stress testing borrowers capacity to cope with rising interest rates. Why now? With property prices (particularly in Sydney and Melbourne) continuing to rise at a rapid rate, the RBA and the Australian Prudential Regulation Authority appear are considering introducing macro prudential policies to ease mounting pressure in Australia’s property sector. <span style="background-color: rgba(255,255,255,0);">What’s happened is that over the past 20 years home prices in Australia have almost trebled while average household income has not kept up. The difference has been made up with debt. The ratio of household debt to household income is now 150 per cent - a historic high. <span style="background-color: rgba(255,255,255,0);">In their September Board meeting minutes the RBA notes that “additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later.” <span style="background-color: rgba(255,255,255,0);">According to the RBA’s Financial Stability Review, “the Bank is discussing with APRA, and other members of the Council of Financial Regulators, additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors". <span style="background-color: rgba(255,255,255,0);">Rather than raise interest rates, which would have a sledgehammer effect on our whole economy, it seems that the RBA would like to specifically limit lending to “high-risk” property investment loans. <span style="background-color: rgba(255,255,255,0);">Now don’t get me wrong... <span style="background-color: rgba(255,255,255,0);">The RBA is NOT saying we have a property bubble or that prices are going to crash. Instead they said: <span style="background-color: rgba(255,255,255,0);">“The low interest rate environment and, more recently, strong price competition among lenders have translated into a strong pick-up in growth in lending for investor housing – noticeably more so than for owner-occupier housing or businesses. Recent housing price growth seems to have encouraged further investor activity.” <span style="background-color: rgba(255,255,255,0);">As a result, the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock.” <span style="background-color: rgba(255,255,255,0);">They continued with: <span style="background-color: rgba(255,255,255,0);">“The risks associated with this lending behaviour are likely to be macroeconomic in nature rather than direct risks to the stability of financial institutions… a broader risk remains that additional speculative demand can amplify the property price cycle and increase the potential for prices to fall later, with associated effects on household wealth and spending.

<span style="background-color: rgba(255,255,255,0);">Yes…if property prices keep going up, they’ll have the potential to fall later. I guess that’s the property cycle isn’t it? <span style="background-color: rgba(255,255,255,0);">Have macro prudential measures been tried elsewhere? <span style="background-color: rgba(255,255,255,0);">While you may not of heard of this before, there’s nothing new in these policy instruments, but their use mostly pre-dates the financial deregulation that occurred in the early 1980s. <span style="background-color: rgba(255,255,255,0);">However the term became fashionable again in the wake of the GFC, as it became clear that systemic risks that had built up unchecked in the global financial system added greatly to the severity of the crisis. <span style="background-color: rgba(255,255,255,0);">Macro prudential regulation is advocated by the International Monetary Fund, has been widely adopted around the world including Britain, New Zealand and a number of Asian countries where housing markets were perceived to pose risks to financial stability, and has become the flavour of the month in Australia. <span style="background-color: rgba(255,255,255,0);">However assessing its effectiveness is complicated. <span style="background-color: rgba(255,255,255,0);">Across the ditch the Reserve Bank of New Zealand last year decided to limit the proportion of bank loans with a loan-to-valuation of more than 80 per cent, to 10 per cent of new lending in response to a housing boom in Auckland and Christchurch. Never the less property prices have once again started surging causing the Bank to never the less raise interest rates. <span style="background-color: rgba(255,255,255,0);">And recently the Bank of England announced that it would restrict the proportion of loans that are 4.5 times the borrower’s income to 15 per cent of new lending. Lenders are also required to assess a borrower’s capacity to absorb a 3 per cent interest rate hike in the first three years of the loan. <span style="background-color: rgba(255,255,255,0);">Can’t the RBA just raise interest rates? <span style="background-color: rgba(255,255,255,0);">Yes they could, but increasing interest rates is a blunt instrument that will not only affect our property markets but our economy as a whole, and that’s not what the RBA wants. <span style="background-color: rgba(255,255,255,0);">Fact is our economy is just limping along - growing at a woeful 2% (annualised) in the second half of 2014 and predicted to grow at a below trend 3% in 2015. This means raising interest rates could stop our economy dead in its tracks as consumer confidence and therefore spending dips. <span style="background-color: rgba(255,255,255,0);">On the other hand macro-prudential policies are seen as providing policymakers with a more targeted set of instruments that might complement or even substitute for changes in official interest rates. <span style="background-color: rgba(255,255,255,0);">What does the government think about all this? <span style="background-color: rgba(255,255,255,0);">Recently Treasurer Joe Hockey endorsed macro-prudential controls, provided they are “targeted” and “time-limited.” <span style="background-color: rgba(255,255,255,0);">His support seemingly came about after the International Monetary Fund (IMF) endorsed macro-prudential controls as “the first line of defense to address potential financial stability threats” at the G20 meeting recently held in Cairns. <span style="background-color: rgba(255,255,255,0);">Will these measure slow our property markets? <span style="background-color: rgba(255,255,255,0);">While they may do so for a short time, they probably won’t have the desired effect in the long term. <span style="background-color: rgba(255,255,255,0);">While rising property prices tend to be blamed on ugly, greedy property investors there’s much more to it than that. <span style="background-color: rgba(255,255,255,0);">The combination of the Chinese economic revolution, which fed an Australian commodities boom and fuelled our economy; an immigration program which added a net one million people over three years at its peak and a general shortage of housing at a time of historically low interest rates has produced a long-running property bull market driven by demand. <span style="background-color: rgba(255,255,255,0);">Sure investors contributed to property price growth, but in truth property investors only account for around 38 per cent of the value of total loans. <span style="background-color: rgba(255,255,255,0);">In other words even if the RBA targets “risky loans” from property investors, first home buyers, upgraders and downgraders will still remain out there pushing up property values. As will all the hoards of overseas investors who’ve been fuelling our “off the plan” and new apartment markets.

<span style="background-color: rgba(255,255,255,0);">Are property investors really a threat to our financial system? <span style="background-color: rgba(255,255,255,0);">Probably not! <span style="background-color: rgba(255,255,255,0);">You see, the RBA analysed the types of households and the ages of the Australia’s property investors in its biannual Financial Stability Review and found it was the highest-income households that owed most (60 per cent) of the total investor housing debt. <span style="background-color: rgba(255,255,255,0);">Compared to homebuyers who often take out loans with very high Loan to Value ratios (using Lenders Mortgage Insurance), investors are "fairly well placed to service their debt" and "typically (used) less than 30 per cent of their income to service their total property debt." <span style="background-color: rgba(255,255,255,0);">Interestingly more than half are ahead on their mortgage repayments and seventy per cent of property investors are 40 or over, which is important because the unemployment rate for this age group is very low. <span style="background-color: rgba(255,255,255,0);">In fact the RBA data shows that investors are typically cashed up, know what they doing and present little risk to the financial system or the economy generally. <span style="background-color: rgba(255,255,255,0);">Now I’m old enough to remember a regulated banking industry and credit squeezes that restricted funds for investors and businesses. Paul Keating introduced deregulation and a “free market” for many reasons: efficiency and productivity and equity because regulation simply wasn't working. <span style="background-color: rgba(255,255,255,0);">While some would argue, “let the markets run their own course”, history shows that it is desirable to moderate our surging property markets in some way, otherwise we’re setting ourselves up for another property crash. <span style="background-color: rgba(255,255,255,0);">But remember, it is not ugly greedy investors that are causing our housing crisis. <span style="background-color: rgba(255,255,255,0);">It is mainly related to insufficient housing stock (other than in our CBD’s), a lack of infrastructure and low interest rates. <span style="background-color: rgba(255,255,255,0);">The fact that investors are taking advantage of the low interest rate environment to purchase the type of properties that are in tight supply is not surprising. It's shrewd business and the way capitalism and our housing markets have always worked. <span style="background-color: rgba(255,255,255,0);">So what's the answer? <span style="background-color: rgba(255,255,255,0);">Clearly I'm not qualified to give one considering the experts, our authorities and economists who are much smarter than me have not been able to. <span style="background-color: rgba(255,255,255,0);">However maybe it's a mixture of something like allowing the right type of properties (ones that are sought by a wide demographic of people) to be built in the right locations, then enforce prudent banking practices and keep interest rates appropriately calibrated. <span style="background-color: rgba(255,255,255,0);">We’re in for some interesting times ahead. Tango Technolog Invest Super in Property

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