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Friday 19 May 2017

APRA may deploy its 'special powers'

'Special powers' APRA to the rescue

It was announced in the 2017 Budget speech that the regulator APRA will explicitly be allowed to differentiate loan controls by location. 

This is another move signalling that politicians and regulators don't trust banks to lend responsibly, while simultaneously inferring that they know better than the market what 'should' be happening in terms of property markets and lending activity (which may be a positive thing or a very worrying development depending on your outlook!).

Practically speaking this means that APRA might look to restrict the flow of credit into 'hot' housing markets - essentially Sydney - while presumably steering clear of intervention in markets where prices and rents are in a multi-year freefall (such as Darwin, Gladstone, or indeed any number of of Australia's resources regions). 

This all sounds jolly good on paper, until you think about all of the potential ramifications of regulatory intervention. There isn't the space here to go into detail on this point, but it's a concern!

Lending finance rebounds

The March 2017 Lending Finance figures, which strangely never seem to get any media coverage, saw total lending jump tidily from $67.6 billion to $72.9 billion in seasonally adjusted terms.


Lending to homebuyers was relatively steady in the lead-up to APRA's latest round of macroprudential curbs, while nationally there was a moderate increase in lending to property investors (classified below under commercial finance). 

It's generally reported that lending for real estate is unproductive and risky, while lending to business is productive and a good thing. This may be true to an extent, though there are many sub-trends to take into account. 

Overall commercial lending saw a neat increase in the month of March to be solidly higher year-on-year, even if the recent trend series looks a little flat lately.


Renovations rose to a 6.5 year high in March 2017, as Aussies apparently shunned stamp duties and trading up for staying put and renovating instead, though looking at the numbers in their historical context the 'renovation boom' story seems a bit less enticing. 


Splitting out commercial finance fixed loans by industry shows how lending into the mining sector has all but evaporated, declining by a further 46 per cent over the year to March. Commercial lending to the mining industry has fallen to about a quarter of the level seen at the peak as the resources construction cliff now approaches its nadir. 


Despite this massive contraction, annual lending for construction continues to expand at a sprightly double digit pace, a trend which belies Australia's over-reliance on the residential building sector for employment and growth. 

Investor loans diverge

Carving up loans to property investors by state, it's clear that Sydney investors don't believe in the apartment oversupply and have been doubling down on harbour city real estate with a vengeance. 

Lending for investment in New South Wales surged to a thumping $6.2 billion in March - 39 per cent higher than for the same month last year - signalling a huge rebound since APRA's first round of macroprudential restrictions

There was also something of an increase in investor lending in Victoria which will warrant careful observation. 


The massive divergence in fortunes across the states in the prevailing low interest rate environment is ultimately what led to APRA's new powers to target lending practices in specific neighbourhoods.

While Sydney property has been burning up, property investor loan volumes in the Northern Territory have collapsed to their lowest level in 11 years as prices and rents in Darwin continue to fall. 


The wrap

Overall, it was a stronger month for lending finance in aggregate, with a sizeable lift in commercial finance. 

The housing market figures pre-date APRA's announcement at the end of the month of March that new restraints would be applied to interest-only lending

What the figures do show is the massive divergence in investor sentiment between the resources states and Sydney (and to a lesser extent, Melbourne).

If this continues APRA may be called upon to use its new powers sooner rather than later.