APRA can’t wait for Basel IV, ‘Unquestionably Strong’

April 6, 2017 admin Australian Economy 68

With a fire raging in the Melbourne and Sydney property markets, incentivised by emergency low interest rates, negative gearing and capital gains discounts, APRA has announced it can no longer wait for Basel IV banking reforms. The regulator plans to implement a new round of stringent regulation starting mid year.

“Without clarity as to a deadline for an agreement in Basel, we have decided it does not make sense to wait any longer to deal with the question of ‘unquestionably strong’,” APRA’s chairman Wayne Byres said in a speech on Wednesday night.

According to Corelogic, Australian house prices are growing at the fastest rate in 7 years.

The plan is understood to involve increasing the minimum risk-weights on property investor loans, and hence requiring the banks to hold billions more loss absorbing capital and be ‘Unquestionably Strong’ for when the inevitable property correction comes.

“If we are going to put an increasing number of eggs into a single basket, we’d better make sure that basket is an unquestionably strong one,” remarked Mr Byres.

Banks are expected to pass on the cost of increased capital to property investors through higher mortgage rates.

» APRA drops housing capital bombshell – The AFR, 5th April 2017.
» Real estate: Mortgage costs to rise as APRA hints at further home loan crackdown – The ABC, 5th April 2017.




68 Comments

  1. Sooo… riddle me this then: does this mean that the savers are going to continue to “take one for the team”? Not for other reason – but I’m rather sore from all the rogering I’ve been getting for the past years now, while everyone else is making out like the bandits they are.

  2. Tick tock tick tock, the bomb has been placed in this bubble, just nobody knows what the timer on the bomb has left.

  5. Friends, Doomsayers, Naysayers, those who get shut down at BBQs by ponzi finance addicts etc…let me share this.

    As of today the Total 12 month ended rolling credit growth for our banks currently stands at 5.0 %.

    This figure was booming pre GFC and crossed under 5.0 % in March 2009 and stayed there until it crossed above it in June 2014. This was achieved by lowering interest rates and loosening mortgage finance.

    Since June 2014 to now we have managed to stay above 5.0 % due to Investor lending, Investor lending was exceeding 10 % p.a through 2014/15.

    Now,this is the current cocktail…were back at 5% and trending down but this time APRA and ASIC are making headwinds for the banks, Investor lending and Ponzi finance is being clamped and business and personal credit is negative.

    Where are the banks going to make their money?

    Personally, I think were baout to see mass unemployment from the banking sector, this is the start of a recession.

  7. I really just don’t understand how a house in Melbournes Burwood East can demand $1,000,000 when you can rent a fairly decent 2-bed home in the same area for $380/week. Can someone please explain this to a layman. It just doesn’t make sense to buy anymore.

  8. I’m literally waiting to turn the radio on one morning and hear about a wave in unemployment. Someone close to me works high in the employment services industry, very closely with the federal government.The amount of panic they are in to ensure the numbers don’t reflect underlying conditions is unprecedented.

  9. @ Damian it doesn’t make sense, theres no yield only capital gains. The will to buy is based purely on capital gains speculation.

  10. @ 5 Jamie,

    Yes correct!

    The banking sector is massive. 35% of the All Ords.

    And the flow on effects are huge. Just one random example: I know of two people in Sydney in IT recruitment. For them its all about the banks. When the banks start spending money on IT the amount of people they employ is massive. And when they stop…

  11. @ Damian

    Oh yeah? You think you have a head scratcher? Hear this one: How the f!@#!%^ can you justify $750,000 for a place 30 minutes out of Maclean (NSW) when local salaries are no bigger than $40,000-$45,000

    And don’t tell me that it’s the views of the f-in lake.. You can certainly can’t eat the freaking views, they’re not particularly nourishing. And judging by looking around – the local population is either really old pensioners or young-ish suckers who are working from 5:30AM to 6PM so they come back in the dark – so much for the views! Oh – and they sleep their weekends because they’re too tired…

    ‘Straya, f%&#ck yeah!

  12. @John@hotmail (message 4)
    >I hear you cant go wrong with tulips.

    I hear the same thing: The only thing better than roses on your piano are tulips on your organ. 😀

  13. @7, quite simply you can demolish a house and put up 6 apartments and sell them for $450,000 each.

  14. The scariest sentence in the English language is “I’m from the Government and I’m here to help”
    So APRA increases bank holding costs which are passed on to the property investors who in turn increase their negative gearing and pay even less tax making the taxpayer pick up the shortfall. As Einstein said “Both stupidity and the universe are infinite … although I’m not sure about the universe”

  16. Its an interesting story “7:30 Report does investor speculation”

    Although one thing I hate hearing is the term “cashed up investors” which is used throughout the story. This is a LIE, they’re simply getting IO loans with the smallest of buffers in spare income.

    A very large percentage of speculators (at least 2/3rd) are using IO loans and are unable to afford the loans otherwise. One of the issues with this is that the IO period usually only lasts 5 years at which point it reverts to a 25 year P&I loan and the repayments for a 25 year period are higher than if it were 30 years. Most of them try to extend the IO period another 5 years with the same bank if possible but then it reverts to a P&I loan with a 20 period. The bar is higher to get this approved as serviceability comes into question. If they fail this they can either sell up or try to refinance with another bank which a lot of them do. If they don’t do it at the 5 year mark they most definitely will at the 10 year mark as the P&I repayments on a 20 year period are too crushing.

    Many speculators and mortgage brokers on the property forums have remarked about how much harder it has been to keep rolling over these IO loans as well as sign new loans since the APRA 10% growth limit. If they think that was hard, now they’re faced with an even tougher limit with APRA’s 30% max on new IO loans.

    As a lot them are about to find out (most are oblivious to these things until it happens) they’re playing a game of rapidly decreasing musical chairs.

    Looking at the data going back to 2012 since there has been a huge jump in IO loans, many of those loans are already starting to come off their honeymoon period but we haven’t seen anything yet!! IO lending was peaking just before the new APRA growth limit and we’re going to see a lot of this start to fall off a cliff in the next few years.

    Speculators like to claim there will be no crash as long as they hold their properties and don’t sell in a downturn. But 2/3 of them are in a situation where they have no choice but to refinance lest they sell their property due to the repayments being too expensive. This refinancing will come back to bite them especially if the market starts to soften which it will eventually under its on weight.

  17. @ 7 Damian

    Bingo!!!!!!

    Yes, if things stay as they currently are (imagine prices don’t rise, so they are static) then the land lord gets no positive return on their capital…….

    So one of either two things can happen:

    A: Prices must rise for the current landlord to receive a return on their capital

    or

    B: Prices crash to a level where a return can become positive off the current rent

    ok, there is a third one, but it’s just not gonna happen

    C: Rents rise to make these places have a positive return (Hint: Rents are tied to wages more than any other input…wages are falling in real terms, hence the static/falling rents being asked)

    So if scenario A plays out…. Where does that lead??? Back to where we are now! Because the new land owner has the same predicament….

    So it’s a endless loop of scenario A’s until, there are no more idiots… then scenario B will occur.

    Apra/Banks are doing their best to see interest rates rise….

    There is NOTHING left in this bubble…. A few greedy foreigners, and a handful of really, really dumb and/or gullible locals.

    How long can it last??? It’s already a dozen years past my first expectations… But then I see how desperate the banks are to lend against property. Who knows.

  18. Just flicking through J is for Junk Economics by Michael Hudson last night (it is effectively a dictionary of economic terms and economists). In the entry on Hyman Minsky he describes the three stages of the financial cycle:
    1. Hedge phase, where both interest and principle can be paid.
    2. Interest only phase where debtors can only afford to pay the interest on their loans.
    3. “Ponzi” phase where borrowers need to borrow the interest as it accrues (as in a negatively amortising loan where effectively you’re borrowing the interest through your deposit). It only works for a short time while price inflation outstrips the rate of negative amortisation.

    And then of course there is the Minsky Moment.

  19. I have said it all along….Housing shortage when one guy has ,2,5,10,15 properties, yet some don’t have 1. Yeah Housing shortage, You just cant take any of this stuff serious, just sit back.

  20. @19 John

    The housing shortage myth is a cracker. Residents per dwelling, the actual statistic that measures how many people live in a dwelling, has been falling for years…….

    If people can easily believe there’s a housing shortage (when the evidence is clearly that there is an abundance of dwellings), shows how easy it is to get them to borrow to buy such an items…and they have been.

    Like any money making scheme, only 5% of investors will come out of this with any profit.

  21. 16- Bubby- is that right about an IO loan extension being part of the full loan term?
    Did not know that… Farrrrrkkk…… IO roll overs this year from 2012. If they get turned down & it’s P&I, well, I don’t know but it all sounds a lot like the plot from The Big Short.
    I don’t know…. My guts been wrong for a few years but with a lot of figures still around post gfc levels my dosh is on big cut backs & lay offs after July 1.
    The party’s over but they’re still spinning the tunes.
    Plenty of vacant shops/ restaurants, no one has any spare cash.

  22. @Ripa

    Eventually the banks wants you to start paying the money back. It’s the true definition of kicking the can down the road.

    I believe they can get the loan term reset to 30 years if they refinance with another lender. Which is what most of them do or try to do if they make it to the 10 year period with the same lender.

    But its been much harder to refinance since the APRA 10% growth rules and its only going to get even more harder with this new 30% IO loan limit.

    But if the number of P&I loans getting written actually decrease in the future (something that will happen in a downturn) then it will leave and even smaller 30% fraction available for IO loans!!!

  24. @23

    Sounds like the US just prior to the GFC. US government wanting to get every man and their dog to become home owners because it would be good for the economy somehow.

  25. I see ScoMo threw the kitchen sink at it today.

    Tax incentives for boomers to sell empty nests and turn the family home into cash. Meanwhile the Gen Y family takes on debt burden in exchange (Ponzi finance).

    Gen Y take out debt (mortgage) to finance the pension payment foregone (avoided by the government). Then, whilst paying the huge mortgage, also pay taxes to fund the remainder of pensions the government remains short on.

    House prices maintained – Check
    Government pension avoided – Check

    Two Birds, one stone, no brain.

  27. @ Jaime

    Yes! So by allowing the young to use super to pay for housing, they effectively pay the retirement of the boomers!

    This is a sick, perverted game they are playing.

    I’m not sure they understand how angry the young are. I don’t use social media, but if these sorts of schemes can be explained to the young, lord knows what will be the end result.

  28. Guys and girls,

    They have to say something. They have no idea how to fix this. Both parties realises correction is the only cure. But who’s gonna tell half the nation that they need to take a haircut, that will lead to financial oblivion for families and the economy as a whole. This is going to lead to record family breakups. The entire fabric we know is at great peril. And is on life support.

    No, they have to say something if only to maintain face. They know it’s gonna pop, but to be seen today doing nothing and say nothing is worse. It’s weasel words to appear after the pop that we tried….

    I’m headed for the sewer for better leadership. It least the smell rings true.

  29. @ Matty , I know..I’ve been posting it online on my FB regularly, some people are like are you sure about this?!!!?

    The commitment to demand side stimulus is truly staggering. The dogma about supply side stimulus continues with no evidence of action for it.

    If nothing else my knowledge on this topic has exploded exponentially in the last 12 months.I knew it was wrong fundamentally but hadn’t pulled the covers back on it until I started looking about a year ago at what Steve Keen suggested..which is when I started looking alot at the ABS and RBA figures.

    I was talking yesterday about bubble psychology and I had a laugh about the whole Bernard Salt Avo and Toast thing..hasn’t that just completely evaporated in the last few months. That in my opinion was the last breath of cognitive dissonance expounded by vested interests before APRA and ASIC come out in plain English and said ‘Actually , yeah…she’s a bubble”.

    I truly wonder how the psyche of the average strayan dowunda is going to transition through this. “Safe as houses” just wont have the same meaning…what will be safe? What will the trades and services self made tanned battler hedge on now?

    I am waiting for mass government spending and commitment on infrastructure in a ‘trades and services’ bail out plan. Plenty are getting nervous, INPEX Darwin has just about imploded and Gorgon and Wheatstone are at final.The amount of tradies praying Adani Carmichael comes through is growing.Another case of eggs in one basket, mining construction tanks, then housing tanks..where’s a bloke spos’d to get some cash for arvos down the watering hole! (By the way I’m trade and degree qualified, so don’t take offence to the slanderous tone fellow brethren)

    Nothing tells the story more than this link which I still cant get over the lack of talk about..reposted again for those that missed it.

    http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5625.0Main%20Features2Dec%202016?opendocument&tabname=Summary&prodno=5625.0&issue=Dec%202016&num=&view=

    The saving grace spending downunda isnt coming form private, thats for sure.

  30. All industries tanking if not tanked and all fruit veggies meat and fish coming from Asia or
    South America . You got to love free trade (not).
    Don’t worry all is good – Real Housewifes of Sydney is on the idiot box .

  32. @ comment 30.

    The all ords tells you that industry is not tanking, its been on the up and up since the GFC. Exports are holding. Veggies and meat fish are substantially local if you want to pay for it. Lets have sensible comments please, not blatant baseless scaremongering.

  33. @ 32 ,
    Yes , the all ords are on the up for the 10% .
    Supported by the stagnant incomes of the working class whose purchasing power has diminished
    drastically . The stock market is gambling for the elite only . Insider connection and the profits are
    very lucrative without the need of real productive investment . This is the reason why we are where we are today .

  34. @32

    I’ve been advised the all ords is primed for a correction. Companies are turning the wheels of capitalism ATM, oiled with the blood of workers. Why aren’t company wages rising like their stockholder owners shares seem to?

    Remember we won’t be making cars soon.

  37. Patrick , yes 50 years ago Australians produced 95% of vehicles driven here . We had tariffs .
    Houses were affordable . Wages were growing yearly . Then , this place was the envy of the
    world . A shining light . What happened ?

  38. Australian workers are being paid what they are worth!

    For the same reason you can’t buy BHP at 5 bucks a share.

    Arguing that workers are exploited = socialist propaganda.

    But I love the imagery: “oiled with the blood of workers”.

    Sounds like something out of Macbeth.

  39. @ 32

    No, the all ord’s is simply the current valuation of these stocks, nothing to do with their real value, expected future earnings or growth.

    Or as in modern times, simply a consequence of artificially low interest rates coupled with QE, and cash looking for a liquid home.

  41. @38

    Lol, not Shakespeare’s work, was Lisa Simpson.

    Not saying workers are exploited even if some are, just saying the maths doesn’t add up.

    On a side note, I wish you all a Happy Easter. As the Canadians say, “peace oooot”

  42. This country…. only for rich people…
    Sorry for young folks and new comers..
    As u already knows there is no hope in Aus..

  43. It’s not that bad really, but we all need to acknowledge that our political system has totally failed us, and we need to fix it.

    I mean, how can we have turned a massive mining boom into little else but a colossal housing bubble?

  46. Interesting to read sensible comments on here as always, today I was looking at the ‘Total Value of Dwelling Stock” near the bottom of this ABS page, and previous releases (tab at top of page) it is mind boggling how recent stock value increases in the last quarter of 2016 have jumped up to $274M increase compared with a $112M over the September increase. It will be interesting to see the March quarterly report.
    http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0

  48. The Gold Coast is in a pre comm games bubble. Rents are tracking WITH house prices, most up 20 – 30 % together in the last 3 years….Vacancy rates are under 1% in most suburbs. I don’t know who the hell are paying these extortionary rents.

    I work for the public service, there is major concern over the infrastructure handling it.So much so that the official mandate is not to travel to here, but book accommodation. AirBnB will be sucking the available rent stock into a black hole for about 2 months. Cannot wait to see the aftermath here.

  49. @Jaime

    Here in SA it’s very, very interesting.

    The $1m + stuff is going gang busters (seriously, $1m for a place in Adelaide???? Let alone $4.5m or whatever the record is now)

    Upto $400k is a fight between first home owners, OO and specufestors.

    Above $400k is a ghost town, open days have no one through. A mate just picked up 9 acres, ~50mins from CBD, double story brick house, 4 car garage, implement shed etc for $600k. Awesome deal.

    But I suppose, I’ve thought the crash was here for the last 15 years now. Who knows when it does come, but I do know, it’s gonna be epic.

  50. @jamie
    I see Qld Gov (Department of Housing) just finished advertising for $100K Project Manager to develop Commonwealth Games Housing and Homelessness Plan due to the Games pushing up rents on Gold Coast and surrounds, they are predicting homelessness in the private rental market which will overwhelm support services. When the games are complete hopefully things will look brighter for rental prices which are currently (as you prob know) rather inflated.

  51. @ Guy, I didn’t know that was happening. The cheapest house here within reasonable distance to anything is $450-$500. I’m in the cheapest non ghetto modernised 2 bed apartment I can find. It’s still $420 p. Week, take an average wage, that’s above mortgage stress threshold but renting.

  52. If we buy here it will be post comm games, prices are unpalatable.The median just crossed $600 k. 2 bedroom asbestos riddled dog boxes on 450 blocks are pulling 650 -700 k because they’re ‘near’ the beach.

    Infrastructure here is exploding, traffic is growing exponentially.

  53. How can anyone compete with stupidy ? People paying high prices and living off bread and party pies and washing it down with cordial. Keep the house. I eat well.

  57. Never fear Bubby, first home owners are gonna be able to speed up their deposit savings. In a couple of years they’ll be able to go from $30k in savings to $40k, just a few hundred thousand shy of what’s needed for a deposit in Sydney.

  58. This FHSA V2.0 is a recession catalyst.

    How will all these cafe’s remain open once the minimum wage earners divert their salary into the new unproductive saving.

    Meanwhile, Private CAPEX tanking has finally set in, the government steps in to build a new airport and stadium.

  59. @58 Jamie

    Yes, lots of big structural issues in the economy. None which will be fixed easily.

    A collapsed credit market, collapsed capex, collapsed manufacturing,
    sure we have strong export numbers, but they’re non-renewable resources, majority owned by foreign interests.

    This is a complete disaster, but almost no-one can see it. It’s amazing.

  60. March numbers
    Private credit -1.5 %
    Business credit 0.0%
    Total credit stalled again at 5.0%
    Stalled, housing flat too given APRA have the word out….. Time to lend to the government!

    Once Sydney plateaus , yields are low enough against current IO rates to make holding a flat investment a bad idea. Even after neg gearing, if your IO is 5% and your yield is 2% your in a jam. I think Sydney will only need to slow to 2-3% growth for ripples to start.

  61. Whats this ? People cash advancing to come up with deposits for a home ? Be patient people.

    Edit (by admin):
    >Genworth Mortgage Insurance warns of risky home loan deposits – 4th May 2017.

    The nation’s largest mortgage insurer has warned that borrowers are scraping together deposits with credit card debt, parental loans and other forms of risky “unsecured debt” as tougher regulations force lenders to require larger deposits.<

  62. @58

    I think the government knows that many will not bother to take advantage of FHSA V2.0 as they didn’t with the previous one so it won’t cost the government much money and it gives them the excuse that they’ve done something about it.

    In related news…

    The thing I find amusing with APRA’s new 30% limit on IO loans is that there is now a large backlog of loans due to or are already coming off their 5 year IO period. At which point the speculator either has to suck it up and start paying 40% more to service their loans or try their hardest to refinance. This is a common topic on the Property Chat forums and its obvious for many that their entire strategy hinges on their ability to keep refinancing without having to switch to P&I.

    So the banks can either:
    A) refinance old loans (which is technically the same as making a new loan)
    B) keep financing brand new speculator loans

    Choose one or the other, a little from column A and a little from column B but NOT both!

    And with the latest figures out for Sydney I truly believe its time to grab the popcorn. Only thing that may postpone it now is more cuts from the RBA but I think they wont move until they see effects from APRA so it will give some time to get the ball rolling downhill.

  63. So the RBA is urging us to borrow less for housing, but the government is urging us that don’t have a mortgage to get one. As if double-think has ever achieved anything.

  64. Most Australian lenders are now refusing to write new investor loans. Certainly, the major lenders are moving away from writing no interest, no deposit loans so I think refinancing is likely to be difficult, if not impossible, for investors coming off five year no interest agreements.

  65. I am sure many have read this article. However, it is becoming abundantly clear that with the start of the (“crash”) the government and media will pass this off as a simple (“slow down”) the title of this article suggests just that.

    “HOUSE prices could fall by as much as seven per cent over the next two years in a “partial correction” as supply catches up to demand and regulators stem the flow of household debt, Citi has warned”

    It really is farcical!!

  66. 7% ….how accurate are these intelligent individuals. They could probably even tell you the streets where these prices will fall. They could probably tell all of us here , up to comment 65, what our birthdays are. The R E market is 7 approximately trillion dollar market. They have no idea!

  67. Sydney prices won’t just stop at a 7% correction. That sounds like a best case scenario.

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