It is beginning to sound like a joke isn’t it?
If you read the news you can’t help tripping over an article speculating on what will happen in the property market. Everybody is talking about it being overheated and yet prices keep going up. This can only mean that conditions dictate property investment as easier and more secure for speculators than other forms of investment.
But we are at the point where investor sentiment is of little or no relevance to the prediction of future prices. This is because our financial sector regulators are hell-bent on action to dampen market growth. While ASIC and APRA might seem at odds on the actions necessary to reduce investor loans, they are committed to the cause.
The Treasurer Scott Morrison has added his five cents noting the government’s concern. Against this backdrop retail banks have announced out-of-cycle rate increases which, paradoxically, seem to have vexed the ASIC Chairman, Greg Medcraft. APRA’s Chairman Wayne Byres on the other hand sees it as imperative for banks to increase profitability to prepare for a downturn.
Where ASIC has certainly got it right is on the issue of interest-only loans. These are of course speculative in nature and they are common to our borrowers because the higher cash-outlay of a principal plus interest repayment loan provides no meaningful principal reduction in the early life of a loan.
To attack this type of loan is to attack property speculators directly, and ASIC knows this is a useful way to dampen enthusiasm for speculation in the property market. At a time when equities are unreliable, and where gearing for equities is difficult to obtain for the average investor, property offers a viable and reliable alternative. Even without a gearing factor, the kind of returns the property market has been providing recent are attractive, but ASIC suspects that the very reason for market growth is this kind of geared speculation.
And it blames an abundance of loan capital. So it believes that if it removes this benefit property investment speculation will reduce. This kind of thinking can lead to further measures if results are not felt quickly. These might include further increases in capital adequacy, increases to sensitizing rates, or even a removal or reduction in tax benefits. It might even ask the government to wake up to the impact of the Significant Investor Visa for applicants acquiring property of $5 million.
In the meantime APRA is taking a sensible protectionist approach. Knowing the market is overheated, and seeing ASIC’s and the Government’s commitment to reducing property speculation, it sees it imperative for banks to shore-up profitability against a potential drop in property prices.
Typically, while the regulators take their respective courses, the government wants the impossible – continued market stability AND housing affordability.
To add grist to the mill self-managed super funds have been allowed to play as well, and given access to bank loans as gearing. Paul Keating has weighed in on the issue only recently. It is true that large superannuation funds that invested in property in the 20 years preceding 2016 returned an average of 9.7% per year to fund holders, but that was then and this is now. The continued entry of self-managed super funds to an already overheated market will not only add fuel to the flames but possibly put at risk billions of self-managed retirement funds.
So what can be draw from this? Well we can expect market interferences to continue until the regulators achieve their goals. We can expect a further tightening of loan capital and a continued reduction in interest-only loans. We can also expect banks to continue to lift interest rates out of cycle with the RBA and this will cause a premature increase in pressure on owner occupiers already suffering from record levels of household debt.
This mounting pressure will continue until the bough of investor sentiment breaks and at that point we can only hope the government is able to release the pressure to prevent the perfect storm of rising domestic interest rates and an exit from the property market by discretionary property investors. If not, property prices will begin a freefall as sales stock exceeds interest from buyers. Then, prices will fall from the outer suburbs inwards.