At one level, the decision by bank regulator APRA to scrap its ‘speed limit’ on the growth in investor mortgages looks like madness.
Just as property prices are starting to retreat from super-unaffordable levels – Sydney prices fell 2.6 per cent in the March quarter – why would the Australian Prudential Regulatory Authority want to help investors once again outbid owner-occupiers?
When APRA introduced its ’10 per cent growth’ limit on investor mortgages at the end of 2014, the banks responded just as planned. Rather than turn investors away at random, they simply increased investor loan rates until enough new borrowers voluntarily walked away.
Three-and-a-half years on, the result is a large disparity in borrowing rates.
The Ratecity comparison website released data on Thursday showing that APRA’s change would “throw a lifeline back to property investors”, who are paying considerably over the odds for their loans.
For principal-and-interest loans, investors pay an average 4.72 per cent compared with the 4.29 per cent charged to owner-occupiers.
And for interest-only loans, investors pay 5.02 per cent compared with 4.70 per cent for owner-occupiers.
That pricing differential has forced over-exuberant investors out of the market, and has given young first home buyers more of a chance of winning the bid on auction day.
Investors accounted for 45 per cent of new loans when the speed limit was introduced in December 2014, but only 35 per cent today.
Not so mad
So while investors see the end of the 10 per cent cap as a ‘lifeline’, first home buyers will feel it as yet another kick in the guts.
They can add it to other economic grievances including stagnant wage growth and out-of-cycle interest rate increases caused by global rather than domestic factors.
That’s why at face value, many will think APRA and its chairman Wayne Byers, have finally gone barking mad.
The sad truth is that what APRA is doing accords perfectly with its mandate of keeping Australia’s banking sector ‘unquestionably strong’.
It is just not the prudential regulator’s job to worry about the split between investors and owner-occupiers in the market, or the extent to which ‘generation rent’ is being priced out of home ownership.
In announcing the end of the speed limit, APRA said it was confident that any bank that had previously stayed under the 10 per cent threshold was responsible enough to set its own internal lending benchmarks and, well, go for it.
The finger of blame
When APRA announced the speed limit policy, a number of commentators including myself praised the measure – not because we like regulators meddling in the free-flow of capital within the economy, but because it offset the harmful effects of other interventionist policies.
Key among those policies are the twin lurks of negative gearing and the capital gains tax discount.
Together they made it highly profitable for investors to borrow large sums and outbid owner-occupiers.
The investors’ profits came from a combination of capital gains, taxed at half the normal rate, and the large tax refunds they receive from the Australian Tax Office after writing off interest and maintenance costs against their other non-property income sources.
So as long as those laws tilt the playing field in favour of investors, it was nice to have APRA tilt it back to the other way. One ludicrous set of laws could balance out the other.
But is that the way to run an economy? Should capital flows be that blatantly interfered with in a so-called ‘free market’ system?
Of course not. The original source of the problem needs to be addressed, and as soon as possible.
Every day that the negative-gearing/capital gains tax breaks remains in place is another day of ripping off young home buyers and taxpayers, and shovelling the proceeds into the pockets of property speculators and bank shareholders.
APRA is not to blame for that – blame successive governments, including the Turnbull government, that have tried to argue negative gearing and the capital gains tax discount should remain untouched.
In 2016 Labor finally promised to rein in both tax breaks, which really is the only long-term solution.
Without such reform, we’ll be looking to regulators like APRA to address mistakes that weren’t of their making, nor within their mandate to fix.