APRA Steps in to Do the RBA’s Dirty Work
In today’s Money Morning…demand isn’t the issue…RBA’s never-ending party…and hey, if property is more your thing, then there is always REITs…and more…
It has finally happened…
The regulators have had enough, and they’re putting a stop to the roaring property market. Intervening before a truly terrible bubble can form.
But it isn’t the RBA doing the dirty work.
No, instead the task has been left to APRA. A body that is responsible for lending rules, rather than interventionist monetary policies or tools.
As a result, APRA has done one of the few things it can only do: tell banks to lend less. Putting in place a ‘serviceability buffer’ of 3% on new loans. Meaning that anyone looking to get a new mortgage, will need to be able pay back the usual interest rate plus this extra 3% to get approval for a loan.
Needless to say, it isn’t a huge change, as this extra 3% isn’t actually being paid by borrowers. It is just a safety net designed to reduce the number of defaults, should the RBA actually raise interest rates.
Nevertheless, APRA believes it will reduce borrowings. Cutting the max lending amount by roughly 5%, and hopefully cooling the rampant demand for property.
Is it a good change, though?
Demand isn’t the issue
APRA’s new rules, whether they intended it or not, don’t really address the issue in our property market. In fact, they even concede themselves that they expect this move will only have a ‘fairly modest’ impact on credit growth.
That should tell you that this is more of a warning shot than anything.
That’s because the real issue is supply, not demand. A subject that SQM Research has been detailing extensively in recent analysis and reports.
Just take a look at this data on total property listings:
Source: SQM Research
As you can see, despite mixed results in month-to-month listings, the yearly change is almost all in the red. Meaning that the total number of property listings (supply) has fallen dramatically. With the national average down 25.9% from a year ago.
That is a huge differential.
An issue that SQM clearly believes is far more systemic than transitory. As the Sydney Morning Herald reported on Tuesday:
‘Louis Christopher, managing director of SQM Research, says there has been an ongoing decline in the number of listings, despite steady increases in the total numbers of dwellings being built across Australia.
‘In 2008, up to 4.5 per cent of all residential properties were available for sale; today the percentage is less than 2.5 per cent.’
As for why there is such a shortage of supply, well one of the biggest reasons is stamp duty…
This egregious tax is simply becoming too costly as house prices continue to rise. A factor that is making downsizing for some sellers an unfeasible reality.
But with state governments, particularly NSW and Victoria, addicted to these huge windfalls, don’t expect anything to change anytime soon.
After all, none of this intervention — by APRA or the RBA — is really about helping out everyday Aussies. It is simply about preventing a bubble, whilst keeping prices as high as can be.
So what does that mean for everyday investors like yourself?
Well, for one thing, it means stocks are still likely the place to be.
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RBA’s never-ending party
See, like I said earlier, the big takeaway from all this property mess is the fact that the RBA won’t touch it. Lowe continues to stand by the fact that he has no plans to change interest rates in response to property prices.
His sole focus is wage growth and healthy inflation.
As a result, the RBA is sticking with its stubbornly low rate of 0.1%, having not budged higher or lower for 11 months now.
Not to mention the fact that QE is still in full swing with ongoing bond buying. Meaning that they’re still pumping cash into the economy too.
All of which has helped push the stock market to record highs this year. Albeit with a few hiccups and roadblocks in more recent times — jitters that have more to do with the global economic situation than anything happening locally.
So as Australia draws closer to ending lockdowns and getting back to business as usual, things are looking primed for growth. An expectation that the RBA is clearly banking on to prevent yet another technical recession.
Whether the property market will have to take one for the team to ensure that, no one knows. Because while APRA’s initial measures seem limp-wristed for now, there may be more to come.
Stocks on the other hand, though, don’t really have much to fear from the RBA. Quite the opposite, it seems, as Lowe is the one hanging onto expectations of lower rates for longer. An environment that should lead to stronger business lending and investment as things go back to some sense of normal.
For that reason, despite some lingering long-term concerns, the stock market party looks likely to roar on. So best to make the most of it while you still can.
And hey, if property is more your thing, then there is always REITs…
Editor, Money Morning
PS: Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.